**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,
                2006.**


**or**


o
            **Transition
                report pursuant to Section 13 or 15 (d) of the Securities Act of****1934
                for**


**the
      transition period from ________ to __________.**





**Commission
      File Number** **001-31260**


________________


**Decorize,
      Inc.**


(Exact
      name of registrant as specified in its charter)


________________




**Delaware**
              **43-193180**(State
                  of Incorporation)
              (IRS
                  Employer Identification
                  Number)





**1938
      E. Phelps**


**Springfield,
      MO 65802**


**(417)
      879-3326**


**(Address,** **z** **ip
      code and telephone number, including area code, of**


**registrant’s
      principal executive offices)**


______________________





Securities
      registered under Section 12 (b) of the Exchange Act:


Title
                  of each class:
              
              Name
                  of each exchange on which registered:Common
                  Stock, $0.001 par value
              
              The
                  American Stock Exchange





Securities
      registered under Section 12 (g) of the Exchange Act:





Securities
      registered pursuant to Section 12 (g) of the Act:


Common
      Stock, $0.001 par value





None





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment of this Form 10-KSB. þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  Yes
o  No
x





The
      registrant’s revenues for the fiscal year ended June 30, 2006, were
      $9,242,278.








As
      of
      September 1, 2006, the total aggregate market value of the 7,039,219 shares
      of
      voting and non-voting common equity held by non-affiliates of the registrant
      was
      $1,970,981, based upon a closing bid of the registrant’s common stock as
      reported by The American Stock Exchange on that date of $0.28 per share. The
      term affiliates is deemed, for this purpose only, to refer to directors,
      officers and holders of 5% or more of the common stock of the
      registrant.





At
      the
      close of business on September 10, 2006, there were issued and outstanding
      25,239,211 share of the registrant’s Common Stock.





**Documents
      Incorporated By Reference:**





Portions
      of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be
      held on November 2, 2006 are incorporated by reference in Part III of this
      Form
      10-KSB.









**DECORIZE,
      INC.**




PART
                IItem
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              10Item
                  3.
              Legal
                  Proceedings
              10Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              10PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder Matters
              11Item
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation
              12Item
                  7.
              Financial
                  Statements
              20Item
                  8.
              Change
                  in and Disagreements with Accountants on Accountingand
                  Financial Disclosure
              21Item
                  8A.
              Controls
                  and Procedures
              21Item
                  8B.
              Other
                  Information
              21PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons;Compliance
                with Section 16(a) of the Exchange Act
              22Item
                  10.
              Executive
                  Compensation
              22Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
              22Item
                  12.
              Certain
                  Relationships and Related Transactions
              22Item
                  13.
              Exhibits
              22Item
                  14.
              Principal
                  Accountant Fees and Services
              24SIGNATURES
              
              26




i


**FORWARD-LOOKING
      STATEMENTS**





*This
      Annual Report on Form 10-KSB contains forward-looking statements. The words
      “intend,” “anticipate,” “believe,” “estimate,” “plan” and “expect,” and similar
      expressions as they relate to us, identify these forward-looking statements.
      Forward-looking statements include those that address activities, developments
      or events that we expect or anticipate will or may occur in the future. All
      statements other than statements of historical facts contained in this Annual
      Report, including statements regarding our future financial position, business
      strategy, budgets, projected costs and plans and objectives of management for
      future operations, are forward-looking statements. The actual outcome of the
      events described in these forward-looking statements could differ materially.
      Risks, uncertainties and assumptions that could cause actual results to differ
      materially from the expectations reflected in the forward-looking statements
      include, among other things:*





*·*
            *the
                risks associated with growth;*





*·*
            *our
                failure to purchase and manufacture merchandise at attractive prices;*





*·*
            *changes
                in consumer demand and preferences that cause people to desire products
                other than those traditionally offered by Decorize; and*





*·*
            *risks
                associated with our lack of liquidity.*





*These
      factors expressly qualify all subsequent oral and written forward-looking
      statements attributable to us or persons acting on our behalf.*





*A
      forward-looking statement may include a statement of the assumptions or bases
      underlying the forward-looking statement. We have chosen these assumptions
      or
      bases in good faith and we believe that they are reasonable. However, we caution
      you that assumed facts or bases almost always vary from actual results, and
      the
      differences between assumed facts or bases and actual results can be material,
      depending on the circumstances. When considering forward-looking statements,
      you
      should keep in mind the risk factors and other cautionary statements in this
      Annual Report. Except for our ongoing obligations to disclose material
      information as required by the federal securities laws, we do not have any
      intention or obligation to update forward-looking statements after we distribute
      this Annual Report.*





*Readers
      are referred to the caption “Risk Factors” appearing at the end of Item 1 of
      this Annual Report for additional factors that may affect our forward-looking
      statements. In light of these risks, uncertainties and assumptions, the
      forward-looking events discussed in this Annual Report may not occur. We
      undertake no obligation to update or revise our forward-looking statements,
      whether as a result of new information, future events or
      otherwise.*








**PART
      I**


**Item
      1. DESCRIPTION OF BUSINESS**





**GENERAL**





Our
      company, headquartered in Springfield, Missouri, is a manufacturer and
      wholesaler of imported home furnishings and accessories. We
      founded decorize.com, LLC, the company that became Decorize, Inc. in March
      2000
      to create a direct “source to business” home furnishings company to serve both
      large and small retailers in the United States, with products delivered from
      Asia. The
      Decorize business model relies on manufacturing and importing our home
      furnishings products direct from Asia to our retailers' sites in the United
      States. All of the products we sold during our most recent fiscal year were
      manufactured by suppliers located in Asia. Products primarily designed and
      marketed to the independent retailer segment are marketed under the GuildMaster
      brand so that we may continue to build on customer awareness of that brand.
      Products we design and source for the large retailer segment are exclusively
      marketed under the Decorize brand name.




1


We
      use
      our “source to business” model to serve two distinct market segments, the source
      to large retailer segment and the source to independent retailer segment. The
      source to large retailer segment is comprised of customers that we believe
      can
      benefit from our pricing, delivery times and custom design capability. The
      independent retailer segment includes small retailers, high-end department
      stores, and designers or decorators, that in our experience, have paid premium
      prices and have been unable to directly source home furnishings and accents
      from
      overseas. The price of our products includes the cost of freight to the United
      States port of entry, which reduces the uncertainty about ocean freight costs
      that would otherwise be borne directly by the independent retailer. Also,
      because we have a significantly higher volume of shipments than our individual
      customers would have, we are able to negotiate lower per item shipping rates
      on
      the ocean freight, allowing us to pass through a lower cost than a small
      retailer would obtain on its own account.





During
      fiscal 2006, the revenue mix of the two business segments was approximately
      61%
      from independent retailers and 39% from large retailers, which represents a
      change in the revenue mix over prior years. Historically, large retailers
      accounted for approximately 60% to 70% of the annual revenues and independent
      retail revenues accounted for the remaining 30% to 40%. However, during fiscal
      2006, we experienced a significant shift toward the independent retail segment
      as a result of our focus of additional resources on the independent retailer
      segment as well as a soft sales year for large retailer accounts. Management
      currently expects the revenue mix between the business segments to become more
      balanced over the next fiscal year. Nevertheless, we cannot predict with
      certainty whether or how our business mix will change in the
      future.





**Decorize**





We
      source
      our products from a network of manufacturing partners in Asia, principally
      China, Indonesia, India and the Philippines. Working in concert with our
      third-party logistics providers, we stage products in facilities located in
      those countries for shipment directly to our large retailer customers in the
      United States. We are able to pass on lower prices to large retailers because
      we
      eliminate or reduce the additional costs that are required in the traditional
      model for building substantial product inventories, multiple stage warehousing
      and multiple handling levels by a third-party. The products sourced to be moved
      through our specialty retailers channel are shipped from Asia directly to our
      fulfillment center in Springfield, Missouri. Decorize has two wholly-owned
      domestic subsidiaries, GuildMaster and Faith Walk, and two wholly-owned foreign
      subsidiaries, WestWay Enterprises and P.T. Niaga Merapi.





**GuildMaster**





GuildMaster
      is our wholly-owned domestic subsidiary, which we acquired in June of 2001.
      GuildMaster was founded in 1981 and is well recognized in the industry for
      its
      design uniqueness. From its beginning, the GuildMaster brand has predominantly
      focused on custom, high-end, home accent products. We have leveraged the
      GuildMaster name to market and brand the products we sell through our specialty
      retailer channel.





**Faith
      Walk**





Faith
      Walk Designs is our wholly-owned domestic subsidiary, founded by J. Michael
      Sandel and his spouse that we acquired in July 2001. Prior to this acquisition, Faith
      Walk sourced its products in unpainted form from domestic suppliers and added
      design finishing in its Houston, Texas manufacturing facility. Under our
      business model, all former Faith Walk branded designs are manufactured entirely
      by our suppliers in Asia and are marketed under the GuildMaster brand name.





**WestWay
      Enterprises, Ltd.**





WestWay
      Enterprises, Ltd., our wholly-owned foreign subsidiary located in Shenzhen,
      China, was created in July 2003. The formation of this subsidiary was required
      because of local regulations affecting our ability to employ personnel locally.
      WestWay employs approximately twelve personnel, who primarily manage quality
      control and quality assurance for product manufactured by suppliers within
      the
      country of China.





2


**P.T.
      Niaga Merapi**





In
      October 2003, we created P.T. Niaga Merapi, a wholly-owned foreign subsidiary
      with offices located near Yogyakarta, Indonesia. We initially created this
      foreign subsidiary to comply with local regulations and requirements for
      Decorize to employ local residents whose primary purpose was to be responsible
      for quality control and assurance within the country of Indonesia, where a
      substantial amount of our GuildMaster products are manufactured. In April 2004,
      to further improve our product quality, we acquired a facility to conduct light
      manufacturing, final assembly, and finishing operations. This operation allows
      us to consistently provide a more unique and higher quality product than
      previously available from third party manufacturers within the country. In
      addition, through this new finishing facility, we are able to better package
      our
      finished products for shipping, thus reducing the amount of losses incurred
      during the transportation process, due to faulty or inadequate
      packaging.





**Business
      Strategy**





Our
      objective in evaluating and designing our business model is to enable our
      company to surpass competitors in our industry on product value, item
      uniqueness, selection and delivery options of imported home furnishings products
      by improving our use of information technology, logistics processes and our
      direct sourcing business model. We believe our customers focus on these factors
      when choosing a home furnishings supplier, and if we can exceed the offerings
      of
      our competitors, we will increase our market share at the cost of our
      competitors.





Our
      "source to business" model for the large retailers, eliminates several layers
      of
      handling and warehousing by importers and distribution centers. Products are
      sourced in Asia and shipped directly to retailers in the United States. We
      believe that a majority of our industry competitors ship product through several
      levels of warehouse facilities, which we estimate would increase the cost of
      our
      products by up to 15%.





The
      business model for our independent retailer customers leverages our unique
      design and foreign production capabilities .
      Our
      manufacturing facility in Indonesia allows us to maintain a higher level of
      product quality than previously found from manufacturers within that country.
      In
      addition to product quality, our facility also allows us to insure the quality
      and adequacy of the product packaging, thus reducing returns due to freight
      damage and increasing customer satisfaction.





We
      have
      developed support systems for manufacturing of our products in Asia, which
      provide product development support and quality assurance supervision in the
      production, packaging and shipping of our private label products. A very
      important element of our business model is a concentration on designing and
      customizing proprietary product lines to meet specific customer needs. This
      model enables us to provide high-volume, high quality proprietary products
      to
      large retailers at attractive prices and offers independent retailers access
      to
      a broad range of accessories and accent furniture that was previously not
      available to them.





Our
      support systems consist primarily of quality control personnel who oversee
      the
      manufacturing done by our suppliers throughout Asia. Our overseas employees
      are
      an integral part of the direct shipping method that we prefer. The oversight,
      management and first-hand knowledge of our foreign regional suppliers provided
      by our overseas manufacturing support team is integral to our business model’s
      success. Recently, Decorize has begun to expand the roles of our overseas
      support team beyond mere quality control into areas of product development
      and
      product procurement of items that are available in Asia that would not likely
      have become part of our product offerings without our overseas staff. Currently,
      our company employs approximately 297 persons overseas, and we may increase
      that
      number to suit our level of production and design. The focus will continue
      to be
      on quality control, regarding items such as consistency to design requests,
      manufacturing quality and packaging and delivery issues, but we will continue
      to
      seek opportunities for them to provide assistance on procurement and development
      of possible product offerings.




We
      are expanding our product sourcing, development
      and warehousing operations in Asia to support the increasing volumes of product
      sourced there under our business model. At the same time, we are continuing
      to
      build our sales and distribution channels in the United States in order to
      improve our ability to present our products and services to a growing customer
      base.




3




To
      improve our operational effectiveness, we continue to develop new and existing
      technological solutions. These solutions provide us the information we need
      to
      closely work with suppliers to improve our supply chain. In addition, we utilize
      technology to track customer orders, production status and deliveries so we
      may
      meet demanding customer expectations. We will continue to seek upgrades in
      our
      technological infrastructure that improve operating efficiencies, improve
      customer service capabilities and improve quality and cost control in our
      operations.





Although
      we are currently focusing our efforts on limited categories and products that
      are most productive for us, our long-term strategy includes the acquisition
      or
      in-house development of additional product categories that will enable us to
      offer a broad line of accessories, accent furniture, and related categories.
      Potential product categories into which we may expand our product offerings
      include specialty lighting, gifts, institutional furnishings, ironwork and
      florals, which are product areas in which we are not currently well-represented.
      We also intend to develop our current staff and management and operational
      infrastructure in order to pursue marketing opportunities that we have
      identified in new product areas in customer markets that we are not currently
      pursuing. In that regard, we intend for our overseas support systems to
      increasingly be responsible for developing new product offerings by researching
      items that may be available in the overseas market for which they are
      responsible. We expect that we will need to raise additional external funds
      to
      implement our growth strategy in a timely fashion. To that end, we expect to
      evaluate various financing opportunities in private or public markets and will
      arrange financing when appropriate terms are available.




**Merchandise** **;
        Research and Development**





We
      design, market and sell through our distribution chain a variety of imported
      home furnishings and home accent items such as hand-painted or traditionally
      finished armoires, chests, tables, chairs, painted furniture, paintings,
      sculpture, tapestries, other fine art pieces, various hand-made ceramics,
      candles, lamps and similar accessory items. Accent furniture includes items
      such
      as occasional tables, end tables, mirrors, wicker chairs, tables, and ottomans.
      Accessories include items such as wood, rattan, glass or ceramic bowls,
      statuettes, vases, candles and candleholders, baskets, boxes, lamps and bath
      items. Wall art includes a variety of traditional art such as framed oil
      paintings or prints, but also includes many other types of materials and designs
      including fabrics, woven materials and collages.





Our
      product offerings are now marketed and sold through two distinct brands,
      Decorize and GuildMaster, each of which has a slightly different product mix
      that is driven by the particular brand’s customer focus. Decorize branded
      products are typically more proprietary in nature and often developed to meet
      the specific requirements of our large retailer customers. Our large retailer
      customers market our products to their retail consumers through their brick
      and
      mortar store locations. The product mix we supply to those retailers depends
      upon their perception of their customers’ tastes and demands. Our GuildMaster
      branded products are typically marketed toward specialty retailers, high-end
      department stores, designers and decorators who market our products to consumers
      that shop at their brick and mortar store locations. The product mix is
      determined by analyzing current and future trends and tastes in the marketplace.
      We maintain approximately 1,000 unique items in our supply chain and
      periodically review, add, and drop products based upon the demand in the
      marketplace.





Utilizing
      technology, we have assembled a world wide focus group of over 100 designers,
      sales professionals, and retailers to participate in the semi-annual selection
      process of new products. We plan to increase the size of the focus group to
      over
      1000 in the near future which we believe will give us a competitive advantage
      as
      we select new product designs for introduction to the marketplace. Furthermore,
      as we introduce leading edge design to the early adopters in the independent
      retail channel and collect market data we are able to take the ‘best’ sellers or
      variants thereof to the large retail segment.


Since
        our
        inception, we have not experienced any significant difficulty in manufacturing
        or otherwise obtaining quality merchandise in adequate volumes and at suitable
        prices.





4


**Suppliers**





We
      have
      developed a network of more than 100 supply partners in China, the Philippines,
      Indonesia and India that manufacture most of the products we sell to our
      customers. For the year ended June 30, 2006, Decorize's top ten vendors
      accounted for approximately 74% of our total purchases. The largest supplier
      accounted for approximately 28% of those purchases. During the time spent
      arranging the production of our goods with overseas manufacturers, Decorize
      and
      its supply partners are developing a better understanding of each other’s needs
      and requirements. We work closely with our overseas suppliers to ensure that
      they manufacture and ship products that meet our requirements. As our supply
      partners become more familiar with Decorize’s business model and products, they
      become more adept at meeting our design and manufacturing needs, which gives
      us
      greater confidence in continuing to direct orders to those overseas vendors
      who
      have demonstrated success in working with us and increasing our reliance on
      particular supply partners for meeting our overseas manufacturing needs.
      However, we believe that none of our suppliers are material to our business
      individually, since there are a number of alternative suppliers available to
      manufacture our products in both Asia and other parts of the world. We currently
      estimate that the largest of those suppliers will represent less than 30% of
      our
      product purchases during any fiscal year.





The
      raw
      materials used by our suppliers, such as wood products, metal, glass and
      ceramics are readily available in many places throughout the world. Because
      of
      the availability of replacement raw materials, we do not anticipate any
      significant difficulties in obtaining suitable raw materials for the manufacture
      of our products, even if there is a shortage of those materials in any
      particular country or region in which our suppliers are located.





The
      relationship with our logistics companies provides us with state-of-the-art
      staging and warehousing facilities in the countries from which we source
      products. However, if necessary, we have alternative sources for those staging
      and warehousing services.





**Customers**





The
      current customer base for our brands includes approximately twelve large
      retailers and more than a thousand small retailers, designers and decorators.
      During the year ended June 30, 2006, our customer revenues were approximately
      $9.2 million. Although our top five customers in the past year accounted for
      approximately 41% of our revenues, our business plan for growing our business
      is
      expected to result in greater revenue diversification. During fiscal 2006,
      our
      top five customers from the standpoint of revenues were, La-Z-Boy, Broyhill,
      Stein Mart, Bombay, and Neiman Marcus. Our purchase orders with our customers
      are completed on a purchase-by-purchase basis. As such, we have not entered
      into
      any long-term purchase agreements with any customers, nor do we have any formal
      volume commitments with any of them.





**Industry
      and Competition**





We
      estimate that the premium home accents and accessories market segment of the
      home furnishings industry in which we compete includes approximately 26,000
      companies that account for approximately $40 billion of sales at the wholesale
      level. We believe that there are no dominant competitors within the premium
      home
      accents and accessories market segment of the home furnishings industry.





There
      is
      intense competition in our industry. However, we believe that our low-cost
      business model, the ability to provide highly customized products, our
      successful selection/design of fashion trends, our large number of products,
      our
      low inventory requirements and our intensive customer service practices, will
      attract a growing number of customers and will allow us to increase revenues
      rapidly. Our model is not protected from duplication and it is possible that
      other companies will compete with us by using a similar approach in conducting
      their business.




5





**Foreign
      Market Risks**





As
      an
      importer of manufactured products from several countries in the Pacific Rim,
      our
      business is subject to political risks that are beyond our control. Since our
      inception, we have perceived the greatest risk relative to our supply chain
      to
      come from our suppliers located in China. This perception arises because most
      of
      our products are manufactured in China, as evidenced by the fact that during
      fiscal 2006, approximately 48% of the products manufactured by our third party
      suppliers were manufactured in China. However, we believe that the globalization
      movement and the recent focus on reduction of tariffs and the planned ongoing
      reductions should provide a beneficial tariff environment for importers. We
      believe that the recent entry of China into the World Trade Organization should
      substantially reduce the risk that China might take political actions that
      would
      restrict its trade with the United States or the rest of the world. Our strategy
      to minimize our exposure to the political risks of any one country has been
      to
      develop manufacturing partners in multiple countries. All of the products
      offered by Decorize are available from multiple supply sources in several
      different countries, which we believe protects us from the political risks
      of
      any one country or region.





We
      are
      also subject to governmental regulations and tariff policies, which may change
      from time to time. We believe that the increased globalization of the United
      States retail economy, which has been spurred in part by the WTO and also the
      broadened reach of consumers because of the expansion of retail capabilities
      of
      the internet, are causing a global shift in attitudes toward the preference
      for
      a more open world-wide economy. These trends should favor the reduction of
      tariffs and expansion of international trade, which should benefit our
      business.





**Warehousing
      and Distribution**





Our
      ability to reduce or eliminate warehousing of our products and the related
      direct expenses and management costs that would be required is critical to
      our
      success. The greater part of the products we sell are to large retailers. Since
      the products for these customers are shipped directly from our manufacturers
      in
      Asia to our customers’ stores or distribution centers, we do not carry any
      inventory related costs. The products we sell to the independent retailer market
      are shipped from Asia direct and through the fulfillment center in Springfield,
      Missouri. From our fulfillment center, goods are then shipped to our customers
      via common and contract carriers throughout the United States and Canada. Quick
      and efficient distribution is required to meet customer needs, and we are
      continually pursuing improvements in our delivery process.





Our
      ability to track orders and merchandise delivery in a detailed and timely manner
      is an essential requirement for us to eliminate excess warehouse and retail
      capacity under our direct ship model. In response to this need for detailed
      order information, Decorize developed a tracking system with our logistics
      provider which utilizes computer and internet technology to track the transport
      and storage of our goods down to the SKU level. The logistics technology we
      use
      lets us know in real time where our merchandise is at all times and when those
      products will be delivered to our customers. We can also track costs in the
      same
      detailed and timely fashion using this technology. Since we first began
      developing our direct ship model, we have consistently sought the services
      of
      those logistics providers which have the capabilities to make the technology
      available to us, since the ability to track our orders, merchandise and costs
      is
      such a significant benefit to that shipping model. Decorize has no intellectual
      property rights in the tracking process or the technology used in the tracking
      process; however, we believe that there are a significant number of other
      logistics suppliers that would be able to provide the same technology and,
      with
      our assistance, duplicate the tracking process that we currently
      use.





**Management
      Information Systems**





We
      maintain a corporate local area network computer system, which integrates
      purchase orders, imports, transportation, distribution, and financial systems.
      Expenditures for continuing upgrades of management information systems are
      anticipated in the foreseeable future to refine and update these
      systems.





6




**Trademarks
      and Tradenames**





We
      completed the registration for the service mark "The World's Décor...Right to
      your Door," on September 2, 2002, with the United States Patent and Trademark
      office. The registration for “The World’s Décor ... Right to your Door” will
      terminate in 10 years from the date of grant, or may be cancelled after 6 years
      if we do not file the appropriate documents evidencing our continued use of
      that
      mark. Our application for the service mark “Decorize” was filed in April 2002
      and registration was granted in August 2003.





In
      addition, we have common law rights to the use of “decorize.com” and “The
      World’s Décor....Right to your Store”; however, we have not chosen to complete an
      application for registration of those marks at this time.





**Employees**





As
      of
      June 30, 2006, our company and its subsidiaries employed 324 persons on a full
      time basis, including 297 in Asia. Our employees are not represented by any
      union. We have not experienced any work stoppage due to labor disagreements
      and
      we believe that our employee relations are good.




7


**RISK
        FACTORS**





*Our
      limited operating history makes it difficult for us to evaluate our future
      business prospects and make decisions based on those estimates of our future
      performance.*





The
      concept for our business model was developed in 2000. The acquisitions of our
      two operating subsidiaries were completed in June and July of 2001. Even though
      GuildMaster and Faith Walk Designs operated independently for some time, we
      have
      a limited operating history in our current combined form, which makes it
      difficult to evaluate our business on the basis of historical operations.
      Furthermore, the opportunity for significant sales growth in the large retail
      segment could dramatically impact our financial performance. As a consequence,
      our past results may not be indicative of future results. Although this is
      true
      for any business, it is particularly true for us because of our limited
      operating history. Reliance on historical results may hinder our ability to
      anticipate and timely adapt to increases or decreases in sales, revenues or
      expenses. For example, if we overestimate our future sales for a particular
      period or periods based on our historical growth rate, we may increase our
      overhead and other operating expenses to a greater degree than we would have
      if
      we correctly anticipated the lower sales level for that period and reduced
      our
      controllable expenses accordingly. If we make poor budgetary decisions as a
      result of unreliable historical data, we could be less profitable or incur
      losses, which may result in a decline in our stock price.





*We
      have incurred losses historically, and we may not be able to attain or maintain
      profitability in the future.*





We
      incurred a net loss of $2.3 million for the fiscal year ended June 30, 2006,
      which was a decrease of 12% from the $2.6 million loss in fiscal 2005. Although
      our margins improved substantially during 2005 and were maintained in 2006,
      we
      have not achieved profitability. We cannot assure you that our operating losses
      will decline, even if our sales increase dramatically. We will need to generate
      greater revenues and maintain or improve our operating margins to achieve and
      maintain profitability in the future. If our operating losses continue on a
      long-term basis, we may experience a shortage of working capital that could
      adversely affect our business or our ability to continue our business, in which
      case our stock price may decline, perhaps significantly, and you could lose
      the
      value of your investment.





*Our
      customers have no obligation to purchase from us, which may result in sudden
      declines in sales.*





Our
      customer mix currently consists of approximately twelve large retailers and
      more
      than two thousand independent retailers, department stores, designers and
      decorators. We do not have supply agreements or other volume commitments that
      are binding on our customers, and our sales originate solely from individual
      purchase orders that we negotiate with our individual customers. As a
      consequence, our customers are not obligated to purchase any amount of our
      products and they may choose to stop or decrease their level of product
      purchases from us at any time, without giving us prior notice. This could cause
      our sales to fluctuate, and we could experience a sudden and unexpected decline
      in sales. We could experience unexpected operational losses if our customer
      sales were to decline significantly without notice. Furthermore, our revenue
      projections are subject to greater uncertainty than if we had volume commitments
      from one or more of our largest customers. Although our top five customers
      in
      fiscal year 2006 accounted for approximately 41% of our revenues, we cannot
      assure you that these customers, or any of our customers, will continue to
      purchase our products in significant volume or at all.





8




*We
      are implementing a strategy to grow and expand our business, which is expensive
      and may not generate increases in our revenues.*





We
      intend
      to expand our business, and we are incurring expenses associated with our growth
      and expansion. Although we recently raised funds through private offerings
      to
      implement our growth strategy, these funds may not be adequate to offset all
      of
      the expenses we incur in expanding our business. We have hired additional
      employees overseas and continue upgrading our technological infrastructure
      to
      improve quality and cost controls, operating efficiency and customer service
      capabilities. We will need to generate greater revenues to offset expenses
      associated with our growth, and we may be unsuccessful in achieving greater
      revenues, despite our attempts to grow our business. If our growth strategies
      do
      not result in increased revenues, we may have to abandon our plans for further
      growth or even reduce the current size of our operations.





*We
      may need to raise additional funds, and these funds may not be available when
      we
      need them.*





Based
      on
      our current plans, we are adjusting our operating expenses so that cash
      generated from operations and from working capital financing and other short
      term financing is expected to be sufficient for the foreseeable future to fund
      our operations at our currently forecasted levels. However, if our forecasts
      are
      inaccurate, we will need to raise additional funds. In addition, we expect
      that
      we will need to raise additional funds if we decide to pursue more rapid
      expansion, the development of new or enhanced services and products, appropriate
      responses to competitive pressures, or the acquisition of complementary
      businesses or technologies, or if we must respond to unanticipated events that
      require us to make additional investments. There can be no assurance that
      additional financing will be available when needed on favorable terms, or at
      all. If these funds are not available when we need them, then we may need to
      change our business strategy and reduce our rate of growth.





*We
      must effectively manage the growth of our operations, or we may outgrow our
      current infrastructure.*





As
      of
      June 30, 2006, our total number of employees was 324, including 297 employees
      in
      Asia. During our initial periods of operation as a combined entity, we
      experienced a high rate of sales growth, which at times exceeded the capacity
      of
      our infrastructure and resulted in a backlog of customer orders and product
      quality issues. The decline in revenues for the current fiscal year is to some
      degree a result of our previous demand exceeding our infrastructural capacity.
      We addressed those capacity issues by hiring additional personnel and upgrading
      our technology infrastructure, and we will continue pursuing additional sales
      growth for our company. If we expand too quickly, or if our infrastructure
      does
      not improve rapidly enough, our customer orders could again outpace our ability
      to meet our customers’ needs, which could force us to delay or reduce customer
      orders. Expanding our infrastructure will be expensive, and will require us
      to
      train our workforce, and improve our financial and managerial controls to keep
      pace with the growth of our operations.





*We
      face substantial competition from numerous sources, many of which have access
      to
      greater resources.*





Competition
      in the wholesale market for home furnishings is intense. We compete with a
      diverse group of wholesalers ranging from internet businesses to traditional
      brick-and-mortar companies, many of which have greater resources than Decorize.
      We believe that barriers to entry in the wholesale furniture and home
      furnishings market are not significant and start-up costs are relatively low,
      so
      our competition may increase in the future. Our belief that there are minimal
      barriers to entry is based on our observation that operations such as ours
      do
      not require the wholesalers to own warehouses, showrooms and factories to
      operate, which we think is because (i) our direct ship business model can be
      operated with minimal warehousing needs and costs, which are significantly
      less
      than traditional models, (ii) wholesale product orders can be placed after
      receipt of customer orders, in order to further reduce warehousing needs, (iii)
      samples can be shown to customers at little or no cost, without the necessity
      of
      showroom space for actual product, (iv) if a competitor wants showroom space,
      it
      is typically available for lease at competitive rates in most United States
      markets, and (v) all manufacturing can be done by third party suppliers, so
      there is no need to own or lease a manufacturing facility. New competitors
      may
      be able to launch new businesses similar to ours, and current competitors may
      replicate our business model, at a relatively low cost. If wholesalers with
      significantly greater resources than Decorize decide to replicate our business
      model, they may be able to quickly gain recognition and acceptance of their
      business methods and products through marketing and promotion. We may not have
      the resources to compete effectively with current or future competitors. If
      we
      are unable to effectively compete, we will lose sales to our competitors and
      our
      revenues will decline.





9




*Our
      directors have the ability to significantly influence any matters to be decided
      by the stockholders, which may prevent or delay a change in control of our
      company.*





The
      current members of our Board of Directors beneficially own, in the aggregate,
      approximately 45.9% of our common stock, on a fully diluted basis. As a result,
      if they choose to vote in concert, our directors are collectively able to
      significantly influence the outcome of any corporate matter submitted to our
      stockholders for approval, including any transaction that might cause a change
      in control, such as a merger or acquisition. It is unlikely that stockholders
      in
      favor of a matter that is opposed by the board of directors would be able to
      obtain the number of votes necessary to overrule the board.





*Because
      we do not manufacture our products in the United States, a disruption in the
      delivery of imported products may have a greater effect on us than on our
      competitors.*





We
      import
      products that we have manufactured, purchased or had manufactured for us
      overseas. Merchandise imported directly from these overseas manufacturers
      currently accounts for all of our total purchases. Because we import all of
      our
      products and deliver them directly to our customers, we believe that disruptions
      in shipping deliveries may have a greater effect on us than on competitors
      who
      manufacture and warehouse products in the United States. Deliveries of our
      products may be disrupted through factors such as:





(i)  raw
      material shortages, work stoppages, strikes and political unrest;


(ii)  problems
      with ocean shipping, including work stoppages and shipping container shortages;


(iii)  increased
      inspections of import shipments or other factors causing delays in shipments;
      and


(iv)  economic
      crises, international disputes and wars.





For
      example, we experienced significant delays in shipments due to a dockworkers
      dispute on the West Coast in fiscal 2003. The delays from this dispute resulted
      in the cancellation of some customer orders, since we could not obtain products
      from overseas in a timely manner. Although we managed to minimize the impact
      of
      the delays, a longer dispute could have placed us at a serious disadvantage
      to
      some of our competitors. Most of our competitors warehouse products they import
      from overseas, which allows them to continue delivering their products for
      the
      near term, despite overseas shipping disruptions. If our competitors are able
      to
      deliver products when we cannot, our reputation may be damaged and we may lose
      customers to our competitors.





*If
      we
      were required to purchase our imported products in foreign currencies instead
      of
      United States dollars, we would be subject to currency rate
      fluctuations.*





Currently,
      the products we buy abroad are priced in United States dollars, so we are not
      directly affected by changes in foreign exchange rates. If we are required
      to
      pay for goods in foreign currencies in the future, we would be affected by
      fluctuating currency exchange rates. In that event, we would attempt to enter
      into foreign currency exchange contracts with major financial institutions
      to
      hedge the overseas purchase transactions and limit our exposure to those
      fluctuations. If we were not able to successfully protect ourselves against
      those currency rate fluctuations, then our profits on the products subject
      to
      those fluctuations would also fluctuate and could cause us to be less profitable
      or incur losses, even if our business is doing well.





*We
      may need to substantially increase our marketing efforts in order to grow our
      business, which is expensive.*





In
      order
      to grow our business, we will need to develop and maintain widespread
      recognition and acceptance of Decorize, our business model, and our products.
      We
      believe that we have presented our product offering to only a small percentage
      of the large and medium sized retailer market. Currently, we rely primarily
      on
      word of mouth from our existing customers and contacts we develop personally
      through industry events to promote and market Decorize. In order to successfully
      grow Decorize, we may need to significantly increase our financial commitment
      to
      creating awareness and acceptance of Decorize among retailers, which would
      be
      expensive. In fiscal year 2006, marketing and advertising expenses were
      approximately $303,000, which is 7.3% of our operational expenses for that
      year.
      If we fail to successfully market and promote our business, we could lose
      current customers to our competitors, or our growth efforts may be ineffective.
      If we incur significant expenses promoting and marketing Decorize, it could
      cause our profitability to decline.





10




*Our
      businesses are not diversified, which could result in significant fluctuations
      in our operating results.*





All
      of
      our business is involved in the retail and wholesale marketing of furniture
      and
      other home products, and accordingly is dependent upon trends in the home
      furnishings sector. Downturns in the home furnishings sector could have a
      material adverse effect on our business. A downturn in the home furnishings
      sector may reduce our stock price, even if our business is
      successful.





**Item
      2. DESCRIPTION OF PROPERTY**





Our
      corporate headquarters are based in a single leased building of approximately
      9,600 square feet located in Springfield, Missouri. The rent for this space
      is
      $3,766 per month and the facilities are in good condition. The current term
      of
      the lease for our corporate headquarters ends in April 2007, and we have options
      to annually renew the lease until April 2008. We anticipate that if additional
      space is required within the next 12 months for our headquarters, then such
      space will be available in the Springfield area on a reasonable commercial
      basis.





We
      lease
      and operate a 41,250 square foot fulfillment center located in Springfield,
      Missouri. The lease agreement currently provides for a monthly rent payment
      of
      $9,860. The lease on the building terminates on November 30, 2006, and the
      lease
      provides for options to renew the lease for two additional five-year periods.
      The Springfield facility is in good condition, and we believe the space is
      adequate for our operations in the foreseeable future. We are looking at
      alternatives to this facility in the Springfield area. If we don’t find a
      suitable alternative, we believe we can lease the current facility at rates
      comparable to the previous lease.





We
      also
      lease additional design studio and office space of approximately 1,950 square
      feet located in Houston, Texas. We continue to lease this facility on a month
      to
      month basis.





We
      lease
      and operate our own showroom of approximately 8,951 square feet located in
      High
      Point, North Carolina. The High Point showroom lease terminates on October
      31,
      2009. The rent for the period ending October 31, 2008 is $9,866.30 per month,
      and from November 1, 2008 to October 31, 2009 is $10,162.00 per month. We have
      an option to renew the lease for one five-year period.





Pursuant
      to agreements with independent sales representative groups, we lease varying
      amounts of floor space at eight regional showrooms throughout the United States.
      The monthly rental payments vary between $500 and $2,440.




We
      maintain insurance for physical loss on all properties described above, and
      we
      believe that the amount of this insurance coverage provides adequate
      protection.





**Item
      3. LEGAL PROCEEDINGS**





We
      are
      subject to certain legal proceedings and claims that arise in the ordinary
      course of and are incidental to the business. In the opinion of management,
      the
      amount of ultimate liability with respect to these actions, individually or
      in
      the aggregate, will not materially affect our consolidated results of operations
      or our financial condition.





**Item
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matters were submitted to a vote of our security holders during the fourth
      quarter of the year ended June 30, 2006.





11


**PART
      II**





**Item
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





Shares
      of
      our common stock are traded on The American Stock Exchange under the symbol
      “DCZ”. The following table summarizes the highest and lowest reported sales
      price per share for all fiscal quarters of 2006 and 2005.





**High**
              
              
              **Low**Fourth
                  Quarter 2006
              
              $
              0.51
              
              $
              0.23Third
                  Quarter 2006
              
              
              0.62
              
              
              0.32Second
                  Quarter 2006
              
              
              0.81
              
              
              0.46First
                  Quarter 2006
              
              
              0.79
              
              
              0.45Fourth
                  Quarter 2005
              
              
              0.75
              
              
              0.45Third
                  Quarter 2005
              
              
              0.82
              
              
              0.40Second
                  Quarter 2005
              
              
              0.85
              
              
              0.51First
                  Quarter 2005
              
              
              0.85
              
              
              0.50




We
      had
      approximately 636 beneficial owners of our common stock, 89 of which were
      holders of record, as of September 19, 2006.





We
      have
      not paid cash dividends on our common stock since our inception. The board
      of
      directors does not anticipate payment of any cash dividends in the foreseeable
      future and intends to continue its present policy of retaining earnings for
      reinvestment in our operations.





The
      following table summarizes as of June 30, 2006, the shares of common stock
      authorized for issuance under our equity compensation plans:





**Equity
      Compensation Plan Information**


Plan
                category
            
            Number
                of securities
              to
                be issued upon exercise of
              outstanding
                options,
              warrants
                and rights
            
            Weighted
                average
              exercise
                price of
              outstanding
                options,
              warrants
                and rights
            
            Number
                of securities
              remaining
                available for
              future
                issuance under
              equity
                compensation plansEquity
                compensation plans approved by security holders
            
            
            708,500
            
            
            0.56
            
            
            2,291,500Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            708,500
            
            
            0.56
            
            
            2,291500




12


**Item
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS**





**Critical
      Accounting Policies**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the amounts reported in the accompanying financial
      statements and related footnotes. Management bases its estimates and assumptions
      on historical experience, observance of industry trends and various other
      sources of information and factors. Actual results could differ from these
      estimates. Critical accounting policies are defined as those that are reflective
      of significant judgments and uncertainties, and potentially could result in
      materially different results under differing assumptions and conditions.
      Decorize believes the following critical accounting policies require
      management's most difficult, subjective and complex judgments.





*Goodwill* -
      Effective July 2001, we adopted the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 142, *Goodwill
      and Other Intangible Assets* ,
      (“SFAS
      No. 142”) which was issued by the Financial Accounting Standards Board (FASB) in
      July 2001. SFAS No. 142 required that an intangible asset that is acquired
      shall
      be initially recognized and measured based on its fair value. SFAS No. 142
      also
      provided that goodwill should not be amortized, but shall be tested for
      impairment annually, or more frequently if circumstances indicate potential
      impairment, through a comparison of fair value to its carrying amount. As of
      June 30, 2006, Decorize did not identify or record any impairment.





*Revenue
      Recognition* - We
      recognize revenue when the earnings process is complete and the risks and
      rewards of ownership of the goods have transferred to the customer, which is
      generally considered to have occurred upon receipt of the products by the
      customer.





*Allowances
      for Doubtful Accounts* - We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of our customers to make required payments. We perform ongoing
      credit evaluation of our customers’ financial condition. If the financial
      condition of our customers were to deteriorate, which resulted in an impairment
      of their ability to make payments, additional allowances would likely be
      required. Actual collections could differ materially from our estimates.





*Stock
      Options* - Prior
      to July 1, 2005, we accounted for our stock option plan under the
      recognition and measurement principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. We used the intrinsic value-based method for measuring
      stock-based compensation cost with required pro forma disclosures of
      compensation expense determined under the fair value method of SFAS No. 123, *Accounting
      for Stock-based Compensation.*





Effective
      July 1, 2005, Decorize adopted the fair value recognition provisions of SFAS
      No.
      123R, *Share-Based
      Payment* .
      We
      applied the modified prospective method of application. Accordingly, after
      July
      1, 2005, Decorize began expensing the fair value of stock options granted,
      modified, repurchased or cancelled.


**Results
        of Operations and Comparison of Prior Year Periods**
 
 The
        following table presents certain items included in Decorize’s consolidated
        statements of operations, a copy of which is included in this Annual Report
        on
        Form 10-KSB, and the percentage of total revenues for the periods indicated.
        All
        such data should be read in conjunction with, and is qualified in their entirety
        by reference to, our financial statements and accompanying notes.


13




**Fiscal
      Years Ended June 30, 2006 and 2005**





**2006**
            
            **2005**
            
            **Change**Sales
                (net)
            
            $
            9,242,278
            
            
            100.0
            %
            $
            10,800,288
            
            
            100.0
            %
            $
            (1,558,010
            )Cost
                of sales
            
            
            6,744,131
            
            
            73.0
            %
            
            7,890,280
            
            
            73.1
            %
            
            (2,480,844
            )
            
            (0.1
            )%Gross
                profit
            
            
            2,498,147
            
            
            27.0
            %
            
            2,910,008
            
            
            26.9
            %
            
            (1,224,276
            )
            
            0.1
            %Operating
                expenses
            
            
            4,110,090
            
            
            44.5
            %
            
            4,422,774
            
            
            41.0
            %
            
            (312,684
            )
            
            3.5
            %Operating
                loss
            
            
            (1,611,943
            )
            
            (17.4
            )%
            
            (1,512,766
            )
            
            (14.0
            )%
            
            (99,177
            )
            
            (3.4
            )%Total
                other expense
            
            
            629,795
            
            
            6.8
            %
            
            1,106,102
            
            
            10.2
            %
            
            476,307
            
            
            3.4
            %Net
                loss
            
            $
            (2,241,738
            )
            
            (24.3
            )%
            $
            (2,618,868
            )
            
            (24.2
            )%
            $
            375,130
            
            
            (0.1
            )%





Sales





Our
      sales
      are derived primarily from the sale of home furnishing and home décor products
      to large and specialty retailers. Sales for fiscal 2006 decreased $1.6 million
      or 14.4% to $9.2 million compared to $10.8 million for fiscal 2005. Although
      total revenues were down for fiscal 2006, reflecting a decrease in revenues
      derived from large retail customers, revenues from our independent retail
      customers increased over the previous year by $1.2 million or 26.5%. We believe
      our revenue growth from the independent retailer group is the result of a
      continued focus on sales efforts and constant improvements to our product
      selection. Returns and allowances from both large and small retail customers
      increased to 6.8% of gross revenues for fiscal 2006 compared to returns and
      allowances of 5.5% on gross revenues for fiscal 2005. The increase can be
      directly attributed to quality issues on proprietary product for large
      retailers. Returns and allowances for independent retailers decreased to 6.0%
      as
      a percentage of revenues for fiscal 2006 compared to 7.4% for fiscal 2005.
      The
      decrease in revenues from fiscal 2005 to fiscal 2006 was wholly due to a reduced
      level of sales to our large retail customers. The sales cycle for the large
      retail sector is significantly longer than for the independent retail customer.
      We believe that we have presented our product and services to only a small
      portion of a vast number of large and medium sized retailers who would find
      our
      offerings attractive and would order product from us. We intend to continue
      marketing our goods aggressively to current retail customers, and we expect
      that
      as a result, we will increase our sales to them substantially on a
      dollar-to-dollar comparative basis. In addition, we are implementing our plan
      to
      market our products to new customers, with the intent to develop a broader
      customer base and diminish the effect of one or more large retail customers
      on
      our results of operations.





Our
      company has existed in its present form only since July 2001, and, accordingly,
      we do not have an extensive history of sales information as a combined entity.
      In the past, approximately 55% of our sales came during the first two quarters
      of our fiscal year and the remaining 45% shipped in the second half of the
      year.
      For fiscal 2006, only 40% of our sales shipped in the first two quarters, while
      nearly 60% was shipped during quarters three and four. The reason for this
      shift
      was due to the soft revenues from our large retailers during the first half
      of
      fiscal 2006. Furthermore, during the second half of our fiscal year shipments
      to
      independent retailers increased significantly and we began to experience an
      upswing in shipments to large retail customers as well. We do believe that
      generally, there is a slight increase in sales for the quarters ending September
      30 and December 31, compared to the two following quarters, due to the buying
      patterns of large retailers in preparation for the holiday months. However,
      this
      slight seasonal pattern can easily be negated by revenue growth or retraction
      as
      was the case during fiscal 2006.


Cost
        of Sales
 
 The
        cost
        of sales for fiscal 2006 decreased slightly as a percentage of sales to 73.0%
        compared to 73.1% for fiscal 2005. We believe that the percentage decrease
        in
        costs for fiscal 2006 compared to the prior year was the result of management’s
        concerted efforts to run efficient manufacturing facilities in Asia and
        successful vendor negotiations. In addition, we eliminated slow moving product
        offerings and improved our designs, providing faster inventory turnover and
        fewer markdowns on aging inventory.


14




Although
      we have improved and further strive to improve our operating margins, pricing
      in
      our industry is very competitive. We must focus on selling more goods to more
      customers at very competitive prices in order to increase our revenues. Greater
      sales volumes, especially from large retailers, may come at the expense of
      some
      gross margin.





Operating
      Expenses





During
      fiscal 2006, our operating expenses decreased by $0.3 million to $4.1 million,
      compared to $4.4 million for fiscal year 2005. The dollar decrease in operating
      expenses for fiscal 2006 was due to the net effect of decreases in certain
      expenses partially offset by increases in others. The increases were
      predominantly related to the $0.1 million of increased selling costs associated
      with the growth in sales to the independent retail sector. We reduced payroll,
      payroll taxes and benefits by approximately $0.3 million during fiscal 2006.
      Furthermore, reductions in professional fees, shipping and delivery expense
      and
      depreciation accounted for another $0.1 million. As a percentage of sales,
      our
      operating expenses increased to 44.5% of sales for fiscal 2006, up 3.5% from
      fiscal 2005, primarily as a result of the decrease in sales.





Other
      Expense





Other
      expense for fiscal 2006 decreased to $0.6 million compared to $1.1 million
      for
      fiscal 2005. The decrease during fiscal 2006 was primarily due to a $0.8 million
      non-cash charge related to the amortization of debt discount and financing
      costs
      for fiscal year 2005, as compared to less than $0.1 million for fiscal year
      2006. However, due to the move from a more traditional bank line of credit
      to a
      factoring facility and the rise in interest rates throughout the year, actual
      interest expense increased $0.3 million compared to fiscal 2005.





Net
      Loss





Loss
      from
      operations was $1.6 million in fiscal year 2006, a $0.1 million increase over
      fiscal 2005. The slight increase in the loss from operations was a direct result
      of the decrease in sales.





We
      recorded a net loss of $2.2 million in fiscal 2006, as compared to a loss of
      $2.6 million in fiscal 2005. Non-cash charges accounted for a significant
      portion of our loss in fiscal year 2005. In fiscal years 2006 and 2005, expenses
      of $0.1 million and $0.8 million, respectively, were recorded for the
      amortization of debt discount and financing costs.





Basic
      and
      diluted loss per share decreased $0.08 per share to $0.12 per share for fiscal
      2006, compared to $0.20 per share in fiscal 2005.





Inflation





We
      do not
      believe our business is materially affected by inflation. We anticipate that
      any
      increase in costs of goods sold and operating costs caused by inflation will
      be
      passed on to our customers through increases in price per unit. However, an
      increase in inflation could decrease customer demand for retail products
      resulting in lower sales volume as retailers adjust to decreased
      demand.


**Liquidity
        and Capital Resources**
 
 We
        had
        working capital of approximately $(0.8) million at June 30, 2006, compared
        with
        $(0.9) million at June 30, 2005. Cash and cash equivalents and short-term
        investments were $0.1 million at June 30, 2006, compared to $0.8 million
        at June
        30, 2005. Cash used in operating activities increased from $1.0 million in
        fiscal year 2005 to $2.3 million in fiscal year 2006. The
        principal operating uses of cash during fiscal year 2006 were attributable
        to
        the net loss of $2.2 million, and a $0.4 million increase in receivables.
        Inventories and prepaid expenses consumed an additional $0.1 million. The
        amount
        of cash used during the current fiscal year was reduced by a $0.2 million
        increase in payables and accrued expenses. Furthermore, $0.2 million in
        depreciation and the amortization of financing costs did not require
        cash.
 
 Investing
        activities during the year ended June 30, 2006, provided $0.7 million in
        cash.
        This amount related primarily to the liquidation of a $750,000 depository
        account at Bank of America. In addition, the acquisition of computer equipment
        and improvements in our technological infrastructure consumed approximately
        $50,000.


15




During
        the year ended June 30, 2006, net cash provided from financing activities
        were
        $1.7 million. We raised $0.9 million from the issuance of common stock and $1.2
        million from short term notes payable. Our credit facility with Bibby Financial
        Services (Midwest),
        Inc. (“BFS”)  provided
        an additional $0.9 million. Upon entering into our credit facility with BF S ,
        we
        terminated our line of credit with Bank of America and used $1.2 million
        to pay
        off the outstanding loan balance. We also disbursed $0.1 million for principal
        payments on long-term debt and capital lease obligations.
 
 Factoring
        and Credit Arrangements
 
 On
        March
        31, 2006, Decorize and BF S entered
        into a new Master Purchase and Sale Agreement (the “Factoring Agreement”) to
        govern the exclusive global factoring arrangements provided by BFS to Decorize
        and its subsidiaries, Guildmaster, Inc., and Faith Walk Designs, Inc. The
        new
        agreement replaces the Master Purchase and Sale Agreement entered
        into between Decorize and BFS in August 2005. The factoring arrangements
        continue to provide Decorize with a maximum credit facility of
        $2,000,000.
 
 Under
        the
        Factoring Agreement, Decorize submits accounts receivable to be purchased
        by
        BFS, and BFS pays Decorize up to 90% of the aggregate net face value of accounts
        receivable purchased, less applicable fees charged by BFS and a reserve withheld
        by BFS to serve as security in the event that BFS receives less than full
        payment for accounts purchased due to returns, allowances, deductions, disputes
        or chargebacks. All accounts submitted for purchase must be approved by BFS.
        Accounts are purchased on a recourse basis, and BFS has the right to charge
        back
        accounts purchased from Decorize at any time. The Factoring Agreement requires
        Decorize and its subsidiaries to grant BFS a first lien security interest
        in all
        their accounts receivable, inventory, equipment and all cash held in bank
        accounts and certain related intangibles.
 
 BFS
        charges Decorize interest on amounts advanced to Decorize under the Factoring
        Agreement at a rate of 1.00% above the prime rate of interest as published
        in
        the Wall Street Journal. BFS receives a factoring administration fee equal
        to
        1.00% of the gross invoice amount of each account submitted. If total
        receivables are more than 60% for any one account debtor, BFS may charge
        Decorize an additional 0.5% discount for accounts from that specific account
        debtor.
 
 The
        Factoring Agreement requires Decorize to maintain a level of accounts submitted
        for purchase each month that is equal to $500,000, on average, during each
        calendar quarter. If the level of purchased accounts falls below the $500,000
        minimum average requirement in any calendar month, Decorize is required to
        pay
        BFS a monthly purchase fee equal to the amount by which the fees paid to
        BFS for
        each month that does not meet the minimum requirements on average during
        a
        calendar quarter is less than $10,000, and Decorize shall not pay less than
        $10,000 in such fees on average for any month in a calendar quarter.
 
 The
        initial term of the Factoring Agreement is twelve months and will be
        automatically extended for successive periods of twelve months unless terminated
        by Decorize more than 60 but less than 90 days prior to the end of the term.
        BFS
        may terminate the Factoring Agreement at any time on 30 days prior notice
        to
        Decorize. If Decorize terminates the Factoring Agreement more than 60 days
        prior
        to the end of the then-current term, Decorize will pay a termination fee
        equal
        to $10,000 for each month remaining during the term.
 
 Decorize
        believes that the factoring arrangements will enhance its working capital
        situation. It is possible, however, that Decorize will continue to require
        additional equity and debt financing in order to provide it sufficient operating
        capital until such time as it can become sufficiently cash flow positive
        to fund
        operations on a stand-alone basis.
 
 On
        May 5,
        2006, Decorize entered into a Commercial Security Agreement with Quest
        Commercial Finance, L.L.C. (“Quest Commercial”), which provides for Quest
        Commercia l to make
        a revolving credit line in the amount of up to $750,000 available to Decorize
        (the “Credit Facility”). The Credit Facility matures on May 5, 2009, and is
        evidenced by a promissory note dated May 5, 2006 , issued
        by Decorize to Quest
        Commercia l .
        In
        consideration of Quest
        Commercia l providing the Credit Facility, Decorize paid Quest Commercial a commitment
        fee
        of $30,000. Outstanding
        principal that is due from time to time will
        bear interest at a rate that is equal to the prime rate of interest plus
        a
        margin of 5%, but the interest rate shall not be less than 10% per annum
        at any
        time. Accrued interest is payable monthly on the last day of each calendar
        month, beginning May 31, 2006. Any payments that are more than 5 days late
        shall
        be assessed a late fee equal to 5% of the late payment.
 
 16
 Subject
        to the provisions of the related
        promissory not e ,
        Decorize can borrow, repay and reborrow principal under the Credit Facility
        from
        time to time during its term. If a default occurs under this
        promissory not e as a
        result of Decorize failing to pay any amount when due or any other event
        of
        default, the unpaid outstanding principal balance will thereafter accrue
        interest at a rate equal to 3% per annum over the interest rate that would
        otherwise apply, and Quest
        Commercial may declare all amounts due under the Credit
        Facilit y to be
        due and payable immediately.
 
 Decorize’s
        obligations under the Credit Facility are secured by a security interest
        granted
        to Quest
        Commercia l in
        Decorize’s inventory. In this regard, Quest Commercial shall have an equal
        priority of interest in this inventory relative to the rights of SRC Holdings
        Corporation (“SRC” ) ,
        which
        has loaned amounts to the Company under a convertible promissory note originally
        issued in April 2004, as most recently amended on June 15, 2005. Quest
        Commercia l shall
        have a prior right in the inventory relative to Decorize’s factor, BFS, except
        for any proceeds of the collateral.
 
 As
        of
        June 30, 2006, our working capital was approximately $(0.8) million. Decorize
        believes that the factoring arrangements will enhance its working capital
        situation and increase the likelihood that it may expand its current operations
        in Asia. However, we first require cash to fund the purchase and manufacturing
        of products for shipment to customers. It is possible that Decorize will
        continue to require additional equity and debt financing in order to provide
        it
        sufficient operating capital until such time as it can become sufficiently
        cash
        flow positive to fund operations on a stand-alone basis. There is no assurance
        that such financing will be available on terms that will be acceptable to
        us.
        The inability to secure such financing could have a material adverse effect
        on
        our ability to maintain our business or to achieve our growth objectives.
 
 Subsequent
        Events
 
 On
        September 11, 2006, Decorize issued a promissory note (the “Promissory Note”),
        payable to the order of Quest Capital Alliance II, L.L.C. (the “Quest
        Capital I I ”),
        in
        the original principal amount of $750,000. Quest
        Capital I I charged
        a $41,250 origination fee in connection with the loan, and discounted the
        principal amount funded to Decorize under the Promissory Note by the amount
        of
        the origination fee. Stephen W. Fox, who is the general manager of Quest
        Capital I I ,
        is also
        a director of Decorize.
 
 Interest
        on the outstanding principal under the Promissory Note accrues commencing
        on
        January 9, 2007, at a rate of (i) eighteen percent (18%) per annum, if the
        Promissory Note is paid in full during the period commencing January 9, 2007
        and
        ending on February 12, 2007, or (ii) twenty-one percent (21%) per annum,
        if the
        Promissory Note is paid in full during the period commencing on February
        13,
        2007 and ending on March 15, 2007. The Promissory Note matures, and all
        outstanding principal and accrued interest is due and payable in full, on
        the
        earliest of (i) the date Decorize has delivered invoices to customers related
        to
        certain Decorize purchase orders identified by Decorize and Quest
        Capital I I ,
        or (ii)
        March 15, 2007. The default interest rate is equal to twenty-one percent
        (21%)
        per annum.
 
 The
        Promissory Note is secured by a security interest in Decorize’s inventory and
        proceeds from inventory pursuant to the terms and conditions of a Commercial
        Security Agreement (the “Security Agreement”) entered into between Decorize and
        Quest Capital II  on
        September 11, 2006. The Security Agreement provides that upon an event of
        default, Quest Capital II  may
        accelerate the indebtedness owed under the Promissory Note, assemble and
        sell
        the collateral, have a receiver appointed to take possession of any or all
        of
        the collateral, collect remedies, obtain a deficiency judgment, and exercise
        all
        other rights and remedies available to Quest Capital I I .
 
 On
        August
        17, 2006, Decorize issued a three-month promissory note, payable to the order
        of
        Quest Capital I I ,
        in the
        original principal amount of $75,000. The maturity date for the Promissory
        Note
        is November 17, 2006. Outstanding principal due under the Promissory Note
        and
        shall accrue interest until the date of maturity at a rate equal to 13.25%
        per
        annum. In consideration of Quest Capital II  providing
        the Promissory Note, Decorize paid Quest Capital II  a
        loan
        fee of $250. If a default occurs under the Promissory Note as a result of
        Decorize’s failure to pay any amount when due or because of any other event of
        default, the unpaid outstanding principal balance will thereafter accrue
        interest at a rate equal to 16.25% per annum, and Quest Capital I I may
        declare the Promissory Note to be due and payable immediately.
 
 17
  Note
          Payable
 
 On
          December 13, 2005, Decorize obtained a four-month $500,000 revolving line
          of
          credit. The maturity date for the line of credit is April 13, 2006. The
          line of
          credit is evidenced by a promissory note dated December 13, 2005, issued
          to
          Quest Capital II in the principal amount of $500,000. In consideration
          of
          providing the line of credit, Decorize paid Quest Capital II a commitment
          fee of
          $33,333.33. After April 13, 2006, any outstanding principal and interest
          become
          convertible into the Company’s common stock at a rate of $0.20 per share at the
          sole option of Quest Capital II. The note was converted into 2,500,000
          shares of
          common stock on May 5, 2006.
 
 On
          October 21, 2005, Decorize issued promissory notes to Quest Capital Alliance,
          L.L.C. (“Quest”) and Nest USA, Inc. (“Nest USA”) for $125,000 each. Both
          promissory notes bore interest at 10% to December 18, 2005 and at 13%
          thereafter. The proceeds were used for working capital purposes, and were
          repaid
          on March 7, and January 9, 2006, respectively.
 
 On
          October 5, 2004, Decorize borrowed $250,000 from SRC which was used for
          working
          capital purposes. The $250,000 was in addition to $500,000 which we had
          borrowed
          from SRC in May 2004 pursuant to a promissory note. We issued a new demand
          note
          to SRC in the aggregate amount of $750,000 in substitution for the promissory
          note previously issued. The note bears interest at a rate of prime plus
          0.5%,
          and requires monthly payments of interest. All amounts outstanding under
          the
          note are payable upon demand from SRC. In consideration of SRC’s additional
          loan, we issued warrants to SRC exersicable for 250,000 shares of common
          stock,
          which had an initial exercise price equal to $1.40 per share and an estimated
          aggregate fair value of $5,000 on October 5, 2004. The warrants expire
          ratably
          on September 30, 2007, 2008 and 2009.
  Private
          Placements
 
 On
          May 5,
          2006, the Company entered into agreements to convert an aggregate $900,000
          that
          was owed to a principal stockholder and one of the Company’s executive officers
          into 3,333,000 shares of common stock. The Company issued 2,500,000 shares
          of
          common stock to Quest as payment in full of an existing convertible term
          note,
          in the original principal amount of $500,000, which was issued by the Company
          on
          December 13, 2005. The shares were issued at a price of $0.20 per share,
          which
          was the conversion price under the December 2005 promissory note. In addition,
          James K. Parsons, a director and the Executive Vice President of the Company,
          exchanged $400,000 in principal owed to him under an existing promissory
          note,
          which was last amended in August 2004, for 833,333 shares of common stock
          issued
          to him on May 5, 2006. The exchange was made in accordance with a stock
          exchange
          agreement entered into on May 5, 2006. As a result of the exchange, the
          outstanding principal amount of Mr. Parson's note was reduced to $609,468,
          which
          is reflected in an amended note issued to him at the closing.
 
 During
          the fiscal year ended June 30, 2006, we received an aggregate $1,160,629
          upon
          the exercise of outstanding warrants held by certain of our stockholders.
          Nest
          USA exercised warrants for an aggregate 996,000 shares of common stock
          at an
          aggregate price of $199,200, or $0.20 per share; SRC exercised warrants
          for an
          aggregate 3,000,000 shares of common stock at an aggregate price of $600,000,
          or
          $0.20 per share; and Quest exercised warrants for an aggregate 1,807,143
          shares
          of common stock at an aggregate price of $361,429, or $0.20 per
          share.
 
 On
          June
          15, 2005, the Company completed the private placement of 1,875,000 shares
          of its
          common stock pursuant to the terms of a Securities Purchase Agreement entered
          into between Decorize, SRC and Quest on that same date. Under the agreement,
          Decorize agreed to issue 1,250,000 shares to SRC and 625,000 shares to
          Quest.
          Decorize also agreed to amend certain outstanding warrants held by SRC
          and
          Quest, which are exercisable for an aggregate 3,000,000 shares of common
          stock
          and 1,807,143 shares of common stock, respectively, in order to reduce
          the
          exercise price of the amended warrants to $0.20 per share and extend the
          period
          during which some of the amended warrants are exercisable. The private
          placement
          proceeds were be used by Decorize for general corporate purposes including
          general working capital initiatives. The total purchase price paid by SRC
          and
          Quest for the shares and the amended warrants was $750,000.
 
 On
          May
          31, 2005, we completed the private placement of 1,000,000 shares of our
          common
          stock to Nest USA pursuant to the terms of a Securities Purchase Agreement
          entered into between Decorize and Nest USA on that same date.
          Under the terms of the agreement, Decorize agreed to issue the shares and
          to
          amend certain outstanding warrants held by Nest USA, which are exercisable
          for
          an aggregate 996,000 shares of common stock, in order to reduce the exercise
          price of the amended warrants to $0.20 per share and extend the period
          during
          which the amended warrants are exercisable .
          We used
          the private placement proceeds for general corporate purposes .
          The
          total purchase price for the shares and the amended warrants was $400,000.
 18
 In
            each
            of the private placements, the investors represented that they were “accredited
            investors” for purposes of the Securities Act, and indicated that they were
            acquiring the shares for investment and not with a view to distribution.
            We
            provided each investor with appropriate financial and operating information.
            Each of the investors was an existing stockholder of Decorize. Accordingly,
            we
            believe this offering was made in compliance with the “safe harbor” requirements
            of Rule 506 under Regulation D of the Securities Act, which we have relied
            upon
            in taking the position that the private placements were exempt from registration
            under the Securities Act.
 
 In
            consideration of SRC providing a commercial guarantee (the “Guarantee”) for a
            new bank line of credit (see *Note
            4* to the
            consolidated financial statements *)* on
            January 12, 2005, Decorize entered into a letter agreement with SRC and
            Quest
            (the “Letter Agreement”), which requires Decorize to (i) issue warrants
            exercisable for shares of Decorize’s common stock to SRC and Quest, (ii) reduce
            the exercise and conversion prices of outstanding warrants and securities
            held
            by SRC and Quest, (iii) amend an existing promissory note payable by
            Decorize to
            SRC to permit the note to be converted into common stock, (iv) obtain
            life
            insurance policies on Steve Crowder, the President and Chief Executive
            Officer
            of Decorize, with SRC, Quest and Decorize as the beneficiaries under
            those
            policies, (v) agree to register under the Securities Act of 1933, as
            amended,
            (the “Securities Act”), all common stock issued to SRC and Quest, including but
            not limited to the common stock issued pursuant to the Letter Agreement,
            and
            (vi) agree to further reduce the exercise and conversion prices of the
            warrants
            and securities convertible into common stock, if any amount is paid to
            Bank of
            America, N.A. by SRC or Quest under the Guarantee or if the Guarantee
            is
            required to extend past June 30, 2006.
  Under
            the
            terms of the Letter Agreement, Decorize agreed to issue warrants to SRC
            to
            acquire 1,500,000 shares of Decorize’s common stock, and warrants to Quest to
            acquire 750,000 shares of common stock (the “New Warrants”). The New Warrants
            have an initial exercise price of $0.40 per share and are exercisable
            for five
            years from the date of the Letter Agreement. Decorize also agreed to
            reduce the
            exercise price of warrants currently outstanding in favor of SRC and
            Quest that
            are exercisable for an aggregate 1,500,000 shares of common stock and
            an
            aggregate 1,057,143 shares of common stock, respectively (the “Existing
            Warrants”), to $0.40 per share. The exercise period of the Existing Warrants
            will be reduced such that 50% will expire six months from the date of
            issuance
            and the remaining 50% shall expire one year from the date of issuance.
            Decorize
            also reduced the applicable conversion price of all outstanding shares
            of its
            Series A Cumulative Convertible Preferred Stock, $.001 par value (the
“Series A
            Preferred”), to a conversion price of $0.40 per share. Decorize also agreed to
            issue to SRC, a second amended and restated promissory note in the principal
            amount of $750,000 (the “Amended Note”), in replacement of a first amended and
            restated promissory note in the same principal amount, which was issued
            on
            September 30, 2004. Amounts outstanding under the Amended Note are convertible
            into shares of common stock at an initial conversion price of $0.40.
            Interest is
            due monthly on the first day of each calendar month commencing on February
            1,
            2005. The outstanding principal amount of the Amended Note is due upon
            SRC’s
            demand. The Amended Note bears interest at a rate equal to the prime
            rate plus
            one-half percent.
  The
            fair
            value of the new warrants and the beneficial conversion feature of the
            second
            amended and restated promissory note, combined with the relative increase
            in the
            fair value of the modified outstanding warrants represents the aggregate
            fair
            value of the guarantees provided by SRC and Quest, $410,000. This asset
            was to
            be amortized to expense on the straight-line method over the term of
            the
            guarantee.


**Total
      Contractual Cash and Other Obligations**





The
      following table summarizes our long-term debt, capital lease obligations, and
      operating lease obligations as of June 30, 2006.





**Total**
            
            **Less
                than**
              **1
                Year**
            
            **1-3
                Years**
            
            **4
                - 5 Years**
            
            **After
                5**
              **Years**Aggregate
                amount of principal to be
              paid
                on the outstanding long-term
              debt
            
            
            436,015
            
            
            6,015
            
            
            430,000
            
            
            -
            
            
            -Principal
                payments due on notes
              payable
                to stockholders
            
            
            2,440,194
            
            
            830,726
            
            
            1,609,428
            
            
            -
            
            
            -Future
                minimum lease payments
              under
                capital leases
            
            
            27,674
            
            
            18,913
            
            
            8,766
            
            
            -
            
            
            -Future
                minimum lease payments
              under
                noncancelable operating leases
            
            
            481,057
            
            
            163,588
            
            
            317,469
            
            
            -
            
            
            -Totals
            
            
            3,384,945
            
            
            1,019,242
            
            
            2,356,703
            
            
            -
            
            
            -




**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements that have or are reasonably likely to have
      a
      current or future effect on our financial condition, revenues, expenses, results
      of operations, liquidity, capital expenditures or capital resources that are
      material to our stockholders.








19




**Item
      7. FINANCIAL STATEMENTS**




**DECORIZE,
      INC.**


**INDEX
      TO FINANCIAL STATEMENTS**


**JUNE
      30, 2006 and 2005**




PageIndependent
                  Accountants Report
              F-2Consolidated
                  Balance Sheets
                for
                  June 30, 2006 and 2005
              F-3Consolidated
                  Statements of Operations
                for
                  the Years Ended June 30, 2006 and 2005
              F-5Consolidated
                  Statements of Stockholders’ Equity
                for
                  the Years Ended June 30, 2006 and 2005
              F-6Consolidated
                  Statements of Cash Flows
                For
                  the Years Ended June 30, 2006 and 2005
              F-7Notes
                  to the Consolidated Financial Statements
                For
                  the Years Ended June 30, 2006 and 2005
              F-9




20




**Report
        of Independent****Registered
        Public Accounting Firm**
 
 
 
 Audit
        Committee, Board of Directors
 and
        Stockholders
 Decorize,
        Inc.
 Springfield,
        Missouri
 
 
 We
        have
        audited the accompanying consolidated balance sheets of Decorize, Inc. as
        of
        June 30, 2006 and 2005, and the related consolidated statements of operations,
        stockholders’ equity and cash flows for the years then ended. 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 the standards of the Public Company
        Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Decorize, Inc. as of
        June
        30, 2006 and 2005, and the results of its operations and its cash flows for
        the
        years then ended in conformity with accounting principles generally accepted
        in
        the United States of America.
 
 
 /s/ **BKD,** **LLP**
 
 
 Springfield,
        Missouri
 August
        10, 2006, except for *Note
        12* ,
        as to
        which the
 date
        is
        September 11, 2006
 
 
  F-2
 **Decorize,
              Inc.**
 **Consolidated
              Balance Sheets**
 **June
              30, 2006 and 2005**
   **Assets**
  **2006**
              
              **2005****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              102,337
              
              $
              43,892Certificate
                  of deposit
              
              
              —
              
              
              750,000ReceivablesTrade
                  accounts receivable, net of allowance 2006 - $250,000, 2005 -
                  $60,066
              
              
              1,494,103
              
              
              1,139,018Other
              
              
              11,146
              
              
              6,549Inventories
              
              
              822,285
              
              
              736,209Prepaid
                  expenses and other
              
              
              212,342
              
              
              113,157Total
                  current assets
              
              
              2,642,213
              
              
              2,788,825Property
                  and equipment, net of accumulated depreciation 2006 - $730,132,
                  2005 -
                  $601,725
              
              
              207,328
              
              
              328,733Goodwill
              
              
              3,258,938
              
              
              3,258,938Other
              
              
              35,824
              
              
              30,4243,502,090
              
              
              3,618,095$
              6,144,303
              
              $
              6,406,920
 
   *See
              Notes to Consolidated Financial Statements*
 F-3
 **Decorize,
              Inc.**
 **Consolidated
              Balance Sheets**
 **June
              30, 2006 and 2005**
   **Liabilities
        and Stockholders** **’
        Equity**
  **2006**
              
              **2005****Current
                  Liabilities**Accounts
                  payable
              
              $
              1,450,925
              
              $
              1,308,671Accrued
                  salaries and commissions
              
              
              44,457
              
              
              30,778Other
                  accrued expenses
              
              
              130,303
              
              
              227,187Due
                  to factor
              
              
              921,506
              
              
              —Revolving
                  line of credit
              
              
              —
              
              
              1,193,478Current
                  portion of capital lease obligations
              
              
              16,741
              
              
              31,749Current
                  portion of long-term debt
              
              
              6,015
              
              
              34,184Current
                  portion of stockholders’ notes
              
              
              830,726
              
              
              860,064Total
                  current liabilities
              
              
              3,400,673
              
              
              3,686,111**Capital
                  Lease Obligations, Less Current Portion**
              
              
              8,514
              
              
              25,251**Long-term
                  Debt, Less Current Portion**
              
              
              430,000
              
              
              6,060**Notes
                  Payable to Stockholders, Less Current Portion**
              
              
              1,609,468
              
              
              1,844,460Total
                  liabilities
              
              
              5,448,655
              
              
              5,561,882**Preferred
                  Stock, 8% Cumulative, Convertible, Redeemable**$.001
                  Par Value; authorized 10,000,000 shares; issued and outstanding
                  500,000
                  shares
              
              
              595,121
              
              
              555,123**Stockholders’
                  Equity**Common
                  stock, $.001 par value; 50,000,000 shares authorized; issued and
                  outstanding 2006 - 25,239,208 shares, 2005 - 16,041,735 shares
              
              
              25,239
              
              
              16,042Additional
                  paid-in capital
              
              
              12,830,735
              
              
              10,787,582Accumulated
                  deficit
              
              
              (12,755,447
              )
              
              (10,513,709
              )Total
                  stockholders’ equity
              
              
              100,527
              
              
              289,915$
              6,144,303
              
              $
              6,406,920
 
   F-4
 **Decorize,
                Inc.**
 **Consolidated
                Statements of Operations**
 **Years
                Ended June 30, 2006 and
                2005**
   
 **2006**
              
              **2005****Net
                  Sales**
              
              $
              9,242,278
              
              $
              10,800,288**Cost
                  of Goods Sold**
              
              
              6,744,131
              
              
              7,890,280**Gross
                  Profit**
              
              
              2,498,147
              
              
              2,910,008**Operating
                  Expenses**Selling,
                  general and administrative
              
              
              4,002,653
              
              
              4,272,626Depreciation
                  and amortization
              
              
              107,437
              
              
              150,1484,110,090
              
              
              4,422,774**Operating
                  Loss**
              
              
              (1,611,943
              )
              
              (1,512,766
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              1,467
              
              
              1,829Interest
                  expense
              
              
              (571,894
              )
              
              (271,210
              )Amortization
                  of debt discount and financing cost
              
              
              (57,934
              )
              
              (832,515
              )Other
              
              
              (1,434
              )
              
              (4,206
              )(629,795
              )
              
              (1,106,102
              )**Loss
                  Before Income Taxes**
              
              
              (2,241,738
              )
              
              (2,618,868
              )**Provision
                  for Income Taxes**
              
              
              —
              
              
              —**Net
                  Loss**
              
              
              (2,241,738
              )
              
              (2,618,868
              )**Add:
                  Dividends Declared on Preferred Stock**
              
              
              (40,000
              )
              
              (40,000
              )**Loss
                  Available to Common Shareholders**
              
              $
              (2,281,738
              )
              $
              (2,658,868
              )**Basic
                  and Diluted Loss Per Common Share**
              
              $
              (0.12
              )
              $
              (.20
              )**Basic
                  and Diluted Weighted Average Common Shares
                  Outstanding**
              
              
              18,866,739
              
              
              13,183,543
 
   *See
              Notes to Consolidated Financial Statements*
 F-5
 **Decorize,
                  Inc.**
 **Consolidated
                  Statements of Stockholders** **’
                  Equity**
 **Years
                  Ended June 30, 2006 and
                  2005**
   
 **Additional****Common
                  Stock**
              
              **Paid-in**
              
              **Accumulated****Shares**
              
              **Par
                  Value**
              
              **Capital**
              
              **Deficit**
              
              **Total****Balances,
                  June 30, 2004**
              
              
              13,136,735
              
              $
              13,137
              
              $
              9,067,808
              
              $
              (7,794,841
              )
              $
              1,286,104Issuance
                  of common stock and warrants
              
              
              2,905,000
              
              
              2,905
              
              
              1,179,596
              
              
              —
              
              
              1,182,501Fees
                  associated with the registration of outstanding common
                  stock
              
              
              —
              
              
              —
              
              
              (84,822
              )
              
              —
              
              
              (84,822
              )Dividends
                  declared
              
              
              —
              
              
              —
              
              
              (40,000
              )
              
              —
              
              
              (40,000
              )Fair
                  value of conversion options added to preferred stock and note
                  payable
              
              
              —
              
              
              —
              
              
              250,000
              
              
              (100,000
              )
              
              150,000Discount
                  recorded on stockholder note
              
              
              —
              
              
              —
              
              
              5,000
              
              
              —
              
              
              5,000Warrants
                  issued for debt guarantee
              
              
              —
              
              
              —
              
              
              410,000
              
              
              —
              
              
              410,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,618,868
              )
              
              (2,618,868
              )**Balances,
                  June 30, 2005**
              
              
              16,041,735
              
              
              16,042
              
              
              10,787,582
              
              
              (10,513,709
              )
              
              289,915Issuance
                  of common stock in exchange for debt
              
              
              3,333,333
              
              
              3,333
              
              
              896,666
              
              
              —
              
              
              899,999Exercise
                  of common stock warrants and options
              
              
              5,864,143
              
              
              5,864
              
              
              1,186,487
              
              
              —
              
              
              1,192,351Dividends
                  declared
              
              
              —
              
              
              —
              
              
              (40,000
              )
              
              —
              
              
              (40,000
              )Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,241,738
              )
              
              (2,241,738
              )**Balances,
                  June 30, 2006**
              
              
              25,239,211
              
              $
              25,239
              
              $
              12,830,735
              
              $
              (12,755,447
              )
              $
              100,527
 
 
  *See
              Notes to Consolidated Financial Statements* *4*
 F-6
 **Decorize,
              Inc.**
 **Consolidated
              Statements of Cash Flows**
 **Years
              Ended June 30, 2006 and 2005**
   **2006**
              
              **2005****Operating
                  Activities**Net
                  loss
              
              $
              (2,241,738
              )
              $
              (2,618,868
              )Items
                  not requiring cashDepreciation
                  and amortization
              
              
              129,094
              
              
              162,630Compensatory
                  issuance of common stock and stock options
              
              
              —
              
              
              32,500Amortization
                  of debt discount and financing cost
              
              
              57,934
              
              
              832,515(Gain)
                  loss on disposal of property and equipment
              
              
              (127
              )
              
              8,480Changes
                  inTrade
                  accounts receivable
              
              
              (359,682
              )
              
              (1,061,497
              )Due
                  from factor
              
              
              —
              
              
              1,314,716Inventories
              
              
              (86,076
              )
              
              33,367Prepaid
                  expenses and other current assets
              
              
              (60,501
              )
              
              (18,886
              )Accounts
                  payable
              
              
              142,254
              
              
              416,984Accrued
                  expenses and other
              
              
              81,802
              
              
              (98,112
              )Net
                  cash used in operating activities
              
              
              (2,337,040
              )
              
              (996,171
              )**Investing
                  Activities**Purchase
                  of property and equipment
              
              
              (43,609
              )
              
              (89,537
              )Redemption
                  (purchase) of certificate of deposit
              
              
              750,000
              
              
              (673,267
              )Proceeds
                  from disposal of property and equipment
              
              
              2,060
              
              
              3,550Net
                  cash provided by (used in) investing activities
              
              
              708,451
              
              
              (759,254
              )**Financing
                  Activities**Principal
                  payments on long-term debt
              
              
              (63,616
              )
              
              (137,223
              )Proceeds
                  from issuance of stockholders’ notes payable
              
              
              750,000
              
              
              250,000Proceeds
                  from issuance of long-term debt
              
              
              430,000
              
              
              —Net
                  advances (repayments on) revolving line of credit
              
              
              (1,193,478
              )
              
              1,193,478Deferred
                  fees associated with bank financing
              
              
              (63,333
              )
              
              (42,933
              )Principal
                  payments on capital lease obligations
              
              
              (36,393
              )
              
              (48,507
              )Issuance
                  of common stock, net of related expenses
              
              
              942,348
              
              
              1,150,000Advances
                  from (repayments to) factor, net
              
              
              921,506
              
              
              (980,398
              )Net
                  cash provided by financing activities
              
              
              1,687,034
              
              
              1,384,417**Increase
                  (Decrease) in Cash and Cash Equivalents**
              
              
              58,445
              
              
              (371,008
              )**Cash
                  and Cash Equivalents, Beginning of Year**
              
              
              43,892
              
              
              414,900**Cash
                  and Cash Equivalents, End of Year**
              
              $
              102,337
              
              $
              43,892
  *See
            Notes to Consolidated Financial Statements* *6*
 F-7
 **Decorize,
            Inc.**
 **Consolidated
            Statements of Cash Flows**
 **Years
            Ended June 30, 2006 and 2005**
  
 **2006**
              
              **2005****Supplemental
                  Cash Flows Information**Interest
                  paid
              
              $
              496,392
              
              $
              202,628Common
                  stock warrants issued in connection with note payable
              
              
              —
              
              $
              5,000Fair
                  value of beneficial conversion option added to note
                  payable
              
              
              —
              
              $
              150,000Fair
                  value of beneficial conversion option added to Series A preferred
                  stock
              
              
              —
              
              $
              100,000Capital
                  lease obligations incurred for property and equipment
              
              $
              4,698
              
              $
              13,000Fair
                  value of warrants and beneficial conversion options issued for
                  guarantee
                  line of credit
              
              
              —
              
              $
              410,000Fair
                  value of warrants issued as compensation for investor relations
                  services
              
              
              —
              
              $
              13,000Dividend
                  accrued on preferred stock
              
              $
              40,000
              
              $
              40,000Accrued
                  fees associated with stock registration
              
              
              —
              
              $
              84,822Debt
                  and accrued interest converted to common stock
              
              $
              1,146,667
              
              
              —
 
  *See
              Notes to Consolidated Financial Statements* *5*
 F-8
 **Decorize,
                  Inc.**
 **Notes
                  to Consolidated Financial Statements**
 **June
                  30, 2006 and 2005**
  **Note
        1:** **Nature
        of Operations and Summary of Significant Accounting
        Policies**
  ***Nature
        of Operations***
  Decorize,
        Inc. (Decorize) and its subsidiaries, collectively (the “Company”), is a
        manufacturer and wholesaler of imported home furnishings and home accent
        items.
        Products are sold primarily to retailers in the United States.
  ***Principles
        of Consolidation***
  The
        consolidated financial statements include the accounts of Decorize, Inc.
        and its
        wholly owned subsidiaries, P.T. Niaga Merapi, Westway Enterprises Limited,
        GuildMaster, Inc. and Faith Walk Designs, Inc. All significant intercompany
        accounts and transactions have been eliminated in consolidation.
  ***Use
        of Estimates***
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires 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 those
        estimates.
  ***Cash
        Equivalents***
  The
        Company considers all liquid investments with original maturities of three
        months or less to be cash equivalents. At June 30, 2006 and 2005, the Company
        had no cash equivalents.
  ***Accounts
        Receivable***
  Accounts
        receivable are stated at the amount billed to customers. The Company provides
        an
        allowance for doubtful accounts, which is based upon a review of outstanding
        receivables, historical collection information and existing economic conditions.
        Accounts receivable are ordinarily due 30 to 60 days after the issuance of
        the
        invoice. Delinquent receivables are written off based on individual credit
        evaluation and specific circumstances of the customer. Provision (credit)
        for
        bad debts was $212,336 and $(13,902) for the years ended June 30, 2006 and
        2005,
        respectively.
  The
        Company has established relationships with several major customers. Sales
        to the
        Company’s top two customers accounted for 32% of total sales for the year ended
        June 30, 2006. Sales to one customer accounted for 50.5% for the year ended
        June
        30, 2005. The Company grants credit to customers who meet the Company’s
        preestablished credit requirements and generally does not require collateral
        to
        secure payment of accounts receivable.
  F-9
 **Decorize,
            Inc.**
 **Notes
            to Consolidated Financial Statements**
 **June
            30, 2006 and 2005**
 ***Inventory
        Pricing***
  Inventories
        consist primarily of finished and unfinished home furnishings and accessories.
        Inventories are stated at the lower of cost or market. Cost is determined
        using
        the first-in, first-out (FIFO) method and includes the cost of ocean freight
        and
        duties.
  ***Property
        and Equipment***
  Property
        and equipment are stated at cost less accumulated depreciation and are
        depreciated over the estimated useful life of each asset. Leasehold improvements
        are amortized over the shorter of the lease term or the estimated useful
        lives
        of the improvements. Depreciation has been computed by applying the
        straight-line method to each asset category over their estimated lives, as
        follows:
  **Category**
              
              **Estimated
                  Life**
              
              **Balance
                  at**
                **June
                  30, 2006**
              
              **Balance
                  at**
                **June
                  30, 2005**Automobiles
              
              
              5
                  years
              
              $
              34,728
              
              $
              34,728Warehouse
                  and production equipment
              
              
              5-7
                  years
              
              
              55,668
              
              
              46,611Computer
                  software
              
              
              3
                  years
              
              
              178,482
              
              
              178,482Office
                  and computer equipment
              
              
              3-7
                  years
              
              
              523,395
              
              
              512,127Leasehold
                  improvements
              
              
              Lease
                  term
              
              
              145,187
              
              
              108,479Construction
                  in progress
              
              
              
              
              
              —
              
              
              50,031Total
              
              
              
              
              
              937,460
              
              
              930,458Less
                  accumulated depreciation
              
              
              
              
              
              730,132
              
              
              601,725Property
                  and equipment, net
              
              
              
              
              $
              207,328
              
              $
              328,733
  ***Impairment
        of Long-lived Assets***
  Long-lived
        assets are reviewed for impairment whenever events or changes in circumstances
        indicate the carrying amount of an asset may not be recoverable. When events
        or
        changes in circumstances indicate an asset may not be recoverable, the Company
        estimates the future cash flows expected to result from the use of the asset.
        If
        the sum of the expected undiscounted future cash flows is less than the carrying
        value of the asset, an impairment loss is recognized. The impairment loss
        is
        recognized by measuring the difference between the carrying value of the
        assets
        and the estimated fair value of the assets. The Company’s estimates of fair
        values are based on the best information available and require the use of
        estimates, judgments and projections as considered necessary. The actual
        results
        may vary significantly. No impairment losses have been recorded in 2006 and
        2005.
  ***Goodwill***
  The
        Company applies the provisions of Statement of Financial Accounting Standards
        No. 142, *Goodwill
        and Other Intangible Assets* (SFAS
        No. 142). SFAS No. 142 requires that an intangible asset that is acquired
        shall
        be initially recognized and measured based on its fair value. SFAS No. 142
        also
        provides that goodwill should not be amortized, but shall be tested for
        impairment annually,
        or more frequently if circumstances indicate potential impairment, through
        a
        comparison of fair value to its carrying amount. The Company has not recorded
        a
        charge as a result of the required impairment tests in 2006 and
        2005.
  F-10
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
  ***Income
        Taxes***
  Deferred
        tax assets and liabilities are recognized for the tax effects of differences
        between the financial statement and tax bases of assets and liabilities.
        A
        valuation allowance is established to reduce deferred tax assets if it is
        more
        likely than not that a deferred tax asset will not be realized. Decorize,
        Inc.
        files consolidated income tax returns with its subsidiaries.
  ***Revenue
        Recognition***
  Revenue
        from the sale of the Company’s products is recognized as products are delivered
        to customers. Any customer deposits relate to amounts received in advance
        from
        customers for unshipped orders.
  ***Advertising
        Costs***
  The
        Company expenses advertising costs as they are incurred. Advertising and
        marketing expenses for the years ended June 30, 2006 and 2005, totaled $303,346
        and $265,962, respectively.
  ***Amounts
        Due To and From Related Parties***
  Accounts
        payable included amounts due to employees and stockholders totaling $52,607
        and
        $74,342 as of June 30, 2006 and 2005, respectively. Other accounts receivable
        from employees totaled $11,146 and $6,549 as of June 30, 2006 and 2005,
        respectively.
  ***Loss
        Per Share***
  Basic
        and
        diluted loss per share are computed by dividing the net loss increased by
        dividends declared on preferred stock by the weighted average number of common
        shares outstanding during the period and excludes the otherwise dilutive
        effects
        of outstanding stock options and warrants as their effects would be
        antidilutive.
  **June
                  30, 2006**
              
              **June
                  30, 2005**Net
                  loss, as reported
              
              $
              (2,274,738
              )
              $
              (2,618,868
              )Add:
                  Dividends declared on preferred stock
              
              
              (40,000
              )
              
              (40,000
              )Loss
                  available to common shareholders
              
              
              (2,314,738
              )
              
              (2,658,868
              )Divided
                  by weighted average shares outstanding
              
              
              18,866,739
              
              
              13,183,543Basic
                  and diluted loss per share
              
              $
              (0.12
              )
              $
              (0.20
              )
   F-11
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 **Stock-based
        Compensation**
  At
        June
        30, 2006 and 2005, the Company had a stock-based employee compensation plan,
        which is described more fully in *Note
        8* .
        Prior
        to July 1, 2005, the Company accounted for this plan under the recognition
        and
        measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related Interpretations. Accordingly, for the fiscal year ended June 30,
        2005,
        and prior years the only stock-based employee compensation cost reflected
        in net
        income was recognized on the intrinsic value method.
  Effective
        July 1, 2005, the Company adopted the fair value recognition provisions of
        Statement of Financial Accounting Standards (SFAS) No. 123(R), *Share-Based
        Payment* .
        The
        Company selected the modified prospective application method. Accordingly,
        after
        July 1, 2005, the Company began expensing the fair value of any stock options
        granted, modified, repurchased or cancelled.
  The
        following table illustrates the effect on net income and net income per share
        if
        the Company had applied the fair value recognition provisions of SFAS 123
        to
        options granted under the Company’s stock-based compensation plans prior to
        July 1, 2005. For purposes of this pro forma disclosure, the value of the
        options was estimated using a Black-Scholes-Merton option-pricing formula
        and
        amortized on a straight-line basis over the respective vesting periods of
        the
        awards.
  **Year
                  Ended****June
                  30,****2005**Loss
                  available to common shareholders
              
              $
              (2,658,868
              )Add:
                  Stock-based employee compensation expense included in reported
                  net
                  loss
              
              
              —Less:
                  Total stock-based employee compensation expense determined under
                  the fair
                  value based method
              
              
              (214,738
              )Pro
                  forma net loss available to common shareholders
              
              $
              (2,873,606
              )Net
                  loss per share available to common shareholdersBasic
                  and diluted - as reported
              
              $
              (0.20
              )Basic
                  and diluted - pro forma
              
              $
              (0.22
              )
 
 Disclosures
        for the year ended June 30, 2006, are not presented because stock-based payments
        were accounted for under SFAS 123(R)’s fair value method during this period (see *Note
        8* ).
  ***Preferred
        Stock***
  During
        2004, the Company issued 500,000 shares of Series A Convertible Preferred
        Stock.
        Each preferred share is convertible into one common share (subject to certain
        antidilution provisions). Conversion is at the shareholder’s option, or
        mandatory if the market price of the common stock exceeds $2.50 for ten
        consecutive trading days with a sufficient daily trading volume. Dividends
        are
        cumulative and accrue 8% per year, payable in arrears. Preferred shares may
        be
        redeemed at the shareholder’s option for $1.00 each plus accrued dividends in
        three equal annual payments beginning February 13, 2007, or earlier at the
        option of the Company (subject to a redemption premium). Holders of Series
        A
        preferred stock are entitled to elect up to two of the Company’s Board of
        Directors while 500,000 or more shares of Series A preferred stock are
        outstanding. All accrued preferred stock dividends must be paid before any
        dividends may be distributed to common shareholders and in the event of
        liquidation the preferred stock ranks prior to common to the extent of its
        redemption value. In January 2005, a conversion feature was added to the
        Series
        A preferred stock, enabling it to be converted to the Company common stock
        at a
        rate of $0.40 per share for an aggregate of 1,250,000 common shares. In June
        2005, the conversion price was amended to $0.20 per share, for an aggregate
        totaling 2,500,000 shares (see *Note
        6* ).
  F-12
 **Decorize,
            Inc.**
 **Notes
            to Consolidated Financial Statements**
 **June
            30, 2006 and 2005**
 ***Financial
        Instruments***
  The
        carrying amounts of the Company’s financial instruments, which consist
        principally of cash, certificate of deposit, accounts receivable, accounts
        payable and notes payable approximate fair value.
  ***Reclassifications***
  Certain
        reclassifications have been made to the 2005 financial statements to conform
        to
        fiscal 2006 presentation. These reclassifications have no effect upon net
        loss.
  ***Recent
        Accounting Standards***
  In
        November 2004, the FASB issued SFAS 151, *Inventory
        Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter
        4* .
        SFAS
        151 amends the guidance in ARB No. 43, Chapter 4, *Inventory
        Pricing* ,
        to
        clarify the accounting for abnormal amounts of idle facility expense, freight
        handling costs and wasted material (spoilage). SFAS 151 requires that those
        items be recognized as current-period charges regardless of whether they
        meet
        the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation
        of fixed production overhead to the costs of conversion be based on the normal
        capacity of the production facilities. The Company adopted SFAS 151 effective
        July 1, 2005. The adoption of SFAS 151 did not have a material impact on
        the Company’s financial condition, results of operations or liquidity.
  In
        December 2004, the FASB issued SFAS 123(R), *Share-Based
        Payment* .
         SFAS 123(R) replaces Statement of Financial Accounting Standards
        No. 123, *Accounting
        for Stock Issued to Employees* and
        supersedes Accounting Principles Board (APB) Opinion No. 25, *Accounting
        for Stock Issued to Employees* .
         SFAS 123(R) requires that compensation costs relating to share-based
        payment transactions be recognized in the consolidated financial statements.
        Compensation costs will be measured based on the fair value of the equity
        or
        liability instruments issued. SFAS 123(R) is effective as of the first annual
        reporting period that begins after June 15, 2005. The adoption of SFAS
        123(R) did not have a material impact upon the Company’s financial condition,
        results of operations or liquidity ( *Note
        8* ).
  F-13
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 In
        December 2004, the FASB issued SFAS 153, *Exchange
        of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
        Nonmonetary Transactions* .
        SFAS
        153 is based on the principle that exchange of nonmonetary assets should
        be
        measured based on the fair value of the assets exchanged. SFAS 153 eliminates
        the exception of nonmonetary exchanges of similar productive assets and replaces
        it with a general exception for exchanges of nonmonetary assets that do not
        have
        commercial substance. The Company adopted SFAS 153 effective July 1, 2005.
        The
        adoption SFAS 153 did not have a material impact on the Company’s financial
        condition, results of operations or liquidity.
  In
        March
        2005, the FASB issued FASB Interpretation No. 47 (FIN 47), *Accounting
        for Conditional Asset Retirement Obligations.* FIN 47
        clarifies that the term conditional asset retirement obligation as used in
        FASB
        Statement No. 143, *Accounting
        for Asset Retirement Obligations* ,
        refers
        to a legal obligation to perform an asset retirement activity in which the
        timing and (or) method of settlement are conditional on a future event that
        may
        or may not be within the control of the entity. The obligation to perform
        the
        asset retirement activity is unconditional even though uncertainty exists
        about
        the timing and (or) method of settlement. Uncertainty about the timing and
        (or)
        method of settlement of a conditional asset retirement obligation should
        be
        factored into the measurement of the liability when sufficient information
        exists. FIN 47 also clarifies when an entity would have sufficient information
        to reasonably estimate the fair value of an asset retirement obligation.
        FIN 47
        is effective no later than the end of fiscal years ending after
        December 15, 2005. The Company adopted FIN 47 effective July 1, 2005. 
The adoption of FIN 47 did not have a material impact on the Company’s financial
        condition, results of operations or liquidity.
  In
        May
        2005, the FASB issued SFAS 154, *Accounting
        Changes and Error Corrections* .
        SFAS
        154 replaces Accounting Principles Board Opinions No. 20, *Accounting
        Changes,* and
        SFAS 3, *Reporting
        Accounting Changes in Interim Financial Statements* .
        SFAS 154 provides guidance on the accounting for and reporting of
        accounting changes and error corrections. It establishes retrospective
        application to prior periods’ financial statements of changes in accounting
        principle, unless it is impracticable to determine either the period-specific
        effects or the cumulative effect of the change. When it is impracticable
        to
        determine the period-specific effects of an accounting change, SFAS 154
        requires application of the new accounting principle as of the earliest period
        for which retrospective application is practicable. When it is impracticable
        to
        determine the cumulative effect of applying a change in accounting principle
        to
        all prior periods, SFAS 154 requires application as if the accounting
        principle were adopted prospectively from the earliest date practicable. The
        Company has adopted the provisions of SFAS No. 154 which are effective for
        accounting changes and corrections of errors beginning after December 15,
        2005.
        The adoption did not have a material effect.
  In
        March
        2006, the FASB issued SFAS No. 155, *Accounting
        for Certain Hybrid Financial Instruments.* SFAS 155
        resolves certain accounting issues related to various hybrid financial
        instruments. The Company expects to adopt the provisions of SFAS No. 155
        effective for its fiscal year beginning July 1, 2007. The Company is still
        evaluating the impact of this standard, but does not expect its adoption
        to have
        a material effect.
  F-14
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
  In
        June 2006, the FASB issued FASB Interpretation 48, *Accounting
        for Uncertainty in Income Taxes* (Interpretation 48). Interpretation 48 provides clarifying guidance on the
        accounting for uncertainty in income taxes recognized in financial statements
        in
        accordance with SFAS 109, *Accounting
        for Income Taxes* ,
        and
        prescribes recognition and measurement guidance in determining amounts to
        be
        recorded in the financial statements. This Interpretation applies to all
        income
        based tax items and is effective for fiscal years beginning after
        December 15, 2006. The Company expects to adopt Interpretation 48 on
        July 1, 2006. The Company is currently evaluating the effect that the
        adoption of Interpretation 48 will have but does not expect it to be material.
  **Note
        2:** **Inventories**
  **2006**
              
              **2005**Raw
                  materials
              
              $
              33,234
              
              $
              54,440Work
                  in process
              
              
              8,500
              
              
              34,868Finished
                  units
              
              
              780,551
              
              
              646,901$
              822,285
              
              $
              736,209
 
  **Note
        3:** **Due
        from Factor and Line of Credit**
  On
        March
        31, 2006, the Company and Bibby Financial Services (Midwest), Inc. (BFS)
        entered
        into a new Master Purchase and Sale Agreement (the “Factoring Agreement”) to
        govern the exclusive global factoring arrangements provided by BFS. The new
        agreement replaces the Master Purchase and Sale Agreement (as amended, the
        “Factoring Agreement”) entered into between the Company and BFS in August 2005.
        The factoring arrangements provide the Company with a maximum credit facility
        of
        $2,000,000.
  Under
        the
        Factoring Agreement, the Company submits accounts receivable to be purchased
        by
        BFS, and BFS pays the Company up to 90% of the aggregate net face value of
        accounts receivable purchased, less applicable fees charged by BFS and a
        reserve
        withheld by BFS to serve as security in the event that BFS receives less
        than
        full payment for accounts purchased due to returns, allowances, deductions,
        disputes or chargebacks. All accounts submitted for purchase must be approved
        by
        BFS. Accounts are purchased on a recourse basis, and BFS has the right to
        charge
        back accounts purchased from the Company at any time. The Factoring Agreement
        requires the Company to grant BFS a first lien security interest in all of
        its
        accounts receivable, inventory, equipment and all cash held in bank accounts
        and
        certain related intangibles.
  BFS
        charges interest on amounts advanced to the Company under the Factoring
        Agreement at a rate of 1.00% above the prime rate of interest as published
        in
        the *Wall
        Street Journal* .
        BFS
        receives a factoring administration fee equal to 1.00% of the gross invoice
        amount of each account submitted. If total receivables are more than 60%
        for any
        one account debtor, BFS may charge the Company an additional 0.5% discount
        for
        accounts from that specific account debtor.
 F-15
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
  The
        Factoring Agreement requires the Company to maintain a level of accounts
        submitted for purchase each month that is equal to $500,000, on average,
        during
        each calendar quarter. If the level of purchased accounts falls below the
        $500,000 minimum average requirement in any calendar month, the Company is
        required to pay BFS a monthly purchase fee equal to the amount by which the
        fees
        paid to BFS for each month that does not meet the minimum requirements on
        average during a calendar quarter is less than $10,000, and the Company shall
        not pay less than $10,000 in such fees on average for any month in a calendar
        quarter.
  The
        initial term of the Factoring Agreement is 12 months and will be automatically
        extended for successive periods of 12 months unless terminated by the Company
        more than 60 but less than 90 days prior to the end of the term. BFS may
        terminate the Factoring Agreement at any time on 30 days prior notice to
        the
        Company. If the Company terminates the Factoring Agreement more than 60 days
        prior to the end of the then-current term, the Company will pay a termination
        fee equal to $10,000 for each month remaining during the term.
  On
        January 12, 2005, the Company obtained a line of credit from Bank of America,
        N.A. (the “Bank”) in the amount of up to $4,000,000 through May 31, 2005, and
        then decreasing to $3,000,000 from June 1, 2005, through maturity on December
        31, 2005. Interest was payable monthly at the average of daily fluctuating
        interest rates offered by major banks in London for U.S. dollar deposits,
        as
        determined by the Bank, plus two percentage points. The interest rate as
        of
        June 30, 2005, was 5.69%. The line of credit was secured by substantially
        all of the assets of the Company and its subsidiaries pursuant to a commercial
        security agreement.
  The
        line
        of credit was guaranteed by a shareholder, SRC Holdings Corporation, in an
        amount limited to $750,000 pursuant to a commercial guarantee. Quest Capital
        Alliance, L.L.C. (Quest), also a shareholder of the Company, agreed to provide
        a
        supplemental guarantee for $250,000 of the amount guaranteed by SRC, pursuant
        to
        an agreement between Quest and SRC. In addition, SRC and James K. Parsons,
        a
        director, officer and shareholder of the Company, each agreed to subordinate
        all
        present and future indebtedness owed to them by the Company to the Bank,
        pursuant to subordination agreements entered into by each of them in favor
        of
        the Bank.
  In
        June
        2005, the Company established a certificate of deposit with Bank of America,
        N.A. in the amount of $750,000 in exchange for termination of the guarantee.
        This certificate of deposit was liquidated in August 2005 when the Bank of
        America line of credit was terminated.
  **Note
        4:** **Notes
        Payable**
  **2006**
              
              **2005**Note
                  payable, bank (A)
              
              $
              6,015
              
              $
              40,244Inventory
                  line of credit (B)
              
              
              430,000
              
              
              —436,015
              
              
              40,244Less
                  current maturities
              
              
              6,015
              
              
              34,184$
              430,000
              
              $
              6,060
 F-16
 **Decorize,
          Inc.**
 **Notes
          to Consolidated Financial Statements**
 **June
          30, 2006 and 2005**
  
 (A)
              Note
                  payable to bank in monthly installments of $2,951, including interest
                  at
                  the bank’s prime rate plus 1% (9.25% at June 30, 2006) through August
                  2006, secured by inventories and accounts receivable. This loan
                  requires
                  the Company to maintain certain covenants, the more important of
                  which
                  restrict certain capital transactions and payment of
                  dividends.
  (B)
              Revolving
                  credit line of up to $750,000 due on May 5, 2009, to Quest Commercial
                  Finance L.L.C. with monthly interest at prime plus 5%, subject
                  to a
                  minimum of 10% (13.25% at June 30, 2006) secured by
                  inventories.
  The
        aggregate annual maturities of notes payable at June 30, 2006, are as
        follows:
  **Year
                  Ended June 30****,**
              
              **Aggregate
                  Principal Maturities**2007
              
              $
              6,0152008
              
              
              —2009
              
              
              430,000Total
                  principal due
              
              
              436,015Less
                  current portion
              
              
              6,015Long-term
                  debt
              
              $
              430,000
 Notes
        payable to stockholders at June 30, 2006, consists of the following unsecured
        notes:
  **2006**
              
              **2005**Note
                  payable (C)
              
              $
              24,275
              
              $
              53,687Note
                  payable (D)
              
              
              609,468
              
              
              844,460Note
                  payable (E)
              
              
              56,451
              
              
              56,451Note
                  payable (F)
              
              
              1,000,000
              
              
              1,000,000Note
                  payable (G)
              
              
              750,000
              
              
              750,000$
              2,440,194
              
              $
              2,704,598
 (C)
              The
                  Company issued a convertible term note in the amount of $750,000
                  and three
                  year warrants to purchase an aggregate of 300,000 shares of common
                  stock
                  to Nest USA, Inc. (Nest USA) on February 26,
                  2002.
  The
        estimated fair value of the warrants and beneficial conversion terms related
        to
        this convertible note payable amounted to $276,515 and $473,485, respectively,
        and were recorded as a discount on the note. The discount was amortized to
        interest expense over the two-year term of the convertible note payable using
        the interest method.
  F-17
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
  On
        January 1, 2003, an amended and restated convertible term note was issued
        which
        created new payment terms, extended the conversion option and required issuance
        of three year warrants for an additional 216,000 shares of the Company’s common
        stock at an exercise price of $2.80 per share that expire February 26, 2005.
        Principal and interest at 6% per annum were payable monthly in the amount
        of
        $17,500 commencing on January 31, 2003, continuing until January 31, 2004,
        when the monthly payments were scheduled to increase to $53,351. In April
        2003,
        the note holder agreed to defer $5,000 of the monthly payments of principal
        for
        April, May and June, which were paid as additional $5,000 principal payments
        in
        July, August and September of 2003.
  As
        of
        January 1, 2003, the estimated fair values of the warrants and beneficial
        conversion terms related to this convertible note were recognized as additional
        discounts to the carrying value of the note of $113,126 and $199,374,
        respectively, with an offsetting credit to paid-in capital. The aggregate
        discount on the convertible note as of January 1, 2003, was equal to its
        $750,000 face value. This discount is being amortized to interest expense
        over
        the revised note term using the interest method.
  In
        February 2004, the Company issued 409,700 shares of common stock to Nest
        USA in
        exchange for a $409,700 principal reduction in the existing convertible term
        note. The second amended and restated convertible note to Nest USA had an
        initial principal balance of $210,497, bears interest at 6% and provides
        for
        monthly payments of $10,000 each beginning February 1, 2004, with the balance
        due December 31, 2005. The balance due on the note is convertible into common
        stock at $1.00 per share for the term of the note. In connection with this
        transaction, the Company also amended certain outstanding warrants held by
        Nest
        USA to extend their expiration date to December 31, 2005, and issued another
        set
        of warrants to Nest USA exercisable for 400,000 shares of common stock at
        $1.40
        per share, that expire on December 31, 2006. The fair value of the new and
        extended warrants was recorded as a discount, reducing the carrying value
        of the
        note to zero. The discount is being amortized to interest expense over the
        revised term of the note using the interest method. During the years ended
        June
        30, 2006 and 2005, the amortization of discounts on this convertible note
        resulted in noncash interest expense of $0 and $119,190,
        respectively.
  (D)
              Stockholder
                  note payable, monthly interest at prime plus 1%, due July 31, 2008.
  (E)
              Stockholder
                  note payable, matured December 31, 2004. Interest is paid monthly
                  at prime
                  plus 1%.
  (F)
              Stockholder
                  note payable, interest at prime plus 1.25%, due July 31, 2006.
                  On July 31,
                  2006, this note was amended and restated with a due date of July
                  31, 2008.
  (G)
              Stockholder
                  note payable, interest at prime plus .5%, due upon demand. During
                  2005,
                  this note was amended to allow the holder to convert outstanding
                  principal
                  and unpaid interest into the Company’s common stock for $0.20 per share.
                  This note is convertible for 3,750,000 shares of common stock.
  F-18
 **Decorize,
          Inc.**
 **Notes
          to Consolidated Financial Statements**
 **June
          30, 2006 and 2005**
  The
        prime
        rate of interest at June 30, 2006, was 8.25%. The aggregate annual maturities
        of
        stockholder notes payable at June 30, 2006, are as follows:
  **Year
                  Ended June 30****,**
              
              **Aggregate
                  Principal Maturities**2007
              
              $
              830,7262008
              
              
              —2009
              
              
              1,609,468Total
                  principal due on stockholder notes payable
              
              
              2,440,194Less
                  current portion
              
              
              830,726Long-term
                  stockholder notes payable
              
              $
              1,609,468
  **Note
        5:** **Leases**
  The
        Company leases various plant, office and showroom facilities and certain
        other
        equipment under agreements accounted for as operating leases. These leases
        expire through November 2007 and certain leases contain renewal
        options.
  The
        Company also leases equipment under agreements accounted for as capital leases.
        The assets under capital leases are amortized on a straight-line basis over
        the
        term of the lease and lease amortization is included in depreciation expense.
        Property and equipment included $226,968 and $223,254 of assets under capital
        lease less $179,476 and $145,119 of accumulated depreciation at June 30,
        2006
        and 2005, respectively.
  Future
        minimum payments for noncancellable capital and operating leases with initial
        or
        remaining terms of one year or more at June 30, 2006, are as
        follows:
  **Operating**
                **Leases**
              
              **Capital**
                **Leases**2007
              
              $
              163,588
              
              $
              18,9132008
              
              
              156,056
              
              
              8,7662009
              
              
              120,764
              
              
              —2010
              
              
              40,649
              
              
              —$
              481,057
              
              
              27,679Less
                  amount representing interest
              
              
              
              
              
              2,424Present
                  value of future minimum lease payments
              
              
              
              
              
              25,255Less
                  current portion
              
              
              
              
              
              16,741$
              8,514
 Total
        rent expense incurred under operating leases amounted to $420,527 and $434,410
        for the years ended June 30, 2006 and 2005, respectively.
  F-19
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 **Note
        6:** **Stockholders** **’
        Equity**
  In
        consideration of SRC providing a commercial guarantee (the “Guarantee”) for a
        bank line of credit on January 12, 2005 (see *Note
        3)* ,
        the
        Company agreed to obtain life insurance policies on Steve Crowder, the President
        and Chief Executive Officer of the Company, with SRC, Quest and the Company
        as
        the beneficiaries under those policies. The Company also issued warrants
        to SRC
        to acquire 1,500,000 shares of the Company’s common stock and warrants to Quest
        to acquire 750,000 shares (the “New Warrants”). The New Warrants had an initial
        exercise price of $0.40 per share and were exercisable for five years. The
        Company also agreed to reduce the exercise price of warrants currently
        outstanding in favor of SRC and Quest that were exercisable for an aggregate
        1,500,000 shares of common stock and an aggregate 1,057,143 shares of common
        stock, respectively (the “Existing Warrants”), to $0.40 per share. The exercise
        period of the Existing Warrants was reduced such that 50% would have expired
        six
        months from the date of issuance and the remaining 50% would have expired
        one
        year from the date of issuance. The Company also reduced the applicable
        conversion price of all outstanding shares of its Series A Cumulative
        Convertible Preferred Stock, $.001 par value (the “Series A Preferred”), to a
        conversion price of $0.40 per share.
  Also
        in
        connection with the Guarantee, the Company issued a second amended and restated
        promissory note to SRC in the principal amount of $750,000 (the “Amended Note”),
        in replacement of a first amended and restated promissory note issued on
        September 30, 2004. Amounts outstanding under the Amended Note were convertible
        into shares of common stock at an initial conversion price of $0.40.
  The
        fair
        value of the new warrants and the beneficial conversion feature of the second
        amended and restated promissory note, combined with the relative increase
        in the
        fair value of the modified outstanding warrants represented the aggregate
        fair
        value of the guarantees provided by SRC and Quest, $410,000. This asset was
        to
        be amortized to expense on the straight-line method over the term of the
        guarantee.
  On
        May
        31, 2005, the Company completed the private placement of 1,000,000 shares
        of its
        common stock to Nest USA. In connection with this transaction, the Company
        agreed to amend certain outstanding warrants held by Nest USA exercisable
        for an
        aggregate 996,000 shares of common stock, in order to reduce the exercise
        price
        of the warrants to $0.20 per share and extend the period during which the
        warrants were exercisable to May 31, 2007. The total purchase price for the
        shares and the amended warrants was $400,000.
  On
        June
        15, 2005, the Company completed the private placement of 1,875,000 shares
        of its
        common stock pursuant to the terms of a Securities Purchase Agreement (the
        “Purchase Agreement”) entered into between the Company, SRC Holdings Corporation
        and Quest on that same date. The Purchase Agreement provides for the Company
        to
        issue 1,250,000 of the shares to SRC and 625,000 of the shares to Quest.
        The
        Company also agreed to amend certain outstanding warrants held by SRC and
        Quest
        (the “Amended Warrants”), which are exercisable for an aggregate 3,000,000
        shares of common stock and 1,807,143 shares of common stock, respectively,
        in
        order to reduce the exercise price of the Amended Warrants to $0.20 per share
        and extend the period during which some the Amended Warrants are exercisable.
 F-20
  At
        the
        closing of the sale of the shares, SRC received certificates representing
        Amended Warrants that were exercisable, in whole or in part, for 1,500,000
        shares of common stock, which terminate on May 31, 2007, and a second set
        of
        Amended Warrants that were exercisable, in whole or in part, for another
        1,500,000 shares of common stock, which terminate on April 11, 2010. Quest
        also
        received certificates representing Amended Warrants that were exercisable,
        in
        whole or in part, for 1,807,143 shares of common stock, which terminate on
        May
        31, 2007, and a second set of Amended Warrants that were exercisable, in
        whole
        or in part, for another 750,000 shares of common stock, which terminate on
        April
        11, 2010. The initial exercise price of the Amended Warrants is $0.20 per
        share.
  A
        further
        condition to closing under the Purchase Agreement was for the Company to
        obtain
        a release of a $750,000 commercial guarantee executed by SRC in connection
        with
        the bank line of credit (see *Note
        3* ).
        Decorize obtained the release of the commercial guarantee in connection with
        the
        termination of its line of credit with Bank of America. The unamortized balance
        of the asset representing the fair value of the guarantee was charged to
        interest expense when the guarantee was released.
  As
        a
        condition to closing the sale of the shares, the Company agreed to file an
        amendment to its Certificate of Designation for its Series A Convertible
        Preferred Stock, $.001 par value per share, in order to reduce the applicable
        conversion price of all outstanding shares of its preferred stock to a
        conversion price of $0.20 per share. Of the Series A Preferred stock, 500,000
        shares were outstanding as of June 30, 2006, which are convertible into an
        aggregate 2,500,000 shares of common stock.
  The
        increase in the value of the beneficial conversion feature of the second
        amended
        and restated promissory note of $150,000 was charged to interest expense.
        The
        increase in the value of the beneficial conversion feature of the Company’s
        Series A Convertible Preferred Stock of $100,000 was recognized as a
        constructive dividend and charged against accumulated deficit in the quarter
        ended June 30, 2005.
  On
        November 16, 2005, SRC Holdings Corporation exercised stock purchase warrants
        for 1,500,000 shares of the common stock of the Company at a price of $0.20
        per
        share, for a total purchase price of $300,000.
  On
        December 13, 2005, the Company obtained a four-month revolving line of credit
        from Quest Capital Alliance II, L.L.C., in an amount up to $500,000. In
        consideration of providing the line of credit, the Company paid Quest Capital
        Alliance II, L.L.C. a commitment fee of $33,333. After April 13, 2006, any
        outstanding principal and interest became convertible into the Company’s common
        stock at a rate of $0.20 per share at the sole option of Quest Capital Alliance
        II, L.L.C. The note was converted into 2,500,000 shares of common stock on
        May
        5, 2006.
  On
        January 9, 2006, Nest USA, Inc. exercised common stock purchase warrants
        for
        625,000 shares of common stock at a price of $0.20 per share, for a total
        purchase price of $125,000.
  On
        March
        7, 2006, Quest Capital Alliance, L.L.C. exercised common stock purchase warrants
        for an aggregate 1,807,143 shares of common stock at a price of $0.20 per
        share,
        for a total purchase price of $361,429.
  F-21
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 On
        March
        14, 2006, SRC Holdings Corporation exercised warrants for the purchase of
        an
        aggregate 1,500,000 shares of the common stock at a price of $0.20 per share,
        for a total purchase price of $300,000.
  On
        March
        20, 2006, Nest USA exercised warrants for the purchase of 371,000 shares
        of
        common stock at a price of $0.20 per share, for a total purchase price of
        $74,200.
  James
        K.
        Parsons, a director and the Executive Vice President of the Company, exchanged
        $400,000 in principal owed to him under an existing promissory note, which
        was
        last amended in August 2004, for 833,333 shares of common stock issued to
        him on
        May 5, 2006. The exchange was made in accordance with a stock exchange agreement
        entered into on May 5, 2006. As a result of the exchange, the outstanding
        principal amount of Mr. Parson’s note was reduced to $609,468.
  Also
        on
        May 5, 2006, the Company completed a private placement of 2,500,000 shares
        of
        its common stock to Quest Capital Alliance II, L.L.C. for an aggregate price
        of
        $500,000. The proceeds were used to pay off a short-term note that the Company
        owed to Quest Capital Alliance II, L.L.C.
  
  **Note
                7:**
              **Income
                  Taxes**
  The
        provision for income taxes includes these components:
  **2006**
              
              **2005**Taxes
                  currently payable
              
              $
              —
              
              $
              —Deferred
                  income taxes
              
              
              —
              
              
              —Income
                  tax expense
              
              $
              0
              
              $
              0
 A
        reconciliation of income tax expense at the statutory rate to the Company’s
        actual income tax expense is shown below:
  **2006**
              
              **2005**Computed
                  at the statutory rate (34%)
              
              $
              (762,191
              )
              $
              (890,415
              )Increase
                  (decrease) resulting fromNondeductible
                  expenses
              
              
              201,895
              
              
              216,182State
                  income taxes
              
              
              (9,309
              )
              
              (82,061
              )Changes
                  in the deferred tax asset valuation allowance including adjustments
                  to
                  prior net operating loss carryforwards
              
              
              630,298
              
              
              728,922Other
              
              
              (60,693
              )
              
              27,372Actual
                  tax expense
              
              $
              0
              
              $
              0
  F-22
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 The
        tax
        effects of temporary differences related to deferred taxes shown on the balance
        sheets were:
  **2006**
              
              **2005**Deferred
                  tax assetsAllowance
                  for doubtful accounts
              
              $
              95,000
              
              $
              22,825Accrued
                  compensated absences
              
              
              9,500
              
              
              9,500Reserve
                  for obsolete inventories
              
              
              19,000
              
              
              19,000Net
                  operating loss carryforwards
              
              
              3,456,572
              
              
              2,912,148Property
                  and equipment
              
              
              7,257
              
              
              4,667Charitable
                  contribution carryforwards and other
              
              
              5,844
              
              
              21,6003,593,173
              
              
              2,989,740Deferred
                  tax liabilitiesPrepaid
                  insurance
              
              
              (15,728
              )
              
              (20,501
              )Inventory
                  adjustments
              
              
              (10,386
              )
              
              (32,478
              )(26,114
              )
              
              (52,979
              )Net
                  deferred tax asset before valuation allowance
              
              
              3,567,059
              
              
              2,936,761Valuation
                  allowanceBeginning
                  balance
              
              
              (2,936,761
              )
              
              (2,417,196
              )Increase
                  during the period
              
              
              (630,298
              )
              
              (519,565
              )Ending
                  balance
              
              
              (3,567,059
              )
              
              (2,936,761
              )Net
                  deferred tax asset
              
              $
              0
              
              $
              0
 For
        the
        years ended June 30, 2006 and 2005, the Company recorded a valuation allowance
        for the full amount of the net deferred tax asset otherwise recorded due
        to the
        losses causing uncertainty as to the realizability of the deferred tax assets
        in
        future years. As of June 30, 2006 and 2005, the Company had approximately
        $9,100,000 and $7,600,000, respectively, of net operating loss carryforwards
        available to offset future federal income taxes. The carryforwards expire
        in
        varying amounts from 2021 to 2026, if unused. Utilization of the net operating
        loss carryforwards may be subject to certain limitations as a result of changes
        in ownership of the Company.
  F-23
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 **Note
        8:** **Stock-based
        Compensation**
  ***Adoption
        of SFAS 123(R)***
  Prior
        to
        July 1, 2005, the Company’s stock-based employee compensation plan was
        accounted for under the recognition and measurement provisions of Accounting
        Principles Board Opinion (APBO) No. 25, *Accounting
        for Stock Issued to Employees* (APBO
        25), and related Interpretations, as permitted by FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* ,
        (SFAS
        123). The Company generally did not recognize stock-based compensation cost
        in
        its statement of operations for periods prior to July 1, 2005, as most
        options granted had an exercise price equal to the market value of the
        underlying common stock on the date of grant. However, compensation expense
        was
        recognized under APBO 25 for certain options based upon the intrinsic value
        (the
        difference between the exercise price and the deemed fair value of the common
        stock at the date of grant).
  Effective
        July 1, 2005, the Company adopted the fair value recognition provisions of
        SFAS No. 123 (Revised 2004), *Share-Based
        Payment* ,
        (SFAS
        123(R)), using the modified-prospective-transition method. Results for prior
        periods have not been restated.
  The
        Company’s loss from operations, loss before income taxes, net loss, basic and
        diluted loss per share available to common stockholders were not different
        as a
        result of the adoption of SFAS 123(R) for the year ended June 30, 2006, than
        if
        it had continued to account for share-based compensation under the recognition
        and measurement provisions of APBO 25, and related Interpretations, as permitted
        by SFAS 123.
  ***Equity
        Incentive Plan***
  The
        Company’s 1999 Equity Incentive Plan (the “Plan”), which is shareholder
        approved, permits the grant of nonqualified options to its employees,
        consultants and directors for up to 3 million shares of common stock. The
        Company believes that such awards better align the interests of its employees
        with those of its shareholders. Option awards are generally granted with
        an
        exercise price equal to the market price of the Company’s stock at the date of
        grant; those option awards generally vest based on three years of continuous
        service and typically have seven-year contractual terms. All outstanding
        stock
        options were fully vested as of June 30, 2005.
  The
        fair
        value of each option award is estimated on the date of grant using a
        Black-Scholes-Merton option valuation model that uses the assumptions noted
        in
        the following table. Expected volatility is based on historical volatility
        of
        the Company’s stock and other factors. The Company uses historical data to
        estimate option exercise and employee termination within the valuation model.
        The expected term of options granted represents the period of time that options
        granted are expected to be outstanding. The risk-free rate for periods within
        the contractual life of the option is based on the implied yield available
        on
        the grant date for U.S. Treasury zero-coupon issues with an equivalent remaining
        term. Where the expected term of the Company’s stock-based awards does not
        correspond with the terms for which interest rates are quoted, the Company
        uses
        a straight-line interpolation to determine the rate from the available term
        maturities.
  F-24
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
 No
        options were granted during the year ended June 30, 2006. The fair value
        of
        options granted during the year ended June 30, 2005, was estimated on the
        date
        of the grant using the Black-Scholes-Merton option-pricing model with the
        following weighted average assumptions:
  **2005**Dividend
                  per share
              
              $
              —Risk-free
                  interest rate
              
              
              3.72
              %Weighted
                  average expected life of options
              
              
              3
                  yearsExpected
                  volatility of the Company’s common stock market price
              
              $
              0.5543Weighted
                  average fair value of options granted during the year
              
              $
              0.21
 
 On
        May 4, 2005, the Board of Directors approved the cancellation of 805,000
        options granted on various dates with various vesting periods, held by employees
        and directors of the Company. In exchange, the Company granted 858,000 options
        at $0.52 per share, the fair market value on that date. The options were
        granted
        under the 1999 Equity Incentive Plan, have a seven-year life and were fully
        vested and exercisable when granted. The weighted average grant date fair
        value
        of options granted during the year ended June 30, 2005, was $.21 per share.
  A
        summary
        of option activity under the Plan as of June 30, 2006 and 2005, and changes
        during the years then ended, is presented below:
  **2006**
              
              **2005****Shares**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Shares**
              
              **Weighted
                  Average Exercise Price**Outstanding,
                  beginning of year
              
              
              916,207
              
              $
              0.56
              
              
              923,261
              
              $
              1.18Granted
              
              
              —
              
              
              —
              
              
              858,000
              
              
              .52Exercised
              
              
              (61,000
              )
              
              .52
              
              
              —
              
              
              —Forfeited
              
              
              (146,707
              )
              
              .78
              
              
              (865,054
              )
              
              1.18Outstanding,
                  end of year
              
              
              708,500
              
              
              .52
              
              
              916,207
              
              
              .56Options
                  exercisable, end of year
              
              
              708,500
              
              
              .52
              
              
              916,207
              
              
              .56
 The
        aggregate intrinsic value of options outstanding and exercisable as of June
        30,
        2006 and 2005, was $0 and $100,800, respectively. The aggregate intrinsic
        value
        is calculated as the difference between the exercise price of the underlying
        awards and the quoted price of the Company’s common stock for the options that
        were in-the-money.
  The
        total
        intrinsic value of options exercised during years ended June 30, 2006 and
        2005,
        was $100 and $0, respectively.
  F-25
  The
        Company had no nonvested shares as of June 30, 2006 and 2005.
  As
        of
        June 30, 2006, there was no unrecognized compensation cost related to nonvested
        share-based compensation arrangements granted under the Plan. The total fair
        value of shares vested during the years ended June 30, 2006 and 2005, was
        $0 and
        $214,738, respectively.
  Prior
        to
        the adoption of SFAS 123(R), the Company presented all tax benefits of
        deductions resulting from the exercise of stock options as operating cash
        flows
        in its statement of cash flows. In accordance with guidance in SFAS 123(R),
        the
        cash flows resulting from excess tax benefits (tax benefits related to the
        excess of proceeds from employee’s exercises of stock options over the
        stock-based compensation cost recognized for those options) are classified
        as
        financing cash flows. The Company recorded no excess tax benefits as financing
        cash inflows during the years ended June 30, 2006 and 2005, because of the
        full
        valuation allowance established against the Company’s deferred tax
        assets.
  The
        following table summarizes information about stock options under the Plan
        outstanding at June 30, 2006:
  **Options
                  Outstanding**
              **Options
                  Exercisable****Range
                  of Exercise Prices**
              **Number
                  Outstanding**
              **Weighted
                  Average**
                **Remaining
                  Contractual Life**
              **Weighted
                  Average**
                **Exercise
                  Price**
              **Number
                  Exercisable**
              **Weighted
                  Average**
                **Exercise
                  Price**$0.52
              708,500
              5.8
                  years
              $0.52
              708,000
              $0.52
  **Note
        9:** **Significant
        Estimates and Concentrations**
  Accounting
        principles generally accepted in the United States of America require disclosure
        of certain significant estimates and current vulnerabilities due to certain
        concentrations. Those matters include the following:
  ***Major
        Supplier***
  The
        Company purchased approximately 28% and 40% of its principal products from
        one
        supplier during the years ending June 30, 2006 and 2005, respectively. There
        are
        a limited number of suppliers for these products.
  ***Foreign
        Assets***
  As
        of
        June 30, 2006, net assets located outside the United States totaled
        approximately $524,000. These assets consisted principally of the inventory
        and
        equipment of Pt. Niaga Merapi facility in Indonesia totaling approximately
        $167,000 and products in transit from Indonesia to the United States of
        approximately $345,000. The equipment located in China totaled approximately
        $12,000.
  F-26
 **Decorize,
          Inc.**
 **Notes
          to Consolidated Financial Statements**
 **June
          30, 2006 and 2005**
  As
        of
        June 30, 2005, net assets located outside the United States totaled
        approximately $343,000. These assets consisted principally of the inventory
        and
        equipment of Pt. Niaga Merapi facility in Indonesia totaling approximately
        $151,000 and products in transit from Indonesia to the United States of
        approximately $173,000. The equipment located in China totaled approximately
        $19,000.
  **Note
        10:** **Profit-sharing
        Plan**
  ***Profit-sharing
        Plan***
  The
        Company has a 401(k) profit-sharing plan covering substantially all employees.
        The Company’s contributions to the plan are determined annually by the Board of
        Directors. There were no Company contributions to the plan for 2006 or
        2005.
  **Note
        11:** **Future
        Liquidity Needs**
  The
        Company has incurred losses and recurring negative cash flows since formation.
        Management is continuing to evaluate and implement strategies to mitigate
        these
        conditions during the next fiscal year. These include establishing and expanding
        relationships with key customers, renewed focus on specialty retail customers,
        better margin management through improved operational processes, selective
        reductions of operating overhead and seeking additional sources of equity
        and
        debt financing.
  Management
        believes that additional financing may be needed to meet the capital
        requirements associated with the Company’s growth objectives or to retire
        existing debt. Management is evaluating alternatives for obtaining new debt
        and
        equity financing to meet future capital requirements, or to retire debt as
        deemed appropriate.
  As
        described in *Note
        12* ,
        subsequent to year end the Company established new short-term working capital
        facilities which provided additional liquidity of approximately $750,000.
  **Note
        12:** **Subsequent
        Events**
  On
        August
        17, 2006, the Company issued a three-month promissory note payable to Quest
        Capital Alliance II, L.L.C. in the original principal amount of $75,000 which
        matures on November 17, 2006, with interest at 13.25%. If a default occurs
        the
        unpaid outstanding principal balance will become due immediately and thereafter
        accrue interest at a rate equal to 16.25%.
 F-27
 
 **Decorize,
              Inc.**
 **Notes
              to Consolidated Financial Statements**
 **June
              30, 2006 and 2005**
  On
        September 11, 2006, the Company issued a promissory note payable to Quest
        Capital Alliance II, L.L.C. in the amount of $750,000. Principal funded to
        the
        Company was discounted by an origination fee of $41,500 which will be amortized
        to interest expense over the term of the note. Stephen W. Fox, who is the
        general manager of the Lender, is also a director of the Company. Interest
        on
        the outstanding principal commencing on January 9, 2007, at a rate of (i)
        eighteen percent (18%) per annum, if the balance is paid in full during the
        period commencing January 9, 2007, and ending on February 12, 2007, or (ii)
        twenty-one percent (21%) per annum, if the note is paid in full during the
        period commencing on February 13, 2007, and ending on March 15, 2007. The
        note
        matures, and all outstanding principal and accrued interest is due and payable
        in full, on the earliest of (i) the date of the Company has delivered invoices
        to customers related to certain Company purchase orders or (ii) March 15,
        2007.
        The default interest rate is equal to twenty-one percent (21%) per annum.
        The
        note is secured by a security interest in the Company’s inventory and proceeds
        from inventory.
  F-28


**Item
        8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None.
  **Item
        8A. CONTROLS AND PROCEDURES.**
 
 We
        carried out an evaluation of the effectiveness of the design and operation
        of
        our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
        and
        15d-15 as of June 30, 2006, the end of our fourth fiscal quarter, which is
        the
        last period presented in this report. The evaluation was carried out under
        the
        supervision of our Chief Executive Officer and Chief Financial Officer and
        with
        the participation of our management group and our audit committee. Our
        disclosure controls and procedures are designed to ensure that information
        that
        is required to be included in our filings with the Commission is recorded,
        processed, summarized and reported within the time periods specified by the
        Commission, and that such information is accumulated and communicated to
        our
        management, including our Chief Executive Officer and Chief Financial Officer,
        as appropriate to allow timely decisions regarding required disclosure. Based
        on
        that evaluation, our Chief Executive Officer and Chief Financial Officer
        concluded that Decoirze’s disclosure controls and procedures were not effective
        as of June 30, 2006 for the reasons described below.
 
 The
        audit
        committee of our Board of Directors held a special meeting on September 23,
        2005, which was also attended by the Chief Financial Officer and Chief Executive
        Officer, in order to discuss issues that had been raised by Decorize’s
        independent registered public accountants, BKD, LLP (“BKD”), with respect to
        Decorize’s historical balance sheet treatment of its outstanding shares of
        Preferred Stock. During the meeting, BKD also presented the audit committee
        with
        written notice that its audit of the fiscal year ended June 30, 2005 revealed
        certain matters which BKD considered to be control deficiencies, significant
        deficiencies or material weaknesses in Decorize’s internal control over
        financial reporting. The items noted included the failure to document accounting
        processes and policies, the inability to segregate accounting duties due
        to lack
        of available personnel, the lack of resources available to apply new and
        complex
        accounting standards, and the need for improvement to overhead allocation
        and
        inventory accounting. The audit committee instructed management to review
        the
        control deficiencies, significant deficiencies and material weaknesses that
        BKD
        communicated and to determine the appropriate corrective actions to be taken.
 
 Management
        has begun taking steps to attempt to address the deficiencies and weaknesses
        noted by BKD, however, it has not successfully resolved the matters raised
        by
        BKD. After BKD completed its audit procedures for the fiscal year ended June
        30,
        2006, BKD sent written notice to the audit committee advising that its audit
        had
        again revealed certain matters which BKD considered to be control deficiencies,
        significant deficiencies or material weaknesses in Decorize’s internal control
        over financial reporting. The notice referenced material weakness with respect
        to the Company's failure to segregate accounting duties and the lack of
        resources, research tools and personnel to evaluate the proper application
        of
        new and complex accounting standards, and significant deficiencies with respect
        to the Company's failure to properly document accounting processes and policies,
        and the failure to segregate accounting duties at the Company's Indonesian
        production facility. The audit committee has again requested that management
        review the control deficiencies, significant deficiencies and material
        weaknesses that BKD communicated, discuss those matters and possible remedial
        actions with BKD and determine appropriate corrective actions. After receiving
        and considering the recommendations of management, the audit committee will
        instruct management to make a determination regarding any corrective actions
        to
        be taken to address the significant deficiencies, control deficiencies and
        material weaknesses noted by BKD.
  **Item
        8B. OTHER INFORMATION.**
 
 None.


21


**PART
      III**





**Item** **9.**  **DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE EXCHANGE ACT**





**Code
      of Ethics**





Our
      Board
      of Directors has adopted a code of ethics that applies to our Chief Executive
      Officer (our principal executive officer) and our Chief Financial Officer (our
      principal financial officer and principal accounting officer). We will provide
      to any person, without charge and upon request, a copy of this code of


ethics.
      All such requests should be mailed to: Decorize, Inc., 1938 E. Phelps,
      Springfield, MO 65802, Attention: Gaylen Ball.





All
      other
      information required by this Item 9 is incorporated by reference to the
      disclosure under the captions “Election of Directors - Nominees,” “Election of
      Directors - Audit Committee,” “Election of Directors - Management” and
“Executive Compensation - Section 16(a) Beneficial Ownership Reporting
      Compliance” in our Proxy Statement to be filed pursuant to Regulation 14A of the
      Exchange Act in connection with our Annual Meeting of Stockholders to be held
      on
      November 3, 2006.





**Item
      10. EXECUTIVE COMPENSATION**





The
      information required by this Item 10 is incorporated by reference to the
      disclosure under the captions “Executive Compensation” and “Election of
      Directors - Attendance and Compensation” in our Proxy Statement to be filed
      pursuant to Regulation 14A of the Exchange Act in connection with our Annual
      Meeting of Stockholders to be held on November 3, 2006.





**Item
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      information required by this Item 11 is incorporated by reference to the
      disclosure under the caption “Security Ownership of Certain Beneficial Owners
      and Management” in our Proxy Statement to be filed pursuant to Regulation 14A of
      the Exchange Act in connection with our Annual Meeting of Stockholders to be
      held on November 3, 2006.





**Item
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      information required by this Item 12 is incorporated by reference to the
      disclosure under the caption “Executive Compensation - Certain Relationships and
      Related Transactions” in our Proxy Statement to be filed pursuant to Regulation
      14A of the Exchange Act in connection with our Annual Meeting of Stockholders
      to
      be held on November 3, 2006.





**Item
      13. EXHIBITS**




The
        exhibits listed below are filed with or incorporated by reference into this
        Annual Report on Form 10-KSB. Exhibits denominated with numbered footnotes
        are
        incorporated by reference to the other filings with the Commission set forth
        below. Items listed in boldface are management contracts or compensatory
        plans
        or arrangements required to be filed pursuant to Item 15(c) of this
        Report.




Exhibit
                Number
              
              Description
 3.1
                
                Certificate
                    of Incorporation of Decorize, Inc., State of Delaware, dated
                    June 27,
                    2001. (1)3.2
                
                Bylaws
                    of Decorize, Inc. (1)4.1
                
                Securities
                    Purchase Agreement dated as of May 31, 2005, between Decorize,
                    Inc. and
                    Nest USA, Inc. (3)4.2
                
                Registration
                    Rights Agreement, dated as of May 31, 2005, between Decorize,
                    Inc. and
                    Nest USA, Inc. (3)4.3
                
                Securities
                    Purchase Agreement dated as of June 15, 2005, by and among Decorize,
                    Inc.,
                    SRC Holdings Corporation and Quest Capital Alliance, L.L.C. (4)4.4
                
                Registration
                    Rights Agreement dated as of May 31, 2005, between Decorize,
                    Inc., SRC
                    Holdings Corporation and Quest Capital Alliance, L.L.C. (4)4.5
                
                Second
                    Amended and Restated Certificate of Designation of the Series
                    A
                    Convertible Preferred Stock of Decorize, Inc. (4)4.6
                
                Warrant
                    Certificate dated as of May 2, 2005, for the purchase of 120,000
                    shares of
                    Common Stock, issued by December 17 in the name of Blodnick Gordon
                    Fletcher & Sibell, P.C. (5)4.7
                
                Securities
                    Purchase Agreement dated as of February 13, 2004, among Decorize,
                    Inc.,
                    SRC Holdings Corporation and Quest Capital Alliance, L.L.C. (6)4.8
                
                Registration
                    Rights Agreement dated as of February 13, 2004, among Decorize,
                    Inc., SRC
                    Holdings Corporation and Quest Capital Alliance, L.L.C. (6)4.9
                
                Voting
                    Agreement and related Proxy, dated February 13, 2004, by and
                    between SRC
                    Holdings Corporation and James K. Parsons (6)
 22
  Exhibit
                Number
              
              Description
 4.10
              
              Stock
                  Exchange Agreement dated as of January 21, 2004, between Decorize,
                  Inc.
                  and NEST USA, Inc. (6)4.11
              
              Registration
                  Rights Agreement dated as of January 21, 2004, between Decorize,
                  Inc. and
                  NEST USA, Inc. (6)4.12
              
              Second
                  Amended and Restated Promissory Note dated January 21, 2004, issued
                  by
                  Decorize, Inc. in the name of NEST USA, Inc. (6)4.13
              
              Stock
                  Purchase Agreement dated as of January 16, 2004, between Decorize,
                  Inc.
                  and James K. Parsons (6)4.14
              
              Stock
                  Purchase Agreement dated as of January 16, 2004, among Decorize,
                  Inc.,
                  John Michael Sandel and Kitty Sandel (6)4.15
              
              Stock
                  Purchase Agreement dated as of January 30, 2004, between Decorize,
                  Inc.
                  and Jon T. Baker (6)4.16
              
              Subordinated
                  Promissory Note dated as of January 30, 2004, made by Decorize,
                  Inc. in
                  favor of Jon T. Baker (6)4.17
              
              Amended
                  and Restated Promissory Note dated December 10, 2003, issued by
                  Decorize,
                  Inc. in the name of James K. Parsons (7)4.18
              
              Subordinated
                  Security Agreement dated as of December 10, 2003, between Decorize,
                  Inc.
                  and James K. Parsons (7)4.19
              
              Stock
                  Purchase Agreement, dated as of December 9, 2003, by and between
                  James K.
                  Parsons, each of the purchasers listed thereon, and Decorize, Inc.
                  (8)4.20
              
              Letter
                  agreement dated April 29, 2004, by and between Decorize, Inc. and
                  SRC
                  Holdings Corporation (9)4.21
              
              Securities
                  Purchase Agreement, dated as of February 26, 2002, by and between
                  Decorize, Inc. and NEST USA, Inc., together with all exhibits and
                  schedules (10)4.22
              
              Form
                  of Decorize, Inc. Stock Certificate (11)10.1
              
              Promissory
                  Note dated June 15, 2001 between Decorate, Inc. and Jon T. Baker.
                  (1)10.2
              
              Promissory
                  Note dated June 15, 2001 between Decorate, Inc. and James K. Parsons.
                  (1)10.3
              
              Employment
                  Agreement between Decorate, Inc. and James K. Parsons dated June
                  15, 2001.
                  (1)10.4
              
              Employment
                  Agreement between Decorize, Inc. and John Michael Sandel dated
                  July 31,
                  2001. (2)10.5
              
              Decorize,
                  Inc. 1999 Stock Option Plan. (12)10.6
              
              Form
                  of Employee Incentive Stock Option Notice and Agreement.
                  (12)10.7
              
              Master
                  Purchase and Sale Agreement between Decorize, Inc. and Bibby Financial
                  Services (Midwest) Inc. dated March 31, 2006. (13)10.8
              
              Commercial
                  Security Agreement dated May 5, 2006, by and between Decorize,
                  Inc. and
                  Quest Commercial Finance, L.L.C. (14)10.9
              
              Revolving
                  Line of Credit Promissory Note in the Principal Amount of up to
                  $750,000,
                  issued to Quest Commercial Finance, L.L.C. on May 5, 2006.
                  (14)10.10
              
              Third
                  Amended and Restated Promissory Note, issued by Decorize, Inc.
                  to James K.
                  Parsons on May 5, 2006. (14)10.11
              
              Stock
                  Exchange Agreement, dated May 5, 2006, by and between Decorize,
                  Inc. and
                  James K. Parsons. (14)10.12
              
              Stock
                  Exchange Agreement, dated May 5, 2006, by and between Decorize,
                  Inc. and
                  Quest Capital Alliance II, L.L.C.
                  (14)
  23
 Exhibit
                Number
              
              Description
 21.1
                  
                  Subsidiaries
                      of the Registrant. (15)23.1
                  
                  Consent
                      of Registered Public Accounting Firm. (15)31.1
                  
                  Certification
                      by Stephen Crowder, President and Chief Executive Officer of
                      the
                      Registrant, pursuant to 17 CFR 240.13a - 14(a) or 17 CFR 240.15d
                      - 14(a).
                      (15)31.2
                  
                  Certification
                      by Brent Olson, Vice President of Finance and Treasurer of
                      the Registrant,
                      pursuant to 17 CFR 240.13a - 14(a) or 17 CFR 240.15d - 14(a).
                      (15)32.1
                  
                  Certification
                      of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant
                      to Section
                      906 of the Sarbanes-Oxley Act of 2002. (15)32.2
                  
                  Certification
                      of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant
                      to Section
                      906 of the Sarbanes-Oxley Act of 2002. (15)99.1
                  
                  Proxy
                      Statement for the 2006 Annual Meeting of Stockholders
                      (16)


_____________________




(1)
              Incorporated
                  by reference to the exhibits to the Annual Report on Form 10-KSB
                  filed by
                  Registrant on September 28, 2001.(2)
              Incorporated
                  by reference to the exhibits to the Current Report on Form 8-K
                  filed by
                  Registrant on August 15, 2001.(3)
              Filed
                  previously as an exhibit to the Current Report on Form 8-K filed
                  by
                  Decorize, Inc. on June 6, 2005.(4)
              Filed
                  previously as an exhibit to the Current Report on Form 8-K filed
                  by
                  Decorize, Inc., on June 21, 2005.(5)
              Filed
                  previously as an exhibit to the Registration Statement on Form
                  S-3 (File
                  No. 333-127070) on July 29, 2005.(6)
              Filed
                  previously as an exhibit to the Current Report on Form 8-K filed
                  by
                  Decorize, Inc. on February 17, 2004.(7)
              Filed
                  previously as an exhibit to the Quarterly Report on Form 10-QSB
                  filed by
                  Decorize, Inc. on February 17, 2004.(8)
              Filed
                  previously as an exhibit to the Registration Statement on Form
                  S-3 (File
                  No. 333-113356) field by Decorize, Inc. on March 5,
                  2004.(9)
              Filed
                  previously as an exhibit to the Quarterly Report on Form 10-QSB
                  filed by
                  Decorize, Inc. on May 14, 2004.(10)
              Incorporated
                  by reference to the exhibits to the Current Report on Form 8-K
                  filed by
                  Registrant on March 19, 2002.(11)
              Filed
                  previously as an exhibit to the Annual Report on Form 10-KSB filed
                  by
                  Decorize, Inc. on September 28, 2001.(12)
              Incorporated
                  by reference to the exhibits to the Registration Statement on Form
                  SB-2
                  filed by Guidelocator.com on September 29, 1999 (File no.
                  000-88083).(13)
              Incorporated
                  by reference to Exhibit 10.1 to the Current Report on Form 8-K
                  filed by
                  Decorize, Inc. on April 6, 2006.(14)
              Incorporated
                  by reference to the exhibits filed with the Current Report on Form
                  8-K
                  filed by Decorize, Inc. on May 11, 2006.(15)
              Filed
                  herewith.(16)
              To
                  be filed on or about September 28,
                  2006.





**Item
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**





BKD,
      LLP **** Certified
      Public Accountants audited our consolidated financial statements as of June
      30,
      2006, 2005, 2004, and 2003.





**Audit
      Fees**





24


The
      aggregate fees billed during the years ended June 30, 2006 and 2005 by BKD,
      LLP **** for
      professional services rendered in connection with the audit of our June 30,
      2005
      and 2004 consolidated financial statements were $71,015 and $66,600,
      respectively.





Fees
      billed by BKD, LLP **** for
      reviews of our interim financial statements for inclusion with quarterly reports
      on Form 10QSB totaled $23,075 and $17,950 during the fiscal years ended June
      30,
      2006 and 2005, respectively.





Fees
      billed by BKD, LLP for professional services rendered in connection with various
      registration statements during fiscal years ended June 30, 2006 and 2005 of
      $4,035 and $11,775, respectively.





**Audit-Related
      Fees**





During
      the fiscal years ended June 30, 2006 and 2005, we incurred professional fees
      for
      other audit-related assurance services from BKD, LLP **** totaling
      $16,630 and $15,750, respectively.





**Tax
      Fees**





Fees
      billed by BKD, LLP **** for
      professional services rendered in connection with tax compliance, tax advice
      and
      tax planning were $11,890 and $20,425 for the fiscal years ended June 30, 2006
      and 2005, respectively.





**All
      Other Fees**





We
      did
      not pay for any other professional accounting services during the fiscal years
      ended June 30, 2006 and 2005, respectively.





**Audit
      Committee**





The
      audit
      committee approves all audit, tax and other consulting services to be rendered
      by outside accountants prior to the work being performed, and evaluates the
      impact that provision of such services has upon the independence of Decorize's
      auditors.





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**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,
      thereunto duly authorized.




**DECORIZE,
              INC.**Date: September
              28, 2006
            By:
            /s/
              Stephen R. CrowderStephen
              R. CrowderChief
              Executive Officer and President





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
      indicated on September 28, 2006.




Name
              
              Title/s/
                  Stephen R. CrowderStephen
                  R. Crowder
              
              President,
                  Chief Executive Officer and Director
                (principal
                  executive officer)/s/
                Brent S. OlsonBrent
                  S. Olson
              
              Vice
                  President of Finance and Treasurer
                (principal
                  financial officer and principal accounting officer)/s/
                Richard B. ChalkerRichard
                  B. Chalker
              
              Director/s/
                Steven W. FoxSteven
                  W. Fox
              
              Director/s/
                  Marwan M. Atalla
              
              DirectorMarwan
                  M. Atalla




26