<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB

            [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 WARRANT
               -------------------------------------------------
                                (TITLE OR CLASS)

               CLASS WC REDEEMABLE COMMON STOCK PURCHASE WARRANT
               -------------------------------------------------
                                (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>

         INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.

         REGISTRANT'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $13,447,743.

         THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING PRICE OF SUCH STOCK AS
OF OCTOBER 6, 1998, WAS APPROXIMATELY $29,322,743.

         THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS A COMMON
STOCK, $.001 PAR VALUE (THE "CLASS A SHARES") AS OF OCTOBER 9, 1998, WAS
27,404,4334 SHARES AND THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
Class B common stock, $.001 par value per share (the "Class B Shares") as of
October 9, 1998, was 2,355,000 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         DEFINITIVE PROXY STATEMENT TO BE FILED NO LATER THAN OCTOBER 28, 1998
PURSUANT TO REGULATION 13A WITH RESPECT TO REGISTRANT'S 1998 ANNUAL MEETING OF
STOCKHOLDERS (INCORPORATED BY REFERENCE IN PART III).

         TRANSITIONAL SMALL BUSINESS FORMAT (CHECK ONE):

                                 YES [ ] NO [X]

                                      -2-
<PAGE>

                                INTERIORS, INC.
                         1998 FORM 10-KSB ANNUAL REPORT

                               TABLE OF CONTENTS

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS..............................................4
ITEM 2.  DESCRIPTION OF PROPERTIES...........................................12
ITEM 3.  LEGAL PROCEEDINGS...................................................12
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................12

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 
         STOCKHOLDER MATTERS.................................................13
ITEM 6.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS.........14
ITEM 7.  FINANCIAL STATEMENTS................................................16
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE................................................17

                                    PART III

ITEMS 9, 10, 11, AND 12 - INCORPORATED BY REFERENCE..........................18
ITEM 13.  EXHIBITS, FINANCIAL STATEMENT AND REPORTS ON FORM 8-K..............18

                                      -3-
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW

         Interiors, Inc., a Delaware corporation ("Interiors" or the
"Company"), is a leading 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.

         Interiors' goal is to become the premier, national single-source
provider of decorative accessories to the home furnishings industry. To achieve
this goal, Interiors has taken a leading position in consolidating the highly
fragmented decorative accessories industry, rapidly establishing its national
presence through the acquisition, integration, and growth of established,
well-regarded manufacturers of decorative accessories. The Company's business
strategy was developed in response to changing demands of large retailers, who
seek to increase "single-sourcing" of inventory purchases in order to reduce
distribution and related expenses, including styling costs associated with
coordinating related products from multiple vendors. Interiors will integrate
and optimize the operations of acquired companies by consolidating into
regional operating units with centralized management, which management believes
will lead to better product design and greater efficiency in manufacturing,
shipping and inventory management, resulting in increased sales.

         Interiors was originally incorporated in New York in October 1990
under the name A.P.F. Holdings, Inc., which subsequently merged with and into
Interiors, Inc., a Delaware corporation, in March 1994. Historically, Interiors
has had two primary operating divisions: the Custom Framing Division, which,
through its A.P.F. Master Framemakers Division, is engaged in the manufacture
of antique and contemporary picture and mirror frames for museums, art
galleries, designers, collectors and frame retailers; and the Wholesale
Division, which manufacturers and markets a line of high-end traditional and
contemporary mirrors sold through upscale retail furniture and department
stores. Since early 1998, the Company has been rapidly acquiring new operating
divisions and expanding its product lines such that today its business includes
the design, manufacture and distribution of a broad range of decorative
accessories.

INDUSTRY

         According to the most recent Universe Study conducted by Home Accents
Today, domestic wholesale sales of home furnishings accessories totaled $19.7
billion in 1995. The two categories most relevant to the Company are wall decor
and portable lamps, which together accounted for 8.2% of total industry sales,
or $1.6 billion, in 1995. Wall decor consists of three segments: framed art,
framed mirrors and miscellaneous wall objects such as metal sculpture. The
Company has strong product lines in each of these categories. Within the wall
decor market, framed art is estimated to account for approximately 70% of sales
at wholesale, framed mirrors to account for approximately 20% of such sales,
and miscellaneous wall objects to account for approximately 10% of such sales.
The market for wall decor has been growing rapidly in recent years. Wholesale
sales of wall decor, which were $357 million in 1993, increased by 40% in 1994
and 40% again in 1995 to $700 million. Home Accents Today's Universe Study
estimated growth for 1996 and 1997 at 20% in each year, resulting in
anticipated total sales in excess of $1 billion in 1997. This represents a
compound annual growth rate of 23% since 1991.

         The growth in the decorative accessory industry is being driven in
part by demographic changes. The "baby boomer" generation, which represents the
largest population group in the country, is entering their 40s and 50s, their
peak earnings years. The baby boomers have traded up from starter homes into
their dream homes, and are spending more on home improvements, additions, and
furnishings to make their homes more luxurious. Management believes that
Interiors' products appeal to the tastes and quality expectations of the baby
boomer generation.

         The manufacturing sector of the decorative accessory industry is
highly fragmented and is composed predominately of small companies with limited
product lines. Over the last 20 years, the retail distribution channels for
their products has

                                      -4-
<PAGE>

shifted from local independent retailers to large, national and regional
retailers in the mass and specialty markets that strive to attain superior
economics of scale and marketing leverage. The Company believes that the
manufacturing sector of the industry is under pressure to consolidate from
these large retailers. These retailers seek increased "single-sourcing" of
inventory purchases, particularly in product categories that do not account for
a significant percentage of their sales. Single-sourcing allows the retailers
to reduce distribution and related expenses, including styling costs associated
with coordinating related products from multiple vendors. Additionally, these
retailers are placing additional burdens on their suppliers by insisting that
suppliers communicate via electronic data interchange ("EDI"), hold inventory
to ensure quick delivery, and drop-ship inventory to each store in the
retailer's chain and, in many instances, directly to the retailer's customers.

         The Company also believes that these retailers give preference to
vendors offering coordinated accessories. Coordinated accessories help satisfy
the consumer's preference for one-stop-shopping, whereby the consumer can
purchase furniture, floor coverings, window treatments and accessories from one
retailer in coordinated styles. Consumers find this approach preferable to
attempting to achieve consistent styling of accessories from several retailers.
Management believes that compliance with the demands of retailers and consumers
is very costly for many small manufacturers of decorative accessories. As a
result, the Company believes that many of these manufacturers are receptive to
being acquired by larger manufacturers such as the Company.

         The Company, through the acquisition and consolidation of
manufacturers and distributors of decorative accessories, as well as internal
growth, intends to capitalize on both the fragmented nature of the
manufacturing sector of this industry and changing demands of retailers and
consumers. Management believes that increasing the breadth and depth of its
product offerings will enhance the Company's ability to expand its wholesale
operations as it develops the capability to market "whole room" packages of
decorative accessories to retailers in the mass and specialty markets. In
addition, management believes that the operations of acquired businesses can be
consolidated into regional operating units with centralized management,
eliminating operating and management redundancies which should help Interiors
improve its cash flow and operating margins. There can be no assurance,
however, that Interiors will be able to successfully integrate the operations,
facilities and management of acquired businesses or realize any benefits from
any such acquisitions.

ACQUISITION AND EXPANSION STRATEGY

         The Company's strategic objective is to become the premier, national
single-source provider of decorative accessories to the home furnishings
industry. Key elements of the Company's strategy to accomplish this objective
are to (i) continue its role as the leading consolidator of independent
manufacturers of decorative accessories; (ii) integrate the operations of its
operating divisions and capture economies of scale; (iii) expand the Company's
product lines through acquisition and internal growth; and (iv) expand into new
markets.

         Continue Consolidation Through Acquisitions. The Company has rapidly
established a national presence and critical customer mass by acquiring several
established, well-regarded companies which design, manufacture and distribute
decorative accessories in selected regions throughout the United States. The
Company intends to continue its consolidation strategy by acquiring additional
manufacturers of decorative accessories in order to deepen and broaden its
market presence and to expand its product offerings. Given the increasing
pressure from large retailers to consolidate, the Company believes that smaller
manufacturers of decorative accessories will continue to be attracted to, and
benefit from, the consolidation opportunity provided by the Company. As part of
its integration strategy, management intends to pursue companies with annual
revenues ranging from $3 million to $15 million, a moderate- to premium-priced
product line, a positive reputation in the marketplace and profitable
operations. The Company has identified several candidates for acquisition that
meet these parameters.

         Integrate Operations and Capture Economies of Scale. To support the
growth of its business, the Company has implemented a continuing program
designed to maximize operating efficiencies by reducing manufacturing costs,
increasing inventory turnover and enhancing its management information systems.
As a result of this program, the Company seeks to integrate and optimize the
operations of the companies it acquires by (i) consolidating operations into
regional operating units with centralized management, (ii) providing the
acquired companies with material requirements planning software, which better
determines inventory requirements, (iii) linking ordering systems through EDI,
which permits the computerized receipt of customer orders, billing and exchange
of information with customers, and (iv) providing the acquired companies with
the Company's integrated support services. Management believes that the
centralization of these functions will lead to increased sales, better product
design, and greater efficiency in manufacturing, shipping and inventory
management. The Company also believes that there will be significant
opportunities for cross-marketing the products of its various operating units.

         Expand Product Lines. Interiors continuously introduces new products
to complement new trends in interior design and decorating. As the Company
grows, management intends to centralize and coordinate product design
throughout the

                                      -5-
<PAGE>

Company. Management believes that the Company's business consolidation and
integration activities will also enhance the Company's ability to design and
manufacture new products which are coordinated with products from the Company's
other product lines. Interiors also plans to pursue licensing arrangements with
one or more leading designer labels to bolster its product development efforts.

         Expand Into New Markets. The Company intends to expand the
distribution of its products into new domestic and international markets.
Initially, the Company intends to focus on those markets in which it already
has achieved some market penetration or for which access is facilitated through
existing distribution channels and relationships. In addition, through its
recently-formed Habitat Solutions division, the Company intends to expand its
business to include merchandising and design for the hospitality, time-share
and model homes industries.

ACQUISITION HISTORY

         Set forth below is a list of the Company's acquisitions since January
1, 1998 along with the date of acquisition, trade or brand names and product
categories related to each acquired company, and the approximate amount of
aggregate annual sales for the businesses acquired in the full year prior to
acquisition:

<TABLE>
<CAPTION>
Date               Company              Trade or                Product Categories          Approximate
----               -------              Brand Names             ------------------          Annual Sales
                                        -----------                                         ------------
<S>                <C>                 <C>                     <C>                          <C>
March 1998         Henlor, Inc. (1)    Serengeti               Framed mirrors, paintings    $13 million
                                       International;          and prints; lighting
                                       Vanguard Studios ;Lee   products; sculptures and
                                       Reynolds                tabletop accessories

March 1998         Merchandise         Renaissance;            Framed mirrors, paintings    $7.5 million
                   Sales, Inc. (2)     Artmaster Studios       and prints; lighting
                                                               products

August 1998        Windsor Art, Inc.   Windsor; Dolbi Cashier  Framed paintings and         $14 million
                                                               prints; framed mirrors

August 1998        Troy Lighting,      Troy-Lite               Lighting products            $13 million
                   Inc.
</TABLE>

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

(1)   On June 29, 1998, Henlor, Inc., a Delaware corporation ("Henlor"), merged
      with and into Vanguard Studios, Inc., a California corporation
      ("Vanguard"), with Vanguard continuing as the surviving corporation and
      as a wholly-owned subsidiary of the Company.

(2)   On March 23, 1998, Merchandise Sales, Inc., a California corporation
      ("MSI") was merged with and into Artmaster Studios, Inc., a Delaware
      corporation ("Artmaster"), with Artmaster continuing as the surviving
      corporation and as a wholly-owned subsidiary of the Company. On June 29,
      1998, Artmaster merged with and into Vanguard, with Vanguard continuing
      as the surviving corporation and as a wholly-owned subsidiary of the
      Company.

                                      -6-
<PAGE>

PRODUCTS

         The Company manufactures picture frames and framed mirrors, framed
paintings and prints, sculptures and tabletop accessories, and portable and
fixed lighting products. The Company's products, brand names and price
positioning are described below.

         Picture Frames and Framed Mirrors. Interiors is a leader in producing
high-end, custom frames for paintings, prints and mirrors. The Company also
restores frames. The Company's frames are primarily reproductions of antique
frames made to look as distressed as genuine frames from that period would look
today. Customers select any combination of elements from the Company's library
of approximately 1,500 elements to generate the frame style best suited for the
picture or mirror and/or their decorating needs. These elements have been
collected over several decades, mostly through the Company's restoration
activities, and primarily represent features from antique frames, many of which
cannot be replicated. The Company's skilled craftspeople hand produce the frame
based on the elements selected by the customer. Frame prices range from $300 to
$52,000, but typically are between $800 and $4,000.

         Picture frames and mirror frames are made with the same tools, dies
and molds. Mirror frames differ from picture frames in that mirror frames are
constructed in the traditional design, with a top that is different from the
sides and bottom. In comparison, picture frames have the same design throughout
the four sides of the frame. The Company's mirror prices range from $1,000 to
$8,000. The Company's picture frames and framed mirrors are sold primarily
under the trade name of A.P.F. Master Framemakers.

         Framed Paintings and Prints. The Company produces framed hand-painted
oil paintings on artist canvas and framed paper prints. The Company's line of
framed hand-painted oil paintings is available in over 500 designs. These large
canvases come in a variety of subjects including floral, abstracts, landscapes,
seascapes, and figurative subjects. The Company also sells prints, both
proprietary and non-proprietary, that are framed and placed under glass. Frames
and mats for both products are carefully selected to complement current trends
in interior design. Retail prices for the Company's framed paintings and prints
range from $70 to $600. The Company's framed art is sold primarily under the
trade names of Vanguard Studios, Artmaster Studios, Lee Reynolds and Windsor.

         Lighting Products. The Company manufactures lamps which are available
in over 350 styles. The Company's portable lamps are manufactured with bases
made of metal, crystal and hand-painted hydrocal, a plaster composition that
can be finished to resemble stone, ceramic or metal. Additionally, the Company
designs and manufactures formed and decorated metal lamps, both portable and
fixed. The Company's lighting products generally are "fashion-forward" and do
not compete with commodity or imported lighting. The Company's lighting
products are sold primarily under the trade names Vanguard Studios, Artmaster
Studios and Troy Lighting.

         Sculptures and Tabletop Accessories. Interiors manufactures and
distributes hand-crafted hydrocal sculptures and tabletop accessories. The
Company's products in this category sell for $75 to $200 at retail. The
Company's sculptures and tabletop accessories are sold primarily under the
trade names of Vanguard Studios and Serengeti International.

RAW MATERIALS AND SUPPLIERS

         The primary raw materials used by Interiors in manufacturing and
distributing its products are wood, hydrocal, composite resins, paint, glass,
plexiglass, corrugated packaging materials, matboards, gold leaf and metal. The
Company purchases its raw materials from a wide variety of domestic and foreign
suppliers. Interiors has at least two, and often more, suppliers for each item
used in its manufacturing process, and has chosen to limit the majority of its
purchases to those vendors with whom it has developed long-term relationships.
Interiors believes that there are a relatively large number of other suppliers
of raw materials available, which enable Interiors to obtain competitive prices
for its raw materials. Interiors does not anticipate, nor has it experienced,
any difficulty in obtaining any of its raw materials, and is not dependent upon
any one supplier. Interiors generally does not enter into long-term contracts
with its suppliers. Significant increases in the costs of raw materials could
have a negative effect on Interiors' gross margins for its products if
Interiors were unable to build these costs into the prices of its products or
to offset such raw material cost increases through cost reductions.

MANUFACTURING

         All of the Company's products are either manufactured directly by the
Company or specifically on its behalf. The Company operates six manufacturing
and distribution facilities in California and New York. Approximately 90% of
the Company's products are manufactured at its production facilities. The
balance of the Company's products are manufactured 

                                      -7-
<PAGE>

primarily in Mexico, China, and Europe. The Company's manufacturing and
distribution systems are run by well-trained and experienced production
personnel.

         The Company's manufacturing processes vary greatly among product
lines, and include metal fabrication and welding, wood cutting and joining,
finishing processes (including painting, polishing and etching), hydrocal
casting, electrification, silk screening and hand painting. Certain of the
Company's manufacturing processes utilize sophisticated computerized equipment,
including mat cutting, metal cutting and acetate generation, and advanced
primer and paint application systems. The Company emphasizes cost-efficiencies
in the manufacturing process and seeks to improve its manufacturing processes
through capital expenditures in facilities and equipment.

         The Company's distribution facilities are located adjacent to its
manufacturing facilities. Interiors is currently investing in sophisticated
computer systems to code and track inventory and to coordinate and monitor
loading and shipment of products to retailers. The Company believes that
coordination of the manufacturing, packaging and distribution functions will
allow for greater quality control and production efficiencies.

SALES AND MARKETING

         The Company's primary customers are domestic retailers in the home
furnishings industry, including furniture stores, home furnishings centers,
catalog retailers, home improvement centers, department stores and lighting
retailers. In addition, the Company's custom frame division markets its
products to museums, art galleries, designers, interior decorators and custom
frame retailers. In the fiscal year ended June 30, 1998, the Company sold
products to over 3,000 home furnishings and specialty accounts. The Company's
ten largest customers accounted for ___% of the Company's net sales for the
fiscal year ended June 30, 1998.

         Each of the Company's product lines is marketed and sold through a
network of independent manufacturers' representatives, who are often agencies
employing a number of sales personnel. These representatives are paid on a
commission-only basis, which the Company believes makes them highly motivated.
None of the Company's present manufacturers' representatives are exclusive to
the Company, and any representative could terminate its relationship with the
Company at any time for any reason. In addition, manufacturers' representatives
typically represent and distribute other non-competing decorative accessories.
Given the large number of accounts, the Company believes that the use of
independent representatives is an effective and cost-efficient means to
distribute its products. The Company's manufacturer's representatives are
supported by an in-house team of twelve sales and marketing personnel. Each of
the Company's product lines is managed by a National Sales Manager or Vice
President of Sales and Marketing who works exclusively with that product line.
In addition, the Company maintains an in-house support staff consisting of
order entry personnel as well as pre-sale and post-sale customer service
personnel.

         To supplement its sales efforts to the home furnishings industry and
specialty account customers, the Company uses a variety of means to advertise
and promote its products, including product brochures, trade shows and
cooperative advertising with some of its accounts. Participation in trade
shows, particularly the semi-annual shows in High Point, North Carolina, is an
important element of Interiors' marketing efforts. In addition, the Company
operates eleven showrooms in five cities around the country.

         The Company believes that one of the primary ways it distinguishes
itself from its competitors is through customer service. A critical element of
the Company's customer service is on-time delivery of products to its
customers. Retailers are pursuing a number of strategies to deliver the
highest-quality, lowest-cost products to their customers. A growing trend among
retailers is to purchase on a "just-in-time" basis in order to reduce inventory
costs and increase returns on investment. As retailers shorten their lead times
for orders, manufacturers need to more closely anticipate consumer buying
patterns. The Company supports its retail customers' "just-in-time" inventory
strategies through investments in supporting inventory, improved forecasting
systems, more responsive manufacturing and distribution capabilities and
electronic manufacturing, communications and distribution capabilities.
Customer service also involves customer contact with the Company's top-level
decision makers, which permits early recognition of market trends and timely
response to customer problems.

                                      -8-
<PAGE>

COMPETITION

         The decorative accessories industry is highly competitive, and
includes a large number of domestic and foreign manufacturers, none of which
dominate the market. A number of the companies which compete directly with the
Company are well established and may have financial and other resources equal
to, or greater than, those of the Company. Interiors believes that it is the
largest manufacturer of premium picture and mirror frames (as well as other
wall decor) in the United States. Interiors maintains a strong competitive
advantage in this market due to its extensive collection of tools, dies, and
molds developed over decades from restoration of genuine antique frames.
Interiors believes that it would be extremely difficult for a competitor to
build a comparable collection of these elements. In addition, Interiors has a
work force of skilled crafts people that would be difficult to replicate.
Interiors also believes that it dominates a niche market for mass production of
hand-painted oil paintings on artist canvasses.

         The rapid growth of high-volume retailers, together with changes in
consumer shopping patterns, have contributed to a significant consolidation of
the domestic home furnishings retail industry and the formation of dominant
multi-category retailers. Other trends among retailers are to require
manufacturers to maintain or reduce product prices or deliver products with
shorter lead times, or for the retailers to import generic products directly
from foreign sources. The combination of these market influences creates a
highly competitive environment in which the Company's largest customers
continuously evaluate which product suppliers to use, resulting in pricing
pressures and the need for ongoing improvements in customer service. Management
believes that the competition in the decorative accessories industry is
generally a function of timeliness of delivery, price, quality, reliability,
product design, product availability and customer service. Interiors believes
that it competes favorably with other companies with respect to the foregoing
factors.

INTELLECTUAL PROPERTY RIGHTS

         Many of the Company's products and their designs, as well as the
design of many of the tools, dies and molds used in manufacturing certain of
the Company's products, are proprietary to Interiors. In addition, the Company
has sought to establish certain proprietary rights with respect to the marks
under which its products and product categories are marketed, including the
registered trademarks "Interiors," "A.P.F. Master Framemakers," "Vanguard
Studios," "Lee Reynolds," and "Artmaster Studios" and the tradenames "Serengeti
International," "Windsor," "Troy-Lite," "Dolbi Cashier" and "Renaissance."
Consequently, the business of the Company is dependent, to a certain extent, on
the Company's ability to establish and protect its intellectual property rights
with respect to its products, designs, trademarks and tradenames under which it
does business.

         The Company believes that it owns or has the right to use all designs
and proprietary technology necessary to manufacture and market its existing and
planned products. Designs with respect to its products are generally created by
employees and artists on a work-for-hire basis (i.e., the design automatically
becomes the property of the Company upon creation) or purchased or licensed
from independent designers on a consulting or royalty basis. The Company has no
knowledge that it is infringing on any existing copyright, trademark or patent
such that it would be liable for material damages or be prevented from
manufacturing or marketing its products. In the event the Company's right to
market any of its products were to be successfully challenged, the Company may
be required to discontinue certain products and the Company's business and
prospects may be adversely affected if acceptable alternative products were not
available.

REGULATORY MATTERS

         Interiors is subject to a wide range of federal, state and local laws
and regulations relating to protection of the environment, worker health and
safety and the emission, discharge, storage, treatment and disposal of
hazardous materials. These laws include the Clean Air Act of 1970, as amended,
the Resource Conservation and Recovery Act, the Federal Water Pollution Control
Act and the Comprehensive Environmental, Response, Compensation and Liability
Act. Certain of the Company's operations use materials containing chemicals
that are considered hazardous under various environmental laws. Accordingly,
management closely monitors the Company's environmental performance at all of
its manufacturing facilities. Management believes that the Company is in
substantial compliance with all environmental laws. While the Company may be
required to make capital investments at some of its facilities to ensure
compliance, Interiors believes that it will continue to meet all applicable
requirements in a timely fashion and that any investment required to meet these
requirements will not materially affect its financial condition or results of
operations. However, legal and regulatory requirements in these areas have been
increasing, and there can be no assurance that significant costs and
liabilities will not be incurred in the future due to regulatory noncompliance.

DIRECTOR AND EXECUTIVE OFFICERS

                                      -9-
<PAGE>

         The following table sets forth the directors and executive officers of
the Company and their respective ages and positions:


           NAME       AGE      POSITION(S) HELD WITH THE COMPANY
           ----       ---      ---------------------------------

Max Munn               54      President, Chief Executive Officer, Chief
                               Financial Officer and Director

Dennis D. D'Amore      49      Executive Vice President and President of
                               Decorative Accessories Division

Joan York              45      Secretary

Roger Lourie           53      Director

Richard Josephberg     51      Director

MANAGEMENT BIOGRAPHIES

         Brief biographies of the directors, executive officers, and key
personnel of the Company are set forth below. All Directors hold office until
their resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining directors. Officers of
the Company serve at the will of the Board of Directors.

         Max Munn has been a director of Interiors since March 1994 and
Chairman of the Board, President and intermittently as Chief Financial Officer
of Interiors since September 1995. Since June 1996 Mr. Munn has served as
Chairman of the Board of Decor Group. Mr. Munn previously held the positions of
Executive Vice President, Operations and Secretary of Interiors from 1993
through September 1995. From November 1990 to May 1993, Mr. Munn served as a
consultant to various companies in the home accessories industry, including
Interiors. From 1980 to February to 1990, Mr. Munn served as President and
Chief Executive Officer of Collectors' Guild International, Inc., a
manufacturer and marketer of decorative accessories. Mr. Munn received a
Bachelor of Architecture degree from the Massachusetts Institute of Technology
and attended graduate school at Columbia University.

         Roger Lourie has been a director of Interiors since May 1995. Since
1980, Mr. Lourie has been a General Partner of Tremont Associates, a private
equity investment fund, and since 1980 has served as President of Misty Ridge
Associates, another private equity investment fund. Mr. Lourie is also Chairman
of the Board of two Connecticut-based manufacturing concerns. Mr. Lourie
received a B.S. degree in engineering from Rensselaer Polytechnic Institute of
Technology and M.B.A. and M.I.A. degrees from Columbia University in New York.

         Richard Josephberg has served as a director of Interiors since October
1995. Since 1986, Mr. Josephberg has been the Chairman of Josephberg Grosz &
Co., Inc., a New York-based investment banking firm specializing in providing
private institutional capital to emerging growth companies. From 1969 through
1975, Mr. Josephberg served with Goldman Sachs & Co. Additionally, from 1985
through 1990, Mr. Josephberg served as a member of the New York Stock Exchange.
Mr. Josephberg received a B.B.A. degree from the University of Cincinnati, and
attended the M.B.A. program at Bernard Baruch Graduate School of Business in
New York.

         Dennis D. D'Amore serves as Executive Vice President of Interiors and
President of Interiors' Decorative Accessories Division since June 1998. Since
March 1997, Mr. D'Amore serves as President and Chief Financial Officer of
Decor Group, Inc. From 1991 through 1996, Mr. D'Amore was a consultant to
various private and public companies. From 1989 to 1991, Mr. D'Amore served as
Vice President of Sales and Marketing for Lasco Bathware, a division of Tomkins
Industries. From 1988 to 1989, Mr. D'Amore served as President of
Colford-D'Amore, a management consulting firm. From 1981 to 1988, Mr. D'Amore
served as Executive Vice President and General Manager of Water Jet
Corporation. Mr. D'Amore holds a Bachelor

                                     -10-
<PAGE>

of Engineering-Mechanical Degree from New York University and subsequently
received a Masters of Business Administration in finance from Fairleigh
Dickinson University.

         Richard Belinsky, 43, was appointed Chief Financial Officer of
Interiors, effective October 19, 1998. Mr. Belinsky has over 20 years
experience in the management of retail, direct marketing and manafacturing
companies. Prior to joining Interiors, Mr. Belinsky was Vice President and
Chief Financial Officer of Petals, Inc., a major catalog retailer of decorative
accessories. Prior to that, he served as Vice President of Finance and Chief
Financial Officer for opertaing divisions of the J. Crew Group, Inc., an
international catalog and retail company with total revenues of $900 million.
Mr. Belinsky was also Director of Budgeting and Financial Analysis at Lincoln
for the Preforming Arts, Inc. and has held management positions with J.C. Penny
Company, Inc.

         Todd R. Langne, 43, was appointed Executive Vice President of Sales
and Marketing of Interiors in August 1998. From 1990 to 1998, Mr. Langner was
President of Troy Lighting and COO since March, 1994. From 1988 to 1990 Mr.
Langner served as Vice President Sales and Marketing for Hinkley Lighting and
President of its subsidiary, LuminArt. From 1982 to 1988 Mr. Langner was Vice
President Sales, Marketing and Product Development for Forecast Lighting. From
1979 to 1982 Mr. Langner served as Marketing Manager of Illuminating
Experiences. Mr. Langner holds a Bachelor of Science Degree in Journalism and
Public Relations from the University of Florida.

         James J. McCorry. Since 1996, Mr. McCorry has served as the Executive
Vice President, Chief Operating Officer and Chief Financial Officer of Plad
Clothing Group, Inc. From 1994 through 1995, Mr. McCorry served as the Senior
Vice President, Chief Financial and Chief Operating Officer of Warnaco Group,
Inc., Warners/Intimates Division. From 1988 to 1994, Mr. McCorry served as the
Chief Financial Officer and Vice President of Operations and Administration of
Sara Lee Corp., Aris Isotoner Division. From 1979 to 1988, Mr. McCorry held
various senior managerial and operating positions with this company.

         Joan York has been Secretary of Interiors since 1994.

         There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.

EMPLOYEES

         As of August 15, 1998, the company employed approximately 626
full-time persons, approximately 115 of whom were subject to collective
bargaining agreements. The Company and its subsidiaries are party to two
collective bargaining agreements which expire in the years 2002 and 2003. None
of the Company's employees have been on strike, or threatened to strike, since
the Company's inception and the Company believes that its relations with its
employees are good.

                                     -11-
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTIES

         Interiors' headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with administrative offices and a showroom. The
facility is occupied under a five year lease expiring at the end of 2001 with a
five-year renewal option. The Company leases the manufacturing facilities
listed in the table below.

<TABLE>
<CAPTION>
                                                                                   Approximate Size
Location                              Primary Use                                  (square feet)
--------                              -----------                                  -------------
<S>                                   <C>                                          <C>
Mount Vernon, New York                Manufacturing; Offices; Executive Offices    70,000 (1)
Mount Vernon, New York                Manufacturing                                10,000 (2)
City of Industry, California          Manufacturing; Administrative Offices        98,000 (3)
Pacoima, California                   Manufacturing; Administrative Offices        108,000 (4)
Pacoima, California                   Manufacturing                                22,000 (5)
Pico Rivera, California               Manufacturing; Administrative Offices        74,000 (6)
</TABLE>

------------
(1)      Lease expires December 31, 2002.
(2)      Lease expires August 31, 1998.
(3)      Lease expires December 31, 2002.
(4)      Lease expires December 31, 1999.
(5)      Month-to-month lease.
(6)      Lease expires November 30, 1998.

         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.

         Interiors believes that its facilities are well-maintained and
adequate for its current requirements, and that suitable additional space will
be available as needed to accommodate anticipated growth of its operations in
the foreseeable future.

ITEM 3.  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.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         NO MATTER WAS SUBMITTED TO A VOTE OF SECURITY HOLDERS DURING THE
FISCAL YEAR.

                                     -12-
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Class A Shares are traded on the Nasdaq Small Cap Market
("NASDAQ") under the symbol INTXA. Prior to this offering, the Company's stock
had been traded on the NASDAQ since June 23, 1994, when the Company completed
its initial public offering. Prior to that date, there was no public market for
the Company's Class A Shares. The Class B Shares are not traded on any public
market. The following table sets forth, for the periods indicated, the high and
low bid prices of shares of the Company's Class A Shares on the NASDAQ:

   FISCAL YEAR ENDING JUNE 30, 1999                             HIGH      LOW
                                                                ----      ---
          Second Quarter (through October 6, 1998)...........   $1.25    $1.03
          First Quarter .....................................   $2.16    $ .94

   FISCAL YEAR ENDING JUNE 30, 1998                             HIGH      LOW
                                                                ----      ---
          Fourth Quarter ....................................   $2.03    $1.69
          Third Quarter......................................   $2.50    $ .97
          Second Quarter.....................................   $1.53    $ .97
          First Quarter......................................   $1.63    $ .75

   FISCAL YEAR ENDING JUNE 30, 1997                             HIGH      LOW
                                                                ----      ---
          Fourth Quarter.....................................   $1.75    $ .75
          Third Quarter .....................................   $2.19    $1.00
          Second Quarter.....................................   $3.50    $1.75
          First Quarter......................................   $4.25    $2.00

         As of October 6, 1998, there were 121 holders of record of the
Company's Class A Shares and 3 holders of record of the Company's Class B
Shares. On October 6, 1998, the last reported sale price on the NASDAQ for the
Company's Class A Shares was $1.13.

         The Company has never declared or paid cash dividends on its Class A
Shares or Class B Shares. The Company intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future.

UNREGISTERED OFFERINGS

         In February 1996, the Company's Board of Directors approved the
issuance of 150,000 Class A Shares in a private placement to Sol Munn, uncle of
the Max Munn, in consideration for past consulting services

                                     -13-

<PAGE>

provided. The subsequent issuance of the Class A Shares was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securides Act"), as a transaction by the issuer not involving any public
offering,

         Pursuant to a March 3, 1996 agreement, the Company issued an aggregate
of 200,000 Class A Shares and 200,000 shares of its Series A 10% Convertible
Preferred Stock ("Series A Freferred Shares") To Decor Group, Inc ("Decor") in
exchange fbr issuance by Decor to the Company of 250,000 shares of its Series A
Non Voting Convertible Preferred Stock (sold by Interiors in February 1997) and
an option to purchase 10,000,000 shares of the Decor's Series B Non-Convertible
Voting Preferred Stock. The issuance of the Class A Shares and the Series A
Pyeferred Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving any public
offering,

         On April 8, 1996, the Company issued an aggregate of 250,000 Class B
Shares in a private placement to Laurie Munn, wife of Max Munn in consideration
for a down payment of $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 guarantee and pledge of her assets
for certain Company debt, The issuance of the Class B Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering,

         In April 24,1996, the Company received $431,251, in a private
placement of 175,000 Class A Shares and 50,000 Series A Preferred Shares to
accredited investors, in a private placement, The issuance of the Class A
Shares and the Series A Preferred Shares was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering.

         On June 30, 1996, pursuant to a Consulting Agreement with Morris Munn,
father of Max Munn, the Company issued options to purchase up to 350,000 Series
A Preferred Shares, in consideration of certain future services. These options
were fully exercised during July to September 1996, generating net proceeds to
the Company totaling $787,500. The issuance of the Series A Preferred Shares
was exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering,

         In July 1996, the Company issued an aggregate of 50,000 Class A Shares
in a private placement to Ann Stevens, a former executive of the Company,
pursuant to the Company's June 30, 1996 settlement with Ms. Stevens (the
"Stevens Settlemene"). Pursuant to the Stevens Settlement the Company placed
into escrow 1,250,000 Class B Shares (the "Escrow Shares") with Michael Levine,
Esq., attorney of Ms, Stevens, as escrow agent. Pursuant to the tenns of the
Stevens Settlement, in November 1997, February 1998 and September 1998, the
Company added an aggregate of 12,500,000 additional Class B Shares to the
Escrow Shares, The issuance of the Class A Shares and Class B Shares was exempt
from registration under Section 4(2) of the Securities Act, as a transaction by
the issuer not involving any public offering,

         In September 1996, the Company issued 10,000 Class A Shares to an
outside director of the Company, and 10,000 Class A Shares to various
individuals named by another outside director of the Company, in consideration
of services performed by such outside directors on behalf of the Company, The
issuances of the Class A Shares were exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving any
public offering.

         On June 30, 1997, the Company issued an aggregate of 300,000 Class A
Shares in a private placement to Hide Tashiro, pursuant to the Company's June
30, 1997 settlement with Mr, TasMro (The "Tashiro Settlement"). The issuance of
the Class A Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involying any public
offering.

                                     -14-

<PAGE>

         On August 18, 1997, the Company issued an aggregate of 23,000 Class A
Shares in a private placemenito an accredited investor, inconsideration of
services rendered. The issuance of the Class A Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering.

         On August 29, 1997, the Company issued an aggregate of 100,000 Class A
Shares and 100,000 Series A Preferred Shares in a private placement to BH
Funding, LLC in consideration of consulting and other services to the Company,
The issuance of the foregoing shares to BH Funding, LLC was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering,

         On December 2, 1997, the Company issued an aggregate of 2,000 Series A
Preferred Shares in a private placement to an accredited investor, in
consideration of services rendered, The issuance of the Series A Preferred
Shares was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by the issuer not involving any public offering.

         In January 1998, the Company granted an option to purchase the Escrow
Shares to Laurie Mum in consideration fbr the guarantee by Ms. Munn of certain
obligations of the Company to certain creditors of the Company. The option to
purchase the Escrow Shares must be exercised by January 9,2001. Intheeventthat
Ms, Munn exercises the option, Ms. Munn must pay $500 in cash, an execute and
deliver a secured promissory note for $500,000 with interest on the unpaid
principal balance at the rate of 6.5% per annum, with interest and unpaid
principal amount to be paid in five equal annual installments commencing on the
first anniversary of the exercise of the option. The grant of the foregoing
option to purchase the Escrow Shares was exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving any
public offering.

         On March 5, 1998, The Company issued an aggregate of 730,000 Class B
Shares in a private placement to Laurie Munn for an aggregate purchase price of
$511,000 and in consideration for the guarantee by Ms. Munn of certain
obligations of the Company to United Credit and other creditors of the Company,
The issuance of the Class B Shares was exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving any
public offering.

         On March 10, 1998, the Company c onsummated the transactions
contemplated by that certain Agreement and Plan of Merger among the Company,
Vanguard Acquisition Corp. ("Acquisition"), Henlor and the shareholders of
Henlor, Pursuant to the agreement, Acquisition merged with and into Henlor,
with Herilor continuing as the surviving corporation and as a wholly-owned
subsidiary of the Company, The merger consideration paid by the Company
consisted of (i) a cad payment of $705,621, (ii) a promissory note at an
interest rate of 8% per annum, in the aggregate principal amount of $794,379,
with a maturity date of December 1, 2000, issued by Henlor to Michael H,
Greeley, as representative for each of the former shareholders of Henlor, and
(iii) the issuance of 299,581 Class A Shares (the "Vanguard Merger Shares") to
the former shareholders of Henlor, The Vanguard Merger Shares remain subject to
adjustment, based upon the fair market value of the Vanguard Merger Shares on
March 10, 1999. The issuance was exempt from registration under Section 4(2) of
the Securities Act, as a transaction by the issuer not involving any public
offering,

         In March 1998 and April 1998, the Company issued convertible notes
(the "Notes") in the aggregate principal amount of $3,175,000, and 15,000 Class
B Warrants and 15,000 Class C Warrants in conne ction with the issuance of
certain Notes, in a private placement to accredited investors. The issuance was
exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering, and met the
requirements of Rule 506 of Regulation D promulgated under the Securiiies Act,
On June 9, 1998, the Company filed a registration statement on Form S-3 in
order to register the Class A Shares underlying the Notes and the warrants
issued in connection therewith with the Securities and Exchange

                                      -15-

<PAGE>

Commission. The registration statement was subsequently declared effective by
the Securities and Exchange Commission. The proceeds received by the Company
Pursuant to this private placement were applied toward the working capital of
the Company and were used, in part, for the acquisitions of Heinlor and MSI,

         Of the Notes, notes in the principal amount of $1,700,000 (the
"6% Notes") accrue interest at a rate of 6% per annum, with interest payable
quarterly beginning July 1, 1998; any default in payment of interest triggers a
default interest rate of 16% per annum, The maturity date of the 6% Notes is
March 19, 2000. $ 1,000,000 of the Notes are three-year convertible
subordinated notes secured by the stock of Vanguard, the successor of Hentor,
with an interest rate of 15%, These notes are convertible at the election of
the holders into CWs A Shares at a rate of $1.50 per share. The remaining
$475,000 of the Notcs are three-year unsecured subordinated debentures with an
interest rate of 15%, These debentures are convertible at the holders' election
into Class A Shares at a rate of $1.75 per share, Attached to certain of the
Notes are warrants to purchase an aggregate of 320,833 Class A Shares with
expiration dates identical to thematurity dates of the Notes to which they are
attached, These exercise prices range from $1,75 to $2.00 per note warrant,

         The 6% Notes are convertible into Class A Shares according to the
following terms: one-half of the principal amount of the 6% Notes are
convertible at the election of The noteholders from and after 180 days after
the date of issuance and at any time prior to full repayment of the principal
amount of the 6% Notes; the entire principal amount of the 6% Notes is
convertible at the election of the noteholders from and after 270 days after
the date of issuance and at any time prior to full repayment of the principal
amount of the 6% Notes. The conversion price fbr the 6% Notes is the lower of
(i) the closing bid price fbr the Class A Shmes on NASDAQ; (ii) if the
conversion date is less than 270 days after the date of issuance, 80% of the
average closing bid price for Class A Shares on NASDAQ for the 5 trading days
immediately preceding (but not including) the conversion date; or (iii) if the
conversion date is more than 270 days after the date of issuance, 75% of the
average closing bid price for Class A Shares on NASDAQ for the 5 trading days
immediately preceding (but not including) the conversion date. The conversion
price is adjustable in the event of a merger, sale of assets, reclassification
of the Class A Shares, stock splits, and additional share issuances at less
than the conversion price.

         On April 13, 1998, the Company granted 400,000 options to purchase
Class A Shares or Class B Shares to Max Mun and 100, 000 options to purchase
Class A Shares or Class B Shares to John D. Mazzuto (the Company's former Chief
Financial Officer) at an exercise price of $1.50, in recognition of the
acquisitions already consummated by the Company- The grant of the foregoing
options was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by the issuer not involving any public offering.

         On July 31,1998, the Company issued 44,431 Class A Shares and options
to purchase 300,000 Class A Shares to James J, McCorry (collectively,
the'"McCorry Shares") in consideration of Mr, McCorryjoining the Company as
President of the Habitat Solutions division of the Company and for the
performance of certain services on behalf of the Company, The exercise price of
the options is equal to the closing price of the Class A Shares on July 31,
1998, The issuance of the McCorry Shares was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering. On September 10, 1998, the Company filed a
registration statement on Form S-3 in order to, among other things, register
the McCorry Shares with the Securities and Exchange Commission.

         In July and August 1998, the Company issued convertible debentures
(the "Convertible Debentures") in the aggregate principal amount of $3,000,000,
and warrants to purchase an aggregate of 1,451,786 Class A Shares in a private
placement to three accredited investors, The issuance was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering, All proceeds received by the Company
pursuant to this private placement were applied toward the working capital of
the Company.

                                     -16-

<PAGE>

         The Convertible Debentures bear interest at the rate of 7% per annum,
payable quarterly beginning October 1, 1998, and mature in July and August,
2001, three years after their respective issuance dates, Any or all portion of
the Convertible Debentures may be cionverted to Class A Shares any time after
240 days from their respective dates of issuance. Upon conversion, the holders
of the Convertible Debentures will receive Class A shares equal to the sum
found by dividing the principal amount being converted, plus any accrued and
unpaid interest on that amount, by the lesser of (i) 80% of the average closing
bid during the three day trading period immediately preceding the conversion or
(ii) $2. 10, The Convertible Debentures must be converted at their respective
dates of maturity if. (i) the Class A Shares are listed on the OTC Bulletin
Board or NASDAQ, (ii) the bid price of the Class A Shares is greater than $ 1
00 for the ten trading days immediately preceding the maturity date, (bi) there
has not been any suspension in the trading of the Class A Shares on the OTC
BWletin Board or NASDAQ during the th~irty trading days immediately preceding
the maturity date, and (iv) the Company has been in full compliance with the
terms and conditions of the Convertible Debenture ageement, If these conditions
are not satisfied, the Company is required to pay the holders of the
Convertible Debentures a sum of cash equal to the market value of the Class A
Shares which such holders would have received if the Convertible Debentures had
been converted.

                                     -17-

<PAGE>

         In conjunction with the issuance of the Convertible Debentures, the
Company issued Common Stock Purchase Warrants ("B Warrants") to a finder. The B
Warrants expire five years from their respective dates of issue and allow the
holder to purchase 112,500 Class A Shares in the aggregate at an exercise price
of $2, 10 per Class A Share. If 50% or more of the voting power of the Company
is disposed of in an exchange other than an exchange solely for cask the B
Warrants may be used to purchase whatever assets or securities that the bolder
of the B Warrants would have been able to acquire had the B Warrants been
previously used to purchase Class A Shares, On September 10, 1998, the Company
filed a registratAon statement on Form S-3 in order to, among other things,
register the Class A Shares underlying the Convertible Debentures and warrants
with the Securities and Exchange Conunission,

         On August 14, 1998, the Compaay consummated the transactions
contemplated by that certain Agreement and Plan of Merger dated July 2, 1998 by
and among the Company, Troy, and others, pursuant to which a wholly-owned
subsidiary of the Company merged with and into Troy, with Troy continuing as
the surviving corporation and a wholly-ovmed subsidiary of the Company, The
merger consideration paid by the Company consisted of a cash payment of
$250,000 and the issuance of 650,000 Class A Shares (the "Troy Merger Shares")
to the former shareholders of Troy. The Troy Merger Shares remain subject to
adjustment, based upon the fair market value of the Troy Merger Shares on July
2, 1999. In addition, the Company agreed to cause Troy to repay S 1,700,000 in
indebtedness to certain fori-ner shareholders of Troy. The issuance of the Troy
Merger Shares was exempt from registration under Section 4(2) of the Securities
Act, as a transaction by the issuer not involving any public offering. On
September 10, 1998, the Company filed a registration statement on Form S-3 in
order to, among other things, register the Troy Merger Shares with the
Securities and Exchange Cornmission,

         No underwriters were engaged by the Company in connection with any of
the issuances described above and, accordingly, no underwriting discounts or
commissions were paid.

ITEM 6.  MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS

         The following is a discussion of the financial condition and results
of operations of the Company for the years ended June 30, 1996, 1997 and 1998.
It should be read in conjunction with the Selected Financial and Operating Data
and the Company's Financial Statements, the related notes thereto, and the
other financial and operating information included elsewhere in this Report.
Certain statements contained or incorporated by reference in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by forward-looking statements. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events or circumstances arising
after the date hereof.

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

         Net Sales. The Company's net sales from operations for the fiscal year
ended June 30, 1998, increased by $8,795,000 or 189, 1% to S 13,447,000 from
$4,652,000 for the fiscal year ended June 3 0, 1997, Sales increased by
$6,130,000 as a result of the Company's acquisitions of Henlor, Inc. and
Artmaster Studios during March 1998, The Company recorded sales by Henlor, Inc.
and Aitnasters Studios subsequent to their acquisition by the Company, Net
sales for the A,P.F. Master Framem4=s division increased $2,665,000 for the
year ended June 30, 1998, due to increased sales to a major wholesale customer.

         Cost of Goods Sold The Company's cost of goods sold as a percentage of
net sales was 61% for the year ended June 30, 1998, and 66% for the year ended
June 30, 1997. The cost of sales for the A,P,F. Master Framemaker division
declined from approximately 66% as of June 30, 1997 to 59% as of June 30, 1998.
The cost of goods sold improved, at the A,P,FI Master Framemaker division, and
as a result of increased sales to a major wholesale customer and increases in
1998 factory productivity. The Company's cost of goods sold was further
improved due to the acquisitions of Henlor and Artmaster. As a result of the
acquisitions, the Company recorded rapid sales growth in the 4h Quarter of
fiscal 1998, During this period, the Company achieved savings in the cost of
raw materials and direct labor as a percentage of sales as a result of
manu&cturing synergies resulting from the consolidation of manufacturing
facilities of these two subsidiaries.

                                     -18-
<PAGE>

         Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses as a percentage of net sales totaled 55.2%
for the year ended June 30, 1997, versus 67.2% for the year ended June 30,
1996. The reduction in the ratio of selling, general, and administrative
expenses as a percentage of net sales for the year ended June 30, 1997 versus
the prior period primarily resulted from certain measures taken by the Company
to reduce expenses. For example, reductions of administrative personnel led to
reduced salaries, benefits and travel expenses. Also discretionary spending for
such items as stationer and supplies, advertising, and consulting fees were
curtailed. Further, the Company entered into various transactions with
Photo-2-Art, Ltd ("P-2-A") a company which converts photographs into
large-scale canvas oil paintings. Effective June 1, 1997, the current supply
contract between the Company and P-2-A provides for the sale of certain
manufacturing equipment and related assets, consulting services, as well as
certain contractual reimbursements of general and administrative expenses by
P-2-A to the company aggregating $1,140,000.

         Interest Expense. Interest expense as a percentage of net sales
totaled a proximately 8.7% for the year ended June 30, 1997, versus
approximately 10.0% f or the year ended June 30, 1996. Interest expense was
approximately $133,000 lower in the year ended June 30, 1997 versus the year
ended June 30, 1996 because certain debts outstanding at higher rates of
interest were replaced by loans carrying lower interest costs.


LIQUIDITY AND CAPITAL RESOURCES

         See pages 14 through 17 for discussion of capital resources
(Unregistered Offerings).

      Management believes that future cash flow from operations will be
sufficient to support the Company's operations. However, Company management
continues to implement what it believes to be the changes deemed necessary to
further increase positive cash flow and profitability. Specific action taken as
of the date of this filing include seeking either the acquisition of or
entering into strategic alliances with unrelated companies in the decorative
accessories industry. The Company has also undertaken efforts to continue to
seek new sources of financing to fund its acquisitions. The Company has also
begun to implement a marketing program meant to increase revenues of its A.P.F.
Master Framemakers Division. No assurances can be given that these measures
will generate the fiscal improvement sought by the Company.

      As of March 31, 1998, the Company reflected cash balances of
approximately $1,739,000 as compared to cash balances of approximately $271,000
at June 30, 1997, representing an increase of $1,468,000. Net cash provided by
operating activities was approximately $698,000 for the nine months ended March
31, 1998, as compared to net cash used in operating activities of approximately
$1,125,000 for the nine months ended March 31, 1997. The net cash provided by
operating activities during the nine months ended March 31, 1998 was primarily
a result of net income of approximately $362,000 as well as the following
approximate changes from continuing operations: decrease in accounts payable
and accrued expenses of $95,000, increase in inventories of $76,000, and an
increase in accounts receivable of $17,000, a decrease in other current assets
of $229,000 and an increase in other assets of $199,000. The increase in cash
provided by operating activities was largely due to increased sales at the
Company's A.P.F. Master Framemakers division.

      Net cash used in investing activities during the nine months ended March
31, 1998 totaled $1,952,000 versus approximately $1,326,000 for the nine months
ended March 31, 1997. During the nine months ended March 31, 1998, the Company
invested $124,000 to acquire equipment, versus approximately $500,000 used to
acquire equipment and other assets during the nine months ended March 31, 1997.
The Company completed the acquisitions of Henlor and MSI, accounting for almost
all of the Company's investing activities for the period.

      Net cash provided by financing activities totaled approximately
$2,722,000 during the nine months ended March 31, 1998, verus approximately
$2,620,000 during the nine months ended March 31, 1997.

                                     -19-
<PAGE>

      As of March 31, 1998, the Company's financial position reflected a
working capital surplus of approximately $228,000, versus a working capital
deficit of approximately $99,000 at June 30, 1997. As of March 31, 1998 versus
June 30, 1997, there were increases in trade receivables of approximately
$17,000, other assets of $199,000 and an increase in inventories of
approximately $76,000.

      The Company declared a record date of December 10, 1997 for a dividend on
its Series A 10% Cumulative Convertible Preferred Stock for the six-month
period ending September 1996, March 1997 and September 1997. The dividend
($0.75 per preferred share) was paid on January 10, 1998 in the form of the
Class A Shares. Retained earnings was charged $530,000 in December 1997 in
conjunction with the issuance of these shares.

                                     -20-
<PAGE>

      Except as otherwise set forth herein, the Company has no 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.

      The Company operates pursuant to a policy that generally precludes
acceptance of goods on a non-cash basis (sometimes known as barter
transactions).


<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 Operations 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

Notes to Consolidated Financial Statements .............................    F-6

<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, 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 of Interiors, Inc.
and subsidiaries (subsidiary for 1997) for each of the two years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.


NEW YORK, NEW YORK
OCTOBER  __, 1998

<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

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:
         Basic                                              $       0.09    $       0.02
                                                            ------------    ------------
         Diluted                                            $       0.08    $       0.02
                                                            ------------    ------------

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                                                           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                                      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                                        (846,800)      (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                                       400,000           --
Stock Issuance Financied by note or Short-Term Revenue
Debt Discount-Warrants Issued                                                                      200,000           --
Promissory Note Conversion                                                                         695,000           --
</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 11). 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 operations, 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 3). Accordingly, significant
intercompany accounts and transactions have been eliminated in the
consolidation.


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.

                                     -24-
<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 13).


GOODWILL

In connection with the acquisitions of Henlor, Inc. and Artmaster Studio, 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, "Earning 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 restate 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 earning is as

                                     -25-
<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

BASIC EPS
Net earnings attributable
to common stock              105,924      4,527,160     $ 0.02           633,674      7,251,193      $ 0.09

EFFECT OF DILUTIVE
 SECURITIES
Stock options                                                                                         
Stock warrants                                                                          902,890

DILUTED EPS
Net earnings attributable
to common stock and
assumed option and
warrant exercises          $ 105,924      4,527,160     $ 0.02          $633,674      8,154,083      $ 0.08
                             -------      ---------     ------           -------      ---------      ----
</TABLE>

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. 

                                     -26-
<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; (2) declared and issued 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 owned 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).

(b)   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.

                                     -27-
<PAGE>

      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 ___.

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

      On March 10, 1998, the Company entered into, and consummated, an
      Agreement and Plan of Merger among the Company, Vangard 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
      indemnification of 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).

                                     -28-
<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 is pro forma statements of income information which reflects
      theses transactions as if they occured at the beginning of each year
      ended Juune 30, 1998 and 1997.


      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 total
      approximately $806,000. Since the financial statements of Italia are
      consolidated into hose 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
                                                          ------------

                                     -29-
<PAGE>

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

The components of property and equipment are as follows:


-------------------------------------------------------------------------------
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 (b)                       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
                                                          -------------

                                     -30-
<PAGE>


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

(b)   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.


-------------------------------------------------------------------------------
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)                                            375,000

                                     -31-
<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
         as of the date of this filing, 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 person 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 a 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 

                                     -32-
<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 the date of this filing. 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 bears 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 her 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 recorded as debt discount.

-------------------------------------------------------------------------------
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.

                                     -33-
<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.

         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.

         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 

                                     -34-
<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.

         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 closed business
         on December 10, 1997 (The "Record Date"). This dividend was for the
         six month periods ending September 1996, March 1997 and September
         1997. Payment was made on January 10, 1998, by the issuance of 0.62672
         of a share of the Company's Class A Common Stock for each share of
         Series A Preferred Stock held of record on 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.

         During the year ended June 30,1997 822,424 shares of common stock
         warrants were exercised at a price of $1.50 yielding net proceeds of
         approximately $1,179,642.

         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. (See "Acquisitions, Disposition and
         Strategic Alliances")

         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. Pursuant to the Settlement, 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.

         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 from October 1998 through June 30,
         1997. Cumulative but unpaid dividends on Series A 10% Cumulative
         Preferred Stock as of June 30, 1998, totals approximately $OPEN.

         WARRANTS AND OTHER

         At June 30, 1998, certain warrants to acquire Company securities are
         outstanding a) 845,150 Class WB Warrants exercisable at $2.00 to
         acquire one Class A Common Share, and b) 2,270,000 Class WC Warrants
         exercisable at $5.50 to acquire one Series A Preferred Share.

         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

                                     -35-
<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.

                                     -36-
<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)

         BASIC EPS    AS REPORTED....        $.09                   $.02
                      PRO FORMA......       $(.01)                  $.02

         DILUTED EPS  AS REPORTED....        $.08                   $.02
                      PROFORMA.......       $(.01)                  $.02


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.

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.

The Company entered into lease on February 1, 1993 for a 1,800 square foot
Manhattan, New York showroom. The lease expires January 3, 2003 and requires
rent payment of approximately $78,000 per annum.

The Company leases its various manufacturing and showroom facilities for west
coast operations under operating leases expiring at various periods through
April 30, 2000.

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


                   1999                             957,715
                   2000                             654,235
                   2001                             338,883
                   2002                             219,580

                                     -37-
<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 __ 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. Refer to note ___ for
subsequent to year-end acquisitions.

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. 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

                                     -38-
<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.

In February 1996, the Company's Board of Directors approved the issuance of Sol
Munn, Uncle of the President of 150,000 shares of the Company's Class A Common
Stock, in consideration for past consulting services provided.

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. For the year
ended June 30, 1998 and 1997, $___________ and $___________, respectively, is
included in OPEN.

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)

[TO BE UPDATED]


The benefit from the Company's net operating loss ("NOL") carry forward for
Federal income tax purposes is approximately $5,000,000 (which expire through
2011). The deferred tax asset of approximately $1,500,000 is comprised
primarily of net operating losses and temporary differences. 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.

                                     -39-
<PAGE>

The reduction of the value 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,

                                     -40-
<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.

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 Commission no
later than October 28, 1998.

Item 13.  Exhibits, Financial Statement 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:

                                     -41-
<PAGE>

         (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 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 Commission on
                May 29, 1998;

         (c)    Company's Current Report on Form 8-K, as filed with the
                Commission on August 10, 1998; and

         (d)    Company's Current Report on Form 8-K, as filed with the
                Commission on August 28, 1998.

The 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 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 Commission on April 6, 1998 and as amended by the Company's
Current Report on Form 8-K/A as filed with the 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 Commission on August 10, 1998
includes the description of the acquisition of Windsor. The Company's Current
Report on Form 8-K, as filed with the Commission on August 28, 1998 includes
the description of the acquisition of Troy.

                                     -42-
<PAGE>

                                 EXHIBIT INDEX

 Exhibit                     Description of Exhibit
   No.                       ----------------------
   ---

   2.1        Agreement and Plan of Merger, dated March 10, 1998, by and among
              Interiors, Vanguard Acquisition Corp., a wholly-owned subsidiary
              of Interiors, Henlor, Inc. and the shareholders of Henlor, Inc.7/

   2.2        Agreement and Plan of Merger, dated March 23, 1998, by and among
              Interiors, Artmaster Studios, Inc., a wholly-owned subsidiary of
              Interiors, Merchandise Sales, Inc. and certain shareholders of
              Merchandise Sales, Inc. 8/

   2.3        Agreement and Plan of Merger, dated April 21, 1998, by and
              between Interiors and Decor Group, Inc.*

   2.4        Agreement and Plan of Merger, dated July 2, 1998, by and among
              Troy Acquisition Corp., Interiors, Troy Lighting, Inc., Barry R.
              Jackson, and Todd R. Langner ("Langner").10/

   2.5        Stock Purchase Agreement, dated July 30, 1998, by and between
              Interiors and Bentley International, Inc. ("Bentley").9/

   3.1        Certificate of Incorporation of Interiors.1/

   3.2        Amendment to the Certificate of Incorporation.2/

   3.3        Certificate of Designations, Rights and Preferences of Series A
              Preferred Stock.2/

   3.4        By-Laws of Interiors.1/

   4.1        Forms of Representative's Warrants to Purchase Class A Shares,
              Class WA Warrants and Class WB Warrants.2/

   4.2        Form of Warrant Exercise Fee Agreement by and between Interiors,
              VTR Capital, Inc., and the Transfer Agent.2/

   4.3        Form of Warrant Agreement by and between Interiors, J. Gregory &
              Company, Inc., and Transfer Agent.3/

   4.4        Specimen Class A Preferred Stock Certificate.2/

   4.5        Specimen Class WC Warrant Certificate.2/

   4.6        Specimen Class A Common Stock Certificate.2/

   4.7        Specimen Class B Common Stock Certificate.2/

   4.8        Specimen Class WB Warrant Certificate.2/

                                      E-1
<PAGE>

   4.9        First Amendment to Warrant Agreement. 3/

   4.10       Convertible Note, dated April 7, 1998, in favor of Beeston
              Investment, Ltd. ("Beeston"), in the sum of $200,000.

   4.11       Common Stock Purchase Warrant, dated April 7, 1998, issued by
              Interiors to Beeston.

   4.12       Convertible Note, dated March 19, 1998, in favor of Austost
              Anstalt Schaan ("Austost"), in the sum of $750,000.

   4.13       Convertible Note, dated March 19, 1998, in favor of Balmore Funds
              S.A. ("Balmore"), in the sum of $375,000.

   4.14       Convertible Note, dated March 19, 1998, in favor of Tusk
              Investment Inc. ("Tusk"), in the sum of $375,000.

   4.15       Common Stock Purchase Warrant, dated March 19, 1998, issued by
              Interiors to Austost.

   4.16       Common Stock Purchase Warrant, dated March 19, 1998, issued by
              Interiors to Balmore.

   4.17       Common Stock Purchase Warrant, dated March 19, 1998, issued by
              Interiors to Tusk.

   4.18       7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
              in the amount of $500,000, issued by Interiors to Dominion
              Capital Fund, Ltd. ("Dominion").

   4.19       7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
              in the amount of $500,000, issued by Interiors to Sovereign
              Partners, L.P. ("Sovereign").

   4.20       7% Convertible Debenture due July 29, 2001, dated July 30, 1998,
              in the amount of $1,250,000, issued by Interiors to RBB Bank AG
              ("RBB").

   4.21       Common Stock Purchase Warrant A to Purchase 214,286 Shares of
              Common Stock of Interiors, dated July 27, 1998, between Interiors
              and Dominion.

   4.22       Common Stock Purchase Warrant A to Purchase 214,286 Shares of
              Common Stock of Interiors, dated July 27, 1998, between Interiors
              and Sovereign.

   4.23       Common Stock Purchase Warrant A to Purchase 535,714 Shares of
              Common Stock of Interiors, dated July 30, 1998, between Interiors
              and RBB.

   4.24       Common Stock Purchase Warrant B to Purchase 50,000 Shares of
              Common Stock of Interiors, dated July 27, 1998, between Interiors
              and Cardinal Capital Management Inc. ("Cardinal").

   4.25       Common Stock Purchase Warrant B to Purchase 62,500 Shares of
              Common Stock of Interiors, dated July 30, 1998, between Interiors
              and Cardinal.

   4.26       Registration Rights Agreement, dated July 27, 1998, by the
              Holders listed therein and Interiors.

   4.27       Common Stock Purchase Warrant A to Purchase 187,500 Shares of
              Common Stock of Interiors, dated August 25, 1998, between
              Interiors and Sovereign.

   4.28       Common Stock Purchase Warrant A to Purchase 187,500 Shares of
              Common Stock

                                      E-2
<PAGE>

              of Interiors, dated August 25, 1998, between Interiors and
              Dominion.

   4.29       7% Convertible Debenture due August 24, 2001, in the amount of
              $375,000, issued by Interiors to Sovereign.

   4.30       7% Convertible Debenture due August 24, 2001, in the amount of
              $375,000, issued by Interiors to Dominion.

   4.31       Registration Rights Agreement, dated August 25, 1998, by the
              Holders listed therein and Interiors.

   10.1       Security Agreement, dated November 13, 1990, between Interiors
              and United Credit Corporation and amendments thereto dated
              November 13, 1990, January 7, 1992 , October 11, 1991, December
              15, 1992 and June 23, 1993.1/

   10.2       Agreement, dated July 29, 1998, between Local 210 and Interiors.

   10.3       Form of Security Agreement between Interiors and the Bridge
              Lenders.1/

   10.4       Form of Non-Negotiable 6% Convertible Promissory Note.1/

   10.5       Form of Non-Negotiable 10% Promissory Note.1/

   10.6       1994 Stock Option and Appreciation Rights Plan.5/

   10.7       1994 Director Stock Option and Appreciation Rights Plan.4/

   10.8       Revised form of Warrant Exercise Fee Agreement.5/

   10.9       General Loan and Security Agreement, dated July 7, 1994, between
              Interiors and The Bank of New York ("BNY").5/

   10.10      Promissory Note, dated July 7, 1994, in favor of BNY, in the
              principal amount of $950,000.5/

   10.11      General Guarantees, dated July 7, 1994, of Ann Stevens, Theodore
              Stevens and Max Munn to BNY.5/

   10.12      Consulting Agreement, dated October 1, 1993, between Morris Munn
              and Interiors.5/

   10.13      Demand Note, dated February 8, 1996, between Interiors and Max
              Munn. 6/

   10.14      Employment Agreement, dated January 1, 1998, between Interiors
              and Max Munn.

   10.15      Promissory Note, dated March 10, 1998, made by Interiors in favor
              of Michael H. Greeley ("Greeley"), in the principal sum of
              $794,379.

   10.16      Non-Negotiable Promissory Note, dated July 30, 1998, made by
              Interiors in favor of Bentley, in the principal sum of
              $3,300,300.9/

   10.17      Non-Negotiable Promissory Note, dated July 30, 1998, made by
              Interiors in favor of Bentley, in the principal sum of
              $2,000,000.9/

   10.18      Consulting Agreement, dated July 30, 1998, by and among Windsor
              Art, Inc., Lloyd R. Abrams, and Interiors. 9/

                                      E-3
<PAGE>

   10.19      Interiors Purchase and Registration Rights Agreement No. 1, dated
              July 30, 1998, by and among Max Munn, Bentley, and Interiors. 9/

   10.20      Employment Agreement, dated March 10, 1998, by and between
              Greeley and Henlor. 7/

   10.21      Employment Agreement, dated August 14, 1998, by and between
              Interiors and Langner.10/

   10.22      Subordinated Promissory Note, dated March 23, 1998, in favor of
              Robert M. Perkowitz ("Perkowitz"), in the principal sum of
              $272,752.

   10.23      Subordinated Promissory Note, dated March 23, 1998, in favor of
              Perkowitz, in the principal sum of $537,248.

   11.1       Statement re: computation of per share earnings.

   21.1       Subsidiaries of the Registrant.

   99.1       U.S. Patent and Trademark Office Trademark Reg- No. 1,736,623.1/

   99.2       U.S. Patent and Trademark Office Service Mark Reg. No.
              1,783,694.1/

   1/         Previously filed as an exhibit to the Registration Statement
              (Registration No. 33-77288-NY), which exhibit is incorporated
              herein by reference.

   2/         Previously filed as an exhibit to Amendment No. 1 to the
              Registration Statement (Registration No. 33-77288-NY), which
              exhibit is incorporated herein by reference.

   3/         Previously filed as an exhibit to Amendment No. 2 to the
              Registration Statement (Registration No. 33-77288-NY), which
              exhibit is incorporated herein by reference.

   4/         Previously filed as an exhibit to Amendment No. 3 to the
              Registration Statement (Registration No. 33-7728-NY), which
              exhibit is incorporated by reference.

   5/         Previously filed as an exhibit to Interiors' Annual Report on
              Form 10-KSB for the fiscal year ended June 30, 1994 (File No.
              0-24352), which exhibit is incorporated herein by this reference.

   6/         Previously filed as an exhibit to Interiors' Quarterly Report on
              Form 10-QSB for the quarter ended December 31, 1995 (File No.
              00-24352), which exhibit is incorporated herein by this
              reference.

   7/         Previously filed as an exhibit to Interiors' Current Report on
              Form 8-K filed March 10, 1998 (File No. 00-24352), which exhibit
              is incorporated herein by reference.

   8/         Previously filed as an exhibit to Interiors' Current Report on
              Form 8-K filed March 23, 1998 (File No. 00-24352), which exhibit
              is incorporated herein by this reference.

   9/         Previously filed as an exhibit to Interiors' Current Report on
              Form 8-K filed July 30, 1998 (File No. 00-24352), which exhibit
              is incorporated herein by this reference.

   10/        Previously filed as an exhibit to Interiors' Current Report on
              Form 8-K filed August 14, 1998 (File No. 00-24352), which exhibit
              is incorporated herein by this reference.

   *          To be filed by Amendment.

                                      E-4
<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 and Chief
                                                       Executive 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        September __, 1998
-----------------------  Officer and Director
Max Munn               

/s/ ROGER LOURIE         Director                          September __, 1998
-----------------------
Roger Lourie

/s/ RICHARD JOSEPHBERG   Director                          September __, 1998
-----------------------
Richard Josephberg

                                      S-1

<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)           573        (967)

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

Income(loss) from operations                                325         (363)      (1,072)          (528)     (1,067)


Basic EPS                                                  0.09                                        .
Diluted EPS                                                0.08
Shares (000)                                               7251
Shares (000)                                               8154
</TABLE>

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

<PAGE>

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

STATEMENT OF OPERATIONS

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

SALES AND OTHER REVENUES :
<S>                                                  <C>           <C>           <C>           <C>           <C>        <C>
Net Sales                                            $ 4,652       $ 9,700       $ 8,292       $ 2,003       (75)c      $24,573
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         2,003                   25,857
                                                  --------------------------------------------------------            ---------

EXPENSES :
 Cost of goods sold                                    3,076         6,099         5,955           991                   16,120
 Selling, general, and administrative                  2,570         3,380         2,477         1,527       (75)c        9,879
 Amortization of intangibles                                                                        98      441 abc         539
                                                  --------------------------------------------------------            ---------
Total Expenses                                         5,646         9,479         8,432         2,616                   26,538
                                                  --------------------------------------------------------            ---------

Income (loss) from operations                            291           222          (140)         (613)                    (681)

GAIN ON SALE OF INVESTMENT                               201                                                                201
OTHER INCOME (EXPENSE), Net                                0           163             8                                    170
INTEREST EXPENSE                                        (405)         (321)         (125)         (243)    (297) ab      (1,391)

Income (loss) from operations before
  (benefit) provision for taxes                           87            64          (257)         (856)                  (1,701)

(BENEFEIT) PROVISION FOR TAXES                           (19)            4             1                                    (15)

Income(loss) from continuing operations              $   106       $    60       $  (258)      $  (856)                 $(1,686)


Basic EPS                                              $0.02
Diluted EPS                                            $0.02
Shares (000)                                           4,527
Shares (000)                                           4,527
</TABLE>


<PAGE>

                                 EXHIBIT INDEX

EXHIBIT
NO.                         DESCRIPTION OF EXHIBIT
-------                     ---------------------

2.1      Agreement and Plan of Merger, dated March 10, 1998, by and among
         Interiors, Vanguard Acquisition Corp., a wholly-owned subsidiary of
         Interiors, Henlor, Inc. and the shareholders of Henlor, Inc.7/

2.2      Agreement and Plan of Merger, dated March 23, 1998, by and among
         Interiors, Artmaster Studios, Inc., a wholly-owned subsidiary of
         Interiors, Merchandise Sales, Inc. and certain shareholders of
         Merchandise Sales, Inc.8/

2.3      Agreement and Plan of Merger, dated April 21, 1998, by and between
         Interiors and Decor Group, Inc.*

2.4      Agreement and Plan of Merger, dated July 2, 1998, by and among Troy
         Acquisition Corp., Interiors, Troy Lighting, Inc., Barry R. Jackson,
         and Todd R. Langner ("Langner").10/

2.5      Stock Purchase Agreement, dated July 30, 1998, by and between
         Interiors and Bentley International, Inc. ("Bentley").9/

3.1      Certificate of Incorporation of Interiors.1/

3.2      Amendment to the Certificate of Incorporation.2/

3.3      Certificate of Designations, Rights and Preferences of Series A
         Preferred Stock.2/

3.4      By-Laws of Interiors.1/

4.1      Forms of Representative's Warrants to Purchase Class A Shares, Class
         WA Warrants and Class WB Warrants.2/

4.2      Form of Warrant Exercise Fee Agreement by and between Interiors, VTR
         Capital, Inc., and the Transfer Agent.2/

4.3      Form of Warrant Agreement by and between Interiors, J. Gregory &
         Company, Inc., and Transfer Agent.3/

4.4      Specimen Class A Preferred Stock Certificate.2/

4.5      Specimen Class WC Warrant Certificate.2/

4.6      Specimen Class A Common Stock Certificate.2/

4.7      Specimen Class B Common Stock Certificate.2/

4.8      Specimen Class WB Warrant Certificate.2/

4.9      First Amendment to Warrant Agreement.3/

4.10     Convertible Note, dated April 7, 1998, in favor of Beeston Investment,
         Ltd. ("Beeston"), in the sum of $200,000.

4.11     Common Stock Purchase Warrant, dated April 7, 1998, issued by
         Interiors to Beeston.


                                      E-1
<PAGE>

4.12     Convertible Note, dated March 19, 1998, in favor of Austost Anstalt
         Schaan ("Austost"), in the sum of $750,000.

4.13     Convertible Note, dated March 19, 1998, in favor of Balmore Funds S.A.
         ("Balmore"), in the sum of $375,000.

4.14     Convertible Note, dated March 19, 1998, in favor of Tusk Investment
         Inc. ("Tusk"), in the sum of $375,000.

4.15     Common Stock Purchase Warrant, dated March 19, 1998, issued by
         Interiors to Austost.

4.16     Common Stock Purchase Warrant, dated March 19, 1998, issued by
         Interiors to Balmore.

4.17     Common Stock Purchase Warrant, dated March 19, 1998, issued by
         Interiors to Tusk.

4.18     7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
         the amount of $500,000, issued by Interiors to Dominion Capital Fund,
         Ltd. ("Dominion").

4.19     7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
         the amount of $500,000, issued by Interiors to Sovereign Partners,
         L.P. ("Sovereign").

4.20     7% Convertible Debenture due July 29, 2001, dated July 30, 1998, in
         the amount of $1,250,000, issued by Interiors to RBB Bank AGREEMENT
         ("RBB").

4.21     Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
         Stock of Interiors, dated July 27, 1998, between Interiors and
         Dominion.

4.22     Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
         Stock of Interiors, dated July 27, 1998, between Interiors and
         Sovereign.

4.23     Common Stock Purchase Warrant A to Purchase 535,714 Shares of Common
         Stock of Interiors, dated July 30, 1998, between Interiors and RBB.

4.24     Common Stock Purchase Warrant B to Purchase 50,000 Shares of Common
         Stock of Interiors, dated July 27, 1998, between Interiors and
         Cardinal Capital Management Inc. ("Cardinal").

4.25     Common Stock Purchase Warrant B to Purchase 62,500 Shares of Common
         Stock of Interiors, dated July 30, 1998, between Interiors and
         Cardinal.

4.26     Registration Rights Agreement, dated July 27, 1998, by the Holders
         listed therein and Interiors.

4.27     Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
         Stock of Interiors, dated August 25, 1998, between Interiors and
         Sovereign.

4.28     Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
         Stock of Interiors, dated August 25, 1998, between Interiors and
         Dominion.

4.29     7% Convertible Debenture due August 24, 2001, in the amount of
         $375,000, issued by Interiors to Sovereign.

4.30     7% Convertible Debenture due August 24, 2001, in the amount of
         $375,000, issued by Interiors to Dominion.


                                      E-2
<PAGE>

4.31     Registration Rights Agreement, dated August 25, 1998, by the Holders
         listed therein and Interiors.

10.1     Security Agreement, dated November 13, 1990, between Interiors and
         United Credit Corporation and amendments thereto dated November 13,
         1990, January 7, 1992 , October 11, 1991, December 15, 1992 and June
         23, 1993."

10.2     Agreement, dated July 29, 1998, between Local 210 and Interiors.

10.3     Form of Security Agreement between Interiors and the Bridge Lenders.1/

10.4     Form of Non-Negotiable 6% Convertible Promissory Note.1/

10.5     Form of Non-Negotiable 10% Promissory Note.1/

10.6     1994 Stock Option and Appreciation Rights Plan.5/

10.7     1994 Director Stock Option and Appreciation Rights Plan.4/

10.8     Revised form of Warrant Exercise Fee Agreement.5/

10.9     General Loan and Security Agreement, dated July 7, 1994, between
         Interiors and The Bank of New York ("BNY").5/

10.10    Promissory Note, dated July 7, 1994, in favor of BNY, in the principal
         amount of $950,000.5/

10.11    General Guarantees, dated July 7, 1994, of Ann Stevens, Theodore
         Stevens and Max Munn to BNY.5/

10.12    Consulting Agreement, dated October 1, 1993, between Morris Munn and
         Interiors. 5/

10.13    Demand Note, dated February 8, 1996, between Interiors and Max Munn.6/

10.14    Employment Agreement, dated January 1, 1998, between Interiors and Max
         Munn.

10.15    Promissory Note, dated March 10, 1998, made by Interiors in favor of
         Michael H. Greeley ("Greeley"), in the principal amount of $794,379.

10.16    Non-Negotiable Promissory Note, dated July 30, 1998, made by Interiors
         in favor of Bentley, in the principal sum of $3,300,300.9/

10.17    Non-Negotiable Promissory Note, dated July 30, 1998, made by Interiors
         in favor of Bentley, in the principal amount of $2,000,000.9/

10.18    Consulting Agreement, dated July 30, 1998, by and among Windsor Art,
         Inc., Lloyd R. Abrams, and Interiors.9/

10.19    Interiors Purchase and Registration Rights Agreement No. 1, dated July
         30, 1998, by and among Max Munn, Bentley, and Interiors.9/

10.20    Employment Agreement, dated March 10, 1998, by and between Greeley and
         Henlor.7/

10.21    Employment Agreement, dated August 14, 1998, by and between Interiors
         and Langner.10/

10.22    Subordinated Promissory Note, dated March 23, 1998, in favor of Robert
         M. Perkowitz ("Perkowitz"), in the principal sum of $272,752.

10.23    Subordinated Promissory Note, dated March 23, 1998, in favor of 
         Perkowitz in the principal sum of $537,248.
                         
11.1     Statement re: computation of per share earnings,


                                      E-3
<PAGE>



1/       Previously filed as an exhibit to the Registration Statement
         (Registration No. 33-77288-NY), which exhibit is incorporated herein
         by reference.

2/       Previously filed as an exhibit to Amendment No. 1 to the Registration
         Statement (Registration No. 33-77288-NY), which exhibit is
         incorporated herein by reference.

3/       Previously filed as an exhibit to Amendment No. 2 to the Registration
         Statement (Registration No. 33-77288-NY), which exhibit is
         incorporated herein by reference.

4/       Previously filed as an exhibit to Amendment No. 3 to the Registration
         Statement (Registration No. 33-7728-NY), which exhibit is incorporated
         by reference.

5/       Previously filed as an exhibit to Interiors' Annual Report on Form
         10-KSB for the fiscal year ended June 30, 1994 (File No. 0-24352),
         which exhibit is incorporated herein by this reference.

6/       Previously filed as an exhibit to Interiors' Quarterly Report on Form
         10-QSB for the quarter ended December 31, 1995 (File No. 00-24352),
         which exhibit is incorporated herein by this reference.

7/       Previously filed as an exhibit to Interiors' Current Report on Form
         8-K filed March 10, 1998 (File No. 00-24352), which exhibit is
         incorporated herein by reference.

8/       Previously filed as an exhibit to Interiors' Current Report on Form
         8-K filed March 23, 1998 (File No. 00-24352), which exhibit is
         incorporated herein by this reference.

9/       Previously filed as an exhibit to Interiors' Current Report on Form
         8-K filed July 30, 1998 (File No. 00-24352), which exhibit is
         incorporated herein by this reference.

10/      Previously filed as an exhibit to Interiors' Current Report on Form
         8-K filed August 14, 1998 (File No. 00-24352), which exhibit is
         incorporated herein by this reference.

*        To be filed by Amendment.

                                      E-4