*Table
        of Contents*







**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**for
      the fiscal year ended June 30, 2008**





**or**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





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





**Commission
      file number** **001-31260**





**DECORIZE,
      INC.**


(Exact
      name of registrant as specified in its charter)


________________


**Delaware**
            **43-193180**(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)**1938
                E. Phelps****Springfield,
                Missouri**
            **65802**(Address
                of principal executive offices)
            (Zip
                Code)Registrant’s
                telephone number, including area code
            **(417)
                879-3326**




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


**None**





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


**None**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o  Yes þ No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Act. o  Yes þ No




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. þ Yes  o 
No




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. þ




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definition of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
                accelerated filer o
            Accelerated
                filer oNon-accelerated
                filer o
            Smaller
                reporting company þ




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




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant as of the last business day of the registrant’s
      most recently completed fiscal quarter was $1,144,851, based upon a closing
      bid
      of the registrant’s common stock as reported by The OTC Bulletin Board on that
      date of $0.10 per share. There were 28,752,318 shares of the registrant’s common
      stock outstanding as of September 14, 2008





**DOCUMENTS
      INCORPORATED BY REFERENCE:**





**The
      definitive proxy statement relating to the registrant’s 2008 Annual Meeting of
      Stockholders is incorporated by reference in Part III of this report to the
      extent indicated therein.**










*Table
        of Contents*




**DECORIZE,
      INC.**




PART
                  IItem
                  1.
              Business
              2Item
                  1A.
              Risk Factors
              7Item
                  1B.
              Unresolved Staff
                Comments
              11Item
                  2.
              Properties
              11Item
                  3.
              Legal
                Proceedings
              12Item
                  4.
              Submission of
                Matters to a
                Vote of Security Holders
              12PART
                  IIItem
                  5.
              Market for Registrant’s
                Common Equity, Related Stockholder Matters and Issuer Purchases of
                Equity
                Securities
              12Item
                  6.
              Selected Financial
                Data
              13Item
                  7.
              Management's Discussion
                and
                Analysis of Financial Condition and Results of Operation
              13Item
                  7A.
              Quantitative and
                Qualitative
                Disclosures About Market Risk
              22Item
                  8.
              Financial Statements
              23Item
                  9.
              Changes in and
                Disagreements
                with Accountants on Accounting and Financial Disclosure
              24Item
                  9A(T)
              Controls and
                Procedures
              24Item
                  9B.
              Other
                Information
              26PART
                  IIIItem
                  10.
              Directors, Executive
                Officers, Promoters and Corporate Governance
              27Item
                  11.
              Executive
                Compensation
              27Item
                  12.
              Security Ownership
                of
                Certain Beneficial Owners and Management and Related Stockholder
                Matters
              27Item
                  13.
              Certain Relationships
                and
                Related Transactions, and Director Independence
              27Item
                  14.
              Principal Accountant
                Fees
                and Services
              27PART
                  IVItem
                  15.
              Exhibits
              27Signatures
              
              29







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**FORWARD-LOOKING
      STATEMENTS**





This
      Annual Report on Form 10-K contains forward-looking statements. The words
“intend,” “anticipate,” “believe,” “estimate,” “plan,” “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 the lack of liquidity of our shares of common stock
                due to
                the limited public market for our common
                stock.




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 Item 1A 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.





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**PART
      I**


**Item****1. 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 independent retailers are marketed under the GuildMaster brand
      name
      so that we may continue to build on customer awareness of that brand. Products
      we design and source for large retailers are exclusively marketed under the
      Decorize brand name.




We
      use
      our “source to business” model to serve two distinct markets, the source to
      large retailers market and the source to independent retailers market. The
      source to large retailers market is comprised of customers that we believe
      can
      benefit from our pricing, delivery times and custom design capability. The
      independent retailers market 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 prices of our products include 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 2008, the revenue mix of the two retail markets we serve was
      approximately 76% from independent retailers and 24% from large retailers.
      The
      independent retailers market historically has not comprised the majority of
      the
      revenue mix. However, the Company has continued to shift more resources to
      growing this portion of the business to service the 35,000 retailers who occupy
      this market space.





**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 either shipped from Asia directly
      to
      our fulfillment center in Springfield, Missouri or, in certain situations where
      it is economically feasible, are shipped direct to our customers utilizing
      a
      third party cross docking service. Decorize has two wholly-owned domestic
      subsidiaries, GuildMaster, Inc. and Faith Walk Designs, Inc., and two
      wholly-owned foreign subsidiaries, WestWay Enterprises, Ltd. and P.T. Niaga
      Merapi.





**GuildMaster**





GuildMaster,
      Inc., a Missouri corporation (“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, Inc., a Missouri corporation (“Faith Walk”), is our wholly-owned
      domestic subsidiary, founded by our Vice President, J. Michael Sandel, and
      his
      spouse, which we acquired in July 2001. Prior to this


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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 subsidiaries or suppliers in Asia and are marketed under the GuildMaster
      brand name.





**WestWay
      Enterprises, Ltd.**





WestWay
      Enterprises, Ltd., our wholly-owned foreign subsidiary located in Dongcheng,
      China (“WestWay”), 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 eighteen personnel, who
      primarily manage quality control and quality assurance for products manufactured
      by suppliers within the country of China.




**P.T.
      Niaga Merapi**





In
      October 2003, we created P.T. Niaga Merapi, our 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 an Indonesian facility
      to
      conduct light manufacturing, final assembly, and finishing operations. This
      operation has allowed 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 subsidiary, we are able to better package
      our finished products for shipping and reduce 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 retailer customers 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 in 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
      procurement


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of
      items
      available in Asia that would not likely have become part of our product
      offerings without our overseas staff. Currently, our company employs
      approximately 520 persons overseas, and we may increase that number to suit
      our
      level of production and design. Our focus overseas will continue to be on
      quality control, concentrating on 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.





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 1,250 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


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the
      size
      of the focus group to over 1,000 persons 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 customers.




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




**Suppliers**





We
      have
      developed a network of more than 200 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, 2008, Decorize's top ten vendors
      accounted for approximately 40% of our total purchases from third parties.
      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 in 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.





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 ten large retailers
      and more than 2,500 small retailers, designers and decorators. During the year
      ended June 30, 2008, our customer revenues were approximately $15.2 million.
      Although our top five customers in the past year accounted for approximately
      20%
      of our revenues, our business plan for growing our business is expected to
      result in greater revenue diversification. During fiscal 2008, our top five
      customers from the standpoint of revenues were Klaussner Furniture, Dillard’s,
      Office Max, Williams-Sonoma 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 of the home
      furnishings industry in which we compete includes approximately 35,000 companies
      that account for approximately $12 billion of sales at the retail level. We
      believe that there are no dominant competitors within the premium home accents
      and accessories market of the home furnishings industry.




There
      is
      intense competition in our industry. However, we believe that our low-cost
      business model, our 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.


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**Foreign
      Market Risks**





As
      an
      importer of manufactured products from 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. 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 (“WTO”) 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 other 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 to large retailers are shipped
      directly from our manufacturers in Asia to our customers’ stores or distribution
      centers, so we do not carry any inventory related costs.





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, we have consistently sought the services of logistics
      providers that have the technology and capabilities to track our orders and
      merchandise delivery in a detailed and timely manner. Decorize has no
      intellectual property rights in the tracking processes or the technology used
      by
      our logistics providers; 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 processes that we currently
      use.





**Management
      Information Systems**





We
      maintain a corporate enterprise software system, which integrates purchase
      orders, imports, transportation, distribution and financial systems. This system
      also supports all subsidiary companies and the consolidation of the same.
      Expenditures for continuing upgrades of management information systems are
      anticipated in the foreseeable future to refine and update these
      systems.




**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, 2008, our company and its subsidiaries employed 554 persons on a full
      time basis, including 501 at our Indonesian subsidiary and 18 at our Chinese
      subsidiary. 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.




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**Item****1A. 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 domestic operating subsidiaries were completed in June and July of 2001.
      Even though GuildMaster and Faith Walk operated independently for some time
      prior to being acquired, we do not have an extensive 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 to large retail customers 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 relatively brief 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 $0.6 million for the fiscal year ended June 30, 2008,
      which was a decrease of 14% from the $0.7 million loss in fiscal 2007. Although
      our margins improved substantially during 2008, we have not achieved
      profitability. We will need to generate greater revenues and maintain or improve
      our operating margins to achieve and maintain profitability in the future.
      If we
      incur operating losses 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 ten large retailers and more
      than 1,000 small retailers, 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 2008 accounted for approximately
      20% 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.





*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 over the course of the last several years we have 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


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          7 -
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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, 2008, our total number of employees was 554, including 519 employees
      at
      our overseas operations in Asia. In the past, we have 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. We
      addressed those capacity issues by hiring additional personnel and increasing
      the capacity of our facilities, 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 than we do.*





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 believe 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.




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*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,
      44.8% of our common stock on a fully diluted basis. As a result, if they choose
      to vote in concert, our directors could 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 of Directors.





*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. 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:





·
            raw
                material shortages, work stoppages, strikes and political
                unrest;





·
            problems
                with ocean shipping, including work stoppages and shipping container
                shortages;





·
            increased
                inspections of import shipments or other factors causing delays in
                shipments; and





·
            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 2008, marketing and advertising expenses were
      approximately $551,000, which represented 10.5% of our operating expenses for
      the 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. However, if we incur significant expenses promoting and marketing
      Decorize, it could cause our profitability to decline in the short
      term.




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          9 -
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          of Contents*




*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.





*There
      are certain rules applicable to our common stock as a “penny stock,” and those
      rules may limit the liquidity and the resale of our common stock.*





The
      Securities and Exchange Commission (the “SEC”) has promulgated rules governing
      the trading in penny stocks, defined generally as low-priced (below $5),
      speculative securities of very small companies. While penny stocks generally
      trade over-the-counter, such as on the Over the Counter Bulletin Board (“OTCBB”)
      or the “Pink Sheets,” they may also trade on securities exchanges, including
      foreign securities exchanges. Under these rules, our common stock is currently
      classified as a penny stock. As a penny stock, our common stock is currently
      subject to rules promulgated by the SEC that impose additional sales practice
      requirements on broker-dealers that might sell such securities to persons other
      than established customers and institutional accredited investors. For
      transactions covered by the rule, the broker-dealer must make a special
      suitability determination for the purchaser and receive the purchaser’s written
      consent to the transaction prior to completing a sale. Further, if the price
      of
      the stock is below $5 per share and the issuer does not have $2.0 million or
      more net tangible assets or is not listed on a registered national securities
      exchange, sales of such stock in the secondary trading market are subject to
      certain additional rules promulgated by the SEC. Our common stock is currently
      subject to these additional rules. These rules generally require, among other
      things, that brokers engaged in secondary trading of penny stocks provide
      customers with written disclosure documents, monthly statements of the market
      value of penny stocks, disclosure of the bid and asked prices and disclosure
      of
      the compensation to the broker-dealer and the salesperson working for the
      broker-dealer in connection with the transaction. These rules and regulations
      may affect the ability of broker-dealers to sell our common stock, thereby
      effectively limiting the liquidity of our common stock. These rules may also
      adversely affect the ability of persons that acquire our common stock to resell
      their securities in any trading market that may exist at the time of such
      intended sale. Furthermore, penny stocks, including our common stock, may trade
      infrequently, which means that it may be difficult to sell penny stock shares,
      including shares of our common stock, once you own them. Investors in penny
      stocks, including our common stock, should be prepared for the possibility
      that
      they may lose their whole investment.




*Our
      common stock is not listed on a national exchange, and the current public market
      for our common stock is limited and highly volatile, which generally affects
      the
      price of our common stock.*




Our
      common stock currently trades in the United States only in the over-the-counter
      market on the OTCBB, which is a reporting service and not a securities exchange.
      We cannot assure investors that in the future our common stock would ever
      qualify for inclusion on any of the NASDAQ markets, The American Stock Exchange
      or any other national exchange or that more than a limited market will ever
      develop for our common stock. The lack of an orderly market for our common
      stock
      may negatively impact the volume of trading and market price for our common
      stock.





Historically,
      the volume of trades for our stock has been limited. Moreover, thus far the
      prices at which our common stock has traded have fluctuated fairly widely on
      a
      percentage basis. There can be no assurance as to the prices at which our common
      stock will trade in the future, although they may continue to fluctuate
      significantly. Prices for our common stock will be determined in the marketplace
      and may be influenced by many factors, including the following:





·
            the
                depth and liquidity of the markets for our common stock;




·
            investor
                perception of Decorize and the industry in which we
                participate;




·
            general
                economic and market conditions;




-
          10 -
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·
            statements
                or changes in opinions, ratings or earnings estimates made by brokerage
                firms or industry analysts relating to the market in which we do
                business
                or relating to us specifically, as has occurred in the
                past;




·
            quarterly
                variations in our results of
                operations;




·
            general
                market conditions or market conditions specific to technology industries;
                and




·
            domestic
                and international macroeconomic
                factors.




The
      trading activity in our common stock should be considered sporadic, illiquid
      and
      highly volatile. An active trading market for our common stock may not exist
      in
      the future. Even if a market for our common stock does exist, investors may
      not
      be able to resell their common stock at or above the purchase price for which
      such investors purchased such shares.





In
      addition, the stock market has recently experienced extreme price and volume
      fluctuations. These fluctuations are often unrelated to the operating
      performance of the specific companies. As a result of the factors identified
      above, a stockholder (due to personal circumstances) may be required to sell
      his
      shares of our common stock at a time when our stock price is depressed due
      to
      random fluctuations, possibly based on factors beyond our control.





**Item****1B. Unresolved Staff Comments.**




Not
      applicable.




**Item
      2****.****Properties.**




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 lease for our
      corporate headquarters ended in April 2008 and we have continued to lease the
      facility on a month-to-month basis since that time. We anticipate that if
      additional space is required within the next twelve months for our headquarters,
      then such space will be available in the Springfield area on a reasonable
      commercial basis.





We
      currently sublease and operate a 30,000 square foot fulfillment center located
      in Springfield, Missouri on a month to month basis from a company owned by
      SRC
      Holdings Corporation, the largest holder of the Company’s common stock and the
      sole holder of the Company’s outstanding shares of Series A Convertible
      Preferred Stock. The lease is for a minimum 10,000 square feet at a monthly
      rate
      of $0.60 per square foot utilized, but allows for expansion and contraction
      of
      square footage as necessary on a month-to-month basis up to a maximum of 45,000
      square feet. Decorize averages approximately 30,000 square feet of utilization
      on a monthly basis. The Springfield facility is in good condition, and we
      believe the space is adequate for our operations in the foreseeable future.
      The
      current agreement is on a month to month basis, however, we believe that we
      could lease suitable space at comparable rates in the Springfield area should
      that be necessary.





We
      also
      lease additional design studio and office space of approximately 1,950 square
      feet located in Houston, Texas. The rent for this facility is $875 per month.
      We
      lease this facility on a month to month basis.





We
      lease
      and operate our own showroom of approximately 8,950 square feet in High Point,
      North Carolina. The lease terminates on October 31, 2009. The base rent per
      month is $9,866 for the period ending October 31, 2008 and $10,162 for the
      period from November 1, 2008 to October 31, 2009. In addition to the base rent
      we are required to pay common area maintenance charges which average
      approximately $700 per month. We have an option to renew the lease for one
      five-year period following the October 31, 2009 termination date.





We
      lease
      and operate our own showroom of approximately 4,780 square feet in Las Vegas,
      Nevada. The lease terminates on September 30, 2012. The base rent per month
      is
      $11,018. On October 1 st of each
      year the base rent increase 3%. In addition to the base rent we are required
      to
      pay common area maintenance charges which


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          11 -
 *Table
          of Contents*


average
      approximately $3,774 per month. We have the option to renew the lease for one
      five-year period following the September 30, 2012 termination date.





We
      lease
      and operate our own showroom of approximately 3,670 square feet in Dallas,
      Texas. The lease terminates on November 30, 2009. The base rent per month is
      $6,721 for the period ending November 30, 2008 and $6,923 for the period from
      December 1, 2008 to November 30, 2009.





Pursuant
      to agreements with independent sales representative groups, we lease varying
      amounts of floor space at several regional showrooms throughout the United
      States on a month-to-month basis. The monthly rental payments vary between
      approximately $500 and $4,500.





Our
      Indonesian subsidiary operations are based in a leased manufacturing, office
      and
      warehouse facility of approximately 21,200 square feet. The lease terminates
      on
      March 31, 2013. The Company has paid all of its obligations under the lease
      with
      the exception of a final payment of approximately $65,000 which is due and
      payable on February 28, 2009. The Company has the option to renew the lease
      for
      one five-year period following the March 31, 2013 termination date.





Our
      Chinese subsidiary lease office and warehouse space in China comprising a total
      of approximately 7,200 square feet. The lease agreements terminate on March
      31,
      2010. The monthly rental payments total approximately $3,000 per month.




We
      maintain insurance for physical loss on all domestic 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 from time to time 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,
      whether 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, 2008.




**PART
      II**





**Ite****m
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.**




Shares
      of
      our common stock are currently quoted on the OTCBB under the symbol “DCZI.OB”.
      Our shares began quotation on the OTCBB on May 23, 2007. The following table
      summarizes the high and low historical closing prices reported by the OTCBB
      Historical Data Service for the periods indicated. OTCBB quotations reflect
      inter-dealer prices, without retail mark-up, mark down or commissions, so those
      quotes may not represent actual transactions.




**High**
              
              **Low**Fourth
                  Quarter 2008
              
              $
              0.21
              
              $
              0.07Third
                  Quarter 2008
              
              $
              0.24
              
              $
              0.14Second
                  Quarter 2008
              
              $
              0.35
              
              $
              0.14First
                  Quarter 2008
              
              $
              0.61
              
              $
              0.33Fourth
                  Quarter 2007 (May 23 through June 30)
              
              $
              0.60
              
              $
              0.50




-
            12 -
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Previously,
      our common stock was traded on The American Stock Exchange from March 8, 2002
      until April 27, 2007, under the symbol "DCZ". The following table summarizes
      the
      highest and lowest closing prices per share as reported by The American Stock
      Exchange for the periods indicated.





**High**
            
            **Low**Fourth
                Quarter 2007 (through April 27)
            
            $
            0.58
            
            $
            0.29Third
                Quarter 2007
            
            
            0.84
            
            
            0.40Second
                Quarter 2007
            
            
            0.49
            
            
            0.23First
                Quarter 2007
            
            
            0.33
            
            
            0.17Fourth
                Quarter 2006
            
            
            0.51
            
            
            0.23Third
                Quarter 2006
            
            
            0.62
            
            
            0.32Second
                Quarter 2006
            
            
            0.81
            
            
            0.46First
                Quarter 2006
            
            
            0.79
            
            
            0.45




We
      had
      approximately 88 record holders of our common stock as of June 30, 2008,
      according to the books of our transfer agent. A significant number of shares
      were held in street name, so the Company believes that the number of beneficial
      owners is significantly higher.





We
      have
      not paid cash dividends on our common stock since our inception. Our 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, 2008, 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 underequity
                compensation plansEquity
                compensation plans approved by security holders
            
            
            1,112,375
            
            $
            0.18
            
            
            1,643,000Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            1,112,375
            
            $
            0.18
            
            
            1,643,000






**Item****6.
      Selected Financial Data.**





Not
      applicable.





**Item****7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





**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


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          13 -
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          of Contents*


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, 2008, Decorize did not identify or record any impairment.





*Revenue
      Recognition* -
      Our
      revenue is generated through the sale of merchandise to customers for prices
      that are fixed at the time the order is placed. We recognize revenue when
      pervasive evidence of the sale exists, the earnings process is complete and
      the
      risks and rewards of ownership of the goods have transferred to the customer,
      which is considered to have occurred when the customer receives title to the
      products. Depending upon the specific terms of the transaction, title may
      transfer upon shipment of the products to the customer or upon receipt of the
      products by the customer. Sales are billed and our services are complete upon
      receipt of title by the customer. Collectibility of the amounts billed to
      customers is reasonably assured. We provide an allowance for expected sales
      returns, which is estimated based upon our historical experience.





*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* - Stock
      options granted to employees are accounted for under SFAS
      No. 123R, *Share-Based Payment* .
      The
      fair value of stock-based awards to employees is calculated by us using the
      Black-Scholes option valuation model, which requires that we make certain
      subjective assumptions. These assumptions include future stock price volatility
      and the expected life of the stock option, which affect the calculated fair
      values. For the majority of the granted options, forfeitures are assumed to
      equal 10% of the total grant amount of the options. The expected term of options
      granted is derived from the time between the date of final vesting and the
      expiration of the option. The risk-free rate for the expected term of the option
      is based on the U.S. Treasury yield curve in effect at the time of grant. The
      calculated compensation expense is recognized on a straight-line basis over
      each
      vesting period.





The
      fair
      values of options granted during the year ended June 30, 2008 were estimated
      on
      the date of the respective grants using the Black-Scholes-Merton option-pricing
      model with the following weighted average assumptions: Dividends per share,
      $0;
      Risk-free interest rate, 3.06%; Weighted-average expected life of options,
      4.7
      years; Expected volatility, 132%. A total of 465,000 and 1,112,500 options
      were
      granted under the Plan during the years ended June 30, 2008 and 2007,
      respectively.




**Results
      of Operations and Comparison of the Year Ended June 30, 2008 to the Year Ended
      June 30, 2007**





The
      following table presents certain items included in Decorize’s consolidated
      statements of operations, a copy of which is included in this Annual Report,
      and
      the percentage of total revenues for the periods indicated. All such data should
      be read in conjunction with, and is qualified in its entirety by reference
      to,
      our consolidated financial statements and accompanying notes.


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          14 -
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**For
                the fiscal years ended June 30,****2008**
            
            **2007**
            
            **Change**Net
                sales
            
            $
            15,233,457
            
            
            100%
            
            $
            15,919,683
            
            
            100.0%
            
            $
            (686,226
            )
            
            —Cost
                of sales
            
            
            9,988,023
            
            
            65.6%
            
            
            10,976,817
            
            
            68.9%
            
            
            (998,794
            )
            
            (3.3)%Gross
                profit
            
            
            5,245,434
            
            
            34.4%
            
            
            4,942,866
            
            
            31.1%
            
            
            302,568
            
            
            3.3%Operating
                expenses
            
            
            5,257,491
            
            
            34.5%
            
            
            4,902,737
            
            
            30.8%
            
            
            354,754
            
            
            3.7%Operating
                income (loss)
            
            
            (12,057
            )
            
            (0.1)%
            
            
            40,129
            
            
            0.3%
            
            
            (52,186
            )
            
            (0.4)%Total
                other expense
            
            
            575,015
            
            
            3.8%
            
            
            722,332
            
            
            4.5%
            
            
            (147,317
            )
            
            (0.7)%Net
                loss
            
            
            (587,072
            )
            
            (3.9)%
            
            
            (682,203
            )
            
            (4.2)%
            
            
            95,131
            
            
            0.3%




Sales





Our
      sales
      are derived primarily from the sale of home furnishing and home décor products
      to large and independent retailers. Sales for fiscal 2008 decreased $0.7
      million, or 4.3%, to $15.2 million compared to $15.9 million in fiscal 2007.
      Sales to independent retailers increased 11.3%, while sales to large retailers
      decreased 34.3%. Returns and allowances from both large and small retail
      customers were relatively flat at 6.2% in fiscal 2008 compared to 6.1% in fiscal
      2007.





We
      believe our revenue growth in the independent retailer market is the result
      of a
      continued focus on sales efforts and constant improvements to our product
      selection and quality. We believe that we have presented our product and
      services to only a small portion the vast number of independent retailers who
      would find our offerings attractive and would order product from us. We intend
      to continue marketing our goods aggressively to our current independent retailer
      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 plans to market our products to new independent retailer customers,
      with the intent to develop a broader, more robust customer base.





The
      decrease in our sales to large retailers during fiscal 2008 compared to fiscal
      2007 resulted from the loss of a significant customer. Sales to this customer
      totaled $3.1 million during fiscal 2007 and $0 during fiscal 2008. No other
      large retailer customer accounted for more than $1.0 million in sales in either
      fiscal 2007 or fiscal 2008.




Cost
      of Sales





The
      cost
      of sales for fiscal 2008 decreased as a percentage of sales to 65.6%, compared
      to 69.00% for fiscal 2007. We believe that the percentage decrease in our costs
      of sales for fiscal 2008 compared to the prior year was the result of
      management’s concerted efforts to run efficient manufacturing facilities in
      Asia, successful vendor negotiations resulting in lower raw materials costs
      for
      some of our products and the implementation of price increases across much
      of
      our product lines. In addition, we eliminated slow moving product offerings
      and
      improved our designs, providing faster inventory turnover and fewer markdowns
      on
      aging inventory.




Operating
      margins and pricing in our industry are 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 2008, our operating expenses increased $0.4 million to $5.3 million,
      compared to $4.9 million for fiscal 2007. The majority of this increase is
      related to increased selling expenses in fiscal 2008, specifically commission
      paid to independent sales reps and royalties paid to independent product
      designers. Additional increase


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in
      showroom rents and advertising were partially offset by decreases in SEC filing
      expenses, audit and legal fees and investor relations costs. All other expenses
      were relatively flat.




Other
      Expense





Other
      expense for fiscal 2008 decreased to $0.6 million compared from $0.7 million
      for
      fiscal 2007. The decrease is attributable to a decrease in interest expense
      resulting from 1) a reduction in interest rates on certain stockholder notes
      payable negotiated in April 2008 and 2) lower interest costs associated with
      the
      revolving line of credit from Guaranty Bank in comparison to the costs
      associated with the factoring agreement with Bibby Financial Services that
      was
      in place during fiscal 2007.




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 $(2.1) million at June 30, 2008, compared
      with
      $(0.9) million at June 30, 2007. Cash was $0.3 million at June 30, 2008,
      compared to $0.8 million at June 30, 2007. Cash used in operating activities
      was
      $1.6 million in fiscal year 2008 compared to $0.9 million in fiscal year 2007.
      The principal operating uses of cash during fiscal year 2008 were attributable
      to the net loss of $0.6 million, a $0.4 million increase in receivables and
      a
      $0.8 increase in inventories.




During
      fiscal 2008 we invested approximately $0.1 million in the purchase of property
      and equipment, primarily leasehold improvements in our Indonesian manufacturing
      facility and computer equipment in our Springfield, Missouri corporate
      headquarters and in our Indonesian subsidiary.




During
      the year ended June 30, 2008, net cash provided by financing activities was
      $1.1
      million. We raised $0.6 million from the issuance of stockholder notes payable,
      made principal payments on stockholder notes payable of $0.1, had net borrowings
      from our bank line of credit of $2.1 million, paid net amounts due to our factor
      totaling $1.3 million and paid registration fees totaling $0.1 million in
      connection with registering our common stock.




Bank
      Line of Credit




On
      October 19, 2007, the Company obtained a $3,000,000 revolving credit facility
      from Guaranty Bank, which was subsequently amended on December 27, 2007 (as
      amended, the “Credit Facility”), to fund the Company’s ongoing working capital
      needs.




The
      Company retired its existing indebtedness under a factoring arrangement with
      Bibby Financial Services (Midwest), Inc. with a portion of the proceeds from
      the
      Credit Facility (see below). The terms of the Credit Facility prohibit the
      Company from using Credit Facility proceeds for the purpose of repaying any
      other third party indebtedness, including indebtedness that is subordinate
      to
      the Credit Facility, without the prior approval of Guaranty Bank.




The
      Company can borrow, repay and re-borrow principal under the Credit Facility
      from
      time to time during its term. The aggregate principal amount drawn under the
      Credit Facility at any given time may not exceed the lesser of $3,000,000 or
      the
      borrowing base. The borrowing base is equal to the sum of (a) 80% of the value
      of eligible accounts receivable, plus (b) 50% of the value of eligible
      inventory. Eligible accounts receivable includes the Company’s accounts
      receivable generated in the ordinary course of business that satisfy certain
      conditions of Guaranty Bank, and excludes certain unacceptable accounts
      receivable, such as accounts of an account debtor when






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20%
      of
      the outstanding balance owed by such account debtor is more than 90 days past
      due. Eligible inventory includes the Company’s inventory that is in good, new
      and saleable condition and is not obsolete or unmerchantable, in Guaranty Bank’s
      reasonable opinion. As of June 30, 2008, the amount available to be advanced
      under the Credit Facility was $2,358,364.





The
      annual interest rate on the Credit Facility was initially equal to the prime
      rate of interest (5.0% at June 30, 2008) plus a prime margin of 1.5% (the “Prime
      Margin”). Pursuant to the amendment made on December 27, 2007, the Prime Margin
      was 2.0% for the period from December 27, 2007 through March 31, 2008. The
      Prime
      Margin was recalculated on April 1, 2008 and will be recalculated on the first
      day of each succeeding fiscal quarter thereafter based upon the Company’s
      trailing four quarters “cash flow”, defined as operating income or loss plus
      depreciation expense deducted in arriving at operating income or operating
      loss
      for the relevant period. Prime Margin being: 0.0% if “cash flow” is equal to or
      greater than $1,000,000; 0.5% if “cash flow” is equal to or greater than
      $750,001 and equal to or less than $1,000,000; 1.0% if “cash flow” is equal to
      or greater than $500,001 and equal to or less than $750,000; 1.50% if “cash
      flow” is equal to or greater than $250,001 and equal to or less than $500,000;
      2.0% if “cash flow” is equal to or greater than $1 or equal to or less than
      $250,000; and 2.50% if “cash flow” is $0 or less. Interest accrued on the
      outstanding principal balance is due monthly. The Credit Facility expires,
      and
      any and all principal outstanding under the Credit Facility is due and payable,
      on the maturity date of December 31, 2008.




The
      Company paid Guaranty Bank a loan origination fee and certain other costs
      totaling $25,000, which were recorded as deferred financing fees and are being
      amortized to interest expense on a straight-line basis over the term of the
      Credit Facility.




The
      Company is not required to pay any fees based upon any unused portion of the
      amount available for borrowing under the Credit Facility.




The
      Credit Facility is secured by substantially all of the assets of the Company
      and
      is guaranteed by Merapi and WestWay.




The
      Credit Facility contains covenants, including financial covenants, with which
      the Company must comply. The financial covenants include a minimum fixed charge
      coverage ratio, a limitation on payment of dividends and a transactional
      limitation on capital expenditures. With certain exceptions, the Company is
      prohibited under the Credit Facility from, among other things, incurring or
      assuming any indebtedness, entering into any merger or reorganization and
      acquiring any stock or assets of any other entity. The Company was not in
      compliance with the minimum fixed charge coverage ratio covenant as of June
      30,
      2008. At the Company’s request, Guaranty Bank agreed to waive the minimum fixed
      charge coverage ratio requirement for the quarter ended June 30, 2008. The
      Company anticipates that it will not be in compliance with the minimum fixed
      charge coverage ratio for the quarter ending September 30, 2008 and will again
      request Guaranty Bank to waive the requirement for compliance. Although Guaranty
      Bank has expressed a willingness to waive the requirement for the quarter ending
      September 30, 2008 there can be no assurance that Guaranty Bank will actually
      do
      so.




Certain
      notes payable to stockholders (see Stockholder
      Notes Payable below)
      contain cross-default provisions, which, as a result of the Company’s
      non-compliance with the minimum fixed charge coverage ratio requirement in
      the
      Credit Facility, have caused the Company to be in default under the terms of
      the
      notes. At the Company’s request, the respective note holders agreed to waive the
      specific cross-default provisions as they relate to the Company’s non-compliance
      with the minimum fixed charge coverage ratio requirement in the Credit
      Facility.




In
      connection with the Credit Facility, all holders of the Company’s notes payable
      to stockholders (see Stockholder
      Notes Payable below)
      agreed to subordinate outstanding indebtedness owed to them by the Company
      pursuant to separately executed subordination agreements in favor of Guaranty
      Bank.




Factoring
      Agreement





On
      March
      31, 2006, the Company and Bibby Financial Services (Midwest), Inc. (“BFS”)
      entered into a new Master Purchase and Sale Agreement (the “BFS Factoring
      Agreement”) to govern the exclusive global





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factoring
      arrangements provided by BFS. The new agreement replaced the Master Purchase
      and
      Sale Agreement entered into between the Company and BFS in August 2005. The
      BFS
      Factoring Agreement, under which BFS purchased certain accounts receivable
      of
      the Company on a full recourse basis, was accounted for as a secured borrowing
      and provided the Company with a maximum credit facility of
      $3,000,000.





On
      October 19, 2007, upon obtaining the revolving credit facility from Guaranty
      Bank (see Bank
      Line of Credit above),
      the Company terminated the BFS Factoring Agreement. Pursuant to the terms of
      the
      BFS Factoring Agreement the Company incurred interest expense and factoring
      fees
      totaling $92,620 and $379,248 during the years ended June 30, 2008 and 2007,
      respectively. Additionally, the Company incurred fees of $44,273 during the
      year
      ended June 30, 2008 to terminate the agreement before its scheduled maturity
      date.




Stockholder
      Notes Payable and Debt-for-Stock Private Placements





*Quest
      Commercial Finance, L.L.C.* -





On
      May 5,
      2006, Decorize entered into a Commercial Security Agreement with Quest
      Commercial Finance, L.L.C. (“Quest Commercial”), which provided for Quest
      Commercial to make a revolving credit line in the amount of up to $750,000
      available to Decorize (the “Quest Credit Facility”). The Quest Credit Faciilty,
      which is evidenced by a promissory note dated May 5, 2006 was modified on
      September 27, 2007 and again on April 28, 2008.




The
      original terms of the Quest Credit Facility provided that interest would accrue
      on the principal balance from time to time outstanding at a rate per annum
      equal
      to the greater of 10% or the prime rate of interest plus 5%. Accrued interest
      was payable monthly on the last day of each calendar month, beginning May 31,
      2006.




On
      September 26, 2007, the Quest Credit Facility was modified to set the interest
      rate at 13.75% per annum and to provide for the payment of a $7,500 annual
      lender fee on September 26, 2007, and thereafter on May 5 of each year until
      the
      note is paid in full.




On
      April
      1, 2008, the Quest Credit Facility was further modified effective April 1,
      2008
      so that the interest payable on the note accrues at the prime rate per annum
      and
      to provide for the suspension of monthly interest payments until January 1,
      2009
      at which time all accrued unpaid interest is due and to provide for monthly
      interest payments thereafter until maturity.




Subject
      to the provisions of the related promissory note, 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 note 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 Facility to be due and payable
      immediately.




Decorize’s
      obligations under the Credit Facility are secured by a security interest granted
      to Quest Commercial 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.




The
      Quest
      Credit Facility matures on May 5, 2009. In consideration of Quest Commercial
      providing the Quest Credit Facility, Decorize paid Quest Commercial a commitment
      fee of $30,000.




Stephen
      W. Fox, a director of the Company, is the General Manager of Quest Commercial
      Finance, L.L.C.





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          18 -
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*Quest
      Capital Alliance II, L.L.C.* -





On
      August
      17, 2006, Decorize issued a $75,000 three-month promissory note, payable to
      the
      order of Quest Capital Alliance II, L.L.C. (“Quest II”), bearing interest at
      13.25% per annum. The note was paid in full on September 11, 2006.





On
      September 11, 2006, Decorize issued a promissory note (the “Quest II Promissory
      Note”), payable to the order of Quest II, in the original principal amount of
      $750,000. Quest II charged a $41,250 origination fee in connection with the
      loan, and discounted the principal amount funded to the Company under the Quest
      II Promissory Note by the amount of the origination fee.





Interest
      on the outstanding principal under the Quest II Promissory Note accrued at
      a
      rate of 18% per annum, from January 9, 2007 to February 12, 2007, and then
      at a
      rate of 21% per annum from February 12, 2007 to March 15, 2007. The note was
      amended on March 15, 2007 to lower the interest rate to 13.75% and to extend
      the
      maturity date to March 15, 2008. The Company paid a renewal fee of $7,500 in
      connection with amendment and extension.





On
      April
      28, 2008, the Company executed an Extension and Modification Agreement (the
      “Quest II Extension Agreement”), effective March 15, 2008, by and between the
      Company and Quest II. Pursuant to the Quest II Extension Agreement, the Quest
      II
      Promissory Note, as amended, was modified so that the maturity date of the
      note
      was extended to March 15, 2009, and the interest rate, effective March 15,
      2008,
      became 9.75% per annum.





Also
      on
      April 28, 2008, the Company executed a Stock Exchange Agreement, effective
      April
      1, 2008, by and between the Company and Quest II (the “Quest II Exchange
      Agreement”). Pursuant to the Quest II Exchange Agreement, the Company sold
      500,000 shares of its common stock to Quest II in exchange for a $100,000
      reduction in the outstanding principal balance of the Quest II Promissory Note.
      Under the Quest II Exchange Agreement, Quest II represented that it is an
“accredited investor” for purposes of the Securities Act, and indicated that it
      is acquiring the shares for investment and without a view towards distribution.
      As such, the Company believes that the issuance of the 500,000 shares of common
      stock to Quest II pursuant to the Quest II Exchange Agreement was made in
      compliance with the requirements of Rule 506 of Regulation D and therefore
      exempt from registration. In connection with the execution of the Quest II
      Extension Agreement and the Quest II Exchange Agreement, the Company executed
      on
      April 28, 2008 an Amended and Restated Promissory Note in the principal amount
      of $650,000, in replacement of and substitution for the Quest II Promissory
      Note
      to give effect to the amended terms resulting from the Quest II Extension
      Agreement and the principal reduction resulting from the Quest II Exchange
      Agreement.





The
      Amended and Restated 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 II on September 11, 2006. The Security Agreement
      provides that upon an event of default, Quest II may accelerate the indebtedness
      owed under the Amended and Restated 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 II. The default interest rate
      is
      equal to 21% per annum.





Stephen
      W. Fox, a director of the Company, is the General Manager of Quest Capital
      Alliance II, L.L.C.




*Jon
      T. Baker* -





On
      April
      28, 2008, the Company executed a Subordinated Promissory Note Payoff Agreement
      (the “Payoff Agreement”) effective April 21, 2008, by and between the Company
      and Jon T. Baker (“Baker”). Pursuant to the Payoff Agreement, the Company
      paid **** Baker
      $20,000 in full satisfaction of all outstanding debt (including all unpaid
      accrued interest) owed to Baker under the terms of that certain Subordinated
      Promissory Note in the principal amount of $56,451 executed by the Company
      in
      favor of Baker on January 30, 2004. As a result of the Payoff Agreement, the
      Company recognized a gain on the retirement of this debt of approximately
      $53,000.


-
          19 -
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Jon
      T.
      Baker is a stockholder and former Chief Executive Officer of the
      Company.




*James
      K. Parsons* -




On
      April
      28, 2008, the Company executed a Stock Exchange Agreement (the “Parsons Exchange
      Agreement”) by and between the Company and James K. Parsons (“Parsons”).
      Pursuant to the Parsons Exchange Agreement, the Company sold 1,500,000 shares
      of
      its common stock to Parsons in exchange for a $300,000 reduction in the
      outstanding principal balance of that certain Amended and Restated Promissory
      Note (the “Amended Promissory Note”) issued by the Company to Parsons on May 5,
      2006 in the original principal amount of $609,467.69. Under the Parsons Exchange
      Agreement, Parsons represented that he is an “accredited investor” for purposes
      of the Securities Act of 1933, as amended (the “Securities Act”), and indicated
      that he is acquiring the shares for investment and without a view towards
      distribution. As such, the Company believes that the issuance of the 1,500,000
      shares of common stock to Parsons pursuant to the Parsons Exchange Agreement
      was
      made in compliance with the requirements of Rule 506 of Regulation D promulgated
      under the Securities Act and was therefore exempt from registration. In
      connection with the execution of the Parsons Exchange Agreement, on April 28,
      2008 the Company also executed in favor of Parsons a Second Amended and Restated
      Promissory Note in the principal amount of $277,160.01, in replacement of and
      substitution for the Amended Promissory Note to give effect to the principal
      reduction of the Amended Promissory Note resulting from the Exchange
      Agreement





Parsons
      also agreed to extend the maturity date of that certain Third Amended and
      Restated Promissory Note issued by the Company to Parsons on July 31, 2006
      in
      the principal amount of $1,000,000, from July 31, 2008 to July 31, 2009. To
      give
      effect to this extension, on April 28, 2008, the Company executed a Fourth
      Amended and Restated Promissory Note in the principal amount of $1,000,000
      in
      favor of Parsons, in replacement of and substitution for the Third Amended
      and
      Restated Promissory Note.





James
      K.
      Parsons is a stockholder and Executive Vice President of the
      Company.




*SRC
      Holdings Corporation* -





On
      April
      30, 2008, Decorize, Inc. (the “Company”) executed an Unsecured Promissory Note
      in the principal amount of $500,000 (the “Note”) in favor of SRC Holdings
      Corporation, a Missouri corporation (“SRC”). The Note bears interest at the
      prime rate per annum as published by the Wall Street Journal and matures on
      April 30, 2009, at which time all accrued interest and outstanding principal
      are
      due and payable. The Company anticipates is using the proceeds from the Note
      for
      working capital and general corporate purposes.





On
      April
      30, 2008, the Company executed a Modification Agreement by and between the
      Company and SRC (the “Modification Agreement”), which modifies the Third Amended
      and Restated Promissory Note in the principal amount of $750,000 executed by
      the
      Company in favor of SRC on June 15, 2005 (the “SRC Note”). Pursuant to the
      Modification Agreement, the SRC Note was modified so that, effective April
      29,
      2008, (i) the SRC Note accrues interest at the prime rate per annum as published
      by the Wall Street Journal (5.25% as of the date of execution) and (ii) all
      accrued interest on the unpaid principal balance on the SRC Note is due and
      payable in full upon demand by SRC at any time.





SRC
      is
      the single largest holder of the Company’s common stock and the sole holder of
      the Company’s outstanding shares of Series A Convertible Preferred
      Stock.




*Consent
      of Lender* -





On
      April
      28, 2008, the Company received written consent in the form of a Consent of
      Lender from Guaranty Bank (“Guaranty”), pursuant to that certain Credit
      Agreement dated October 19, 2007 between Guaranty and the Company, whereby
      Guaranty consented to the Company executing and consummating the
      Subordinated


-
          20 -
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Note
      Payoff Agreement between the Company and Baker and the Unsecured Promissory
      Note
      in favor of SRC, both as described above.




*Summary* -





After
      giving effect to the various transactions noted above the Company’s outstanding
      stockholder notes payable as of June 30, 2008 is summarized as
      follows:





**Holder**
            
            **Principal**
              **Outstanding**
            
            **Maturity**
              **Date**James
                K. Parsons
            
            $
            1,000,000
            
            
            July
                31, 2009James
                K. Parsons
            
            
            256,968
            
            
            July
                31, 2010SRC
                Holdings Corporation
            
            
            750,000
            
            
            On
                DemandSRC
                Holdings Corporation
            
            
            500,000
            
            
            April
                30, 2009Quest
                Capital Alliance II, L.L.C.
            
            
            650,000
            
            
            March
                15, 2009Quest
                Commercial Finance, L.L.C.
            
            
            700,000
            
            
            May
                5, 2009Total
            
            $
            3,856,968




Other
      Private Placements





On
      February 5, 2007, the Company sold 821,429 shares of common stock, $0.001 par
      value per share to an accredited investor for total consideration of $287,500,
      representing a purchase price of $0.35 per share. This investor also received
      warrants in this transaction, which are exercisable for an aggregate of 178,571
      shares of common stock at an initial exercise price of $0.70 per share. The
      warrants will expire on February 5, 2009.





Also
      on
      February 5, 2007, the Company sold 446,428 shares of common stock to another
      accredited investor, in a separate transaction for total consideration of
      $250,000, representing a purchase price of $0.56 per share. This investor also
      received warrants, which are exercisable for an aggregate of 297,620 shares
      of
      common stock at $0.80 per share. The warrants will expire on February 5, 2009.
      Professional fees totaling $100,603 incurred in connection with the registration
      of shares issued in these private placements have been charged to additional
      paid in capital during the twelve months ended June 30, 2007.




In
      each
      of these 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 these offerings were 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.




Stock
      Registration Fees





Professional
      fees totaling $77,250 and $100,603 incurred in connection with the registration
      of certain of the Company’s shares of common stock issued in private placements
      have been charged to additional paid in capital during the years ended June
      30,
      2008 and 2007, respectively.




Access
      to Equity Financing





On
      April
      12, 2007, our Board of Directors received a letter from the American Stock
      Exchange LLC (“AMEX”) indicating that AMEX intended to file a delisting
      application with the SEC in order to terminate the listing of our common stock
      on the exchange. The April 12 letter from AMEX indicated that this decision
      was


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          of Contents*


based
      upon its determination that the Company was not in compliance with certain
      continued listing standards of AMEX. We subsequently applied to have our shares
      of common stock quoted on the OTCBB, and our application was approved and our
      shares listing on the OTCBB approved in May 2007. We believe that the OTCBB
      is a
      better trading platform for our shares, in light of our current stage of
      development, and that the OTCBB will be more cost effective than listing on
      a
      securities exchange. We currently anticipate that the principal source of
      working capital in the foreseeable future will continue to be from the issuance
      of short-term debt instruments and advances from our factor, or we may consider
      moving to an asset-backed credit facility from a more traditional lender. We
      do
      not believe that the move from AMEX to the OTCBB will have any impact on the
      availability of any of those forms of debt financings, and none of our current
      loan agreements or any related covenants were impacted by the transition to
      the
      OTCBB. In addition, we note that our most recent private placements of equity
      were made in April of this year, after we moved to the OTCBB, and we continue
      to
      expect that sources of equity financing will be available to our company
      following the move to the OTCBB.




Other





It
      is
      likely that Decorize will continue to require additional equity and debt
      financing in order to provide sufficient operating capital until such time
      as
      the Company generates sufficient operating cash flow to support its operations.
      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.




**Total
      Contractual Cash and Other Obligations**





The
      following table summarizes our long-term debt and operating lease obligations
      as
      of June 30, 2008:




**Total**
            
            **Less
                than**
              **1
                Year**
            
            **1-5
                Years**Principal
                payments due on notes payable to stockholders
            
            $
            3,856,968
            
            $
            2,705,000
            
            $
            1,151,968Future
                minimum lease payments under noncancelable operating
                leases
            
            
            1,236,876
            
            
            496,988
            
            
            739,888Totals
            
            $
            5,093,844
            
            $
            3,201,988
            
            $
            1,891,856




**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.




**Item****7A.
      Quantitative and Qualitative Disclosures About Market
      Risk.**





Not
      applicable.


-
          22 -
 *Table
          of Contents*




**Item****8. Financial Statements.**




**DECORIZE,
      INC.**


**Index
      to Financial Statements**


**June
      30, 2008 and 2007**




PageReport
                of Independent Registered Public Accounting
                Firm
            F-1Consolidated
                Balance Sheets as of June 30, 2008 and
                2007
            F-2Consolidated
                Statements of Operations for the years ended June 30, 2008 and
                2007
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the years ended June 30,
                2008 and 2007
            F-5Consolidated
                Statements of Cash Flows for the years ended June
                30, 2008 and 2007
            F-6Notes
                to Consolidated Financial Statements for the years
                ended June 30, 2008 and 2007
            F-8







-
          23 -
 *Table
          of Contents*




**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, 200 8
      and
      2007, and the related consolidated statements of operations, stockholders’
equity (deficit) and cash flows for the years then ended. The Company’s
      management is responsible for these financial statements. 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 audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing auditing procedures
      that are appropriate in the circumstances, but not for the purpose of expressing
      an opinion on the effectiveness of the Company's internal control over financial
      reporting. Accordingly, we express no such opinion. Our audits also included
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management and 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, 2008 and 2007, 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


September
      25, 2008




F-1
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
      Balance Sheets**


**June
      30, 2008 and 2007**






**ASSETS**




**2008**
            
            **2007**Current
                AssetsCash
            
            $
            269,105
            
            $
            781,011ReceivablesTrade
                accounts receivable, net of allowances2008
                - $319,119; 2007 - $120,250
            
            
            2,814,326
            
            
            2,397,464Other
            
            
            26,709
            
            
            8,052Inventories
            
            
            1,692,597
            
            
            933,104Prepaid
                expenses and other
            
            
            196,660
            
            
            243,056Total
                current assets
            
            
            4,999,397
            
            
            4,362,687Property
                and equipment, net of accumulated depreciation 2008 - $934,658; 2007
                -
                $813,684
            
            
            299,802
            
            
            311,264Goodwill
            
            
            3,258,938
            
            
            3,258,938Other
            
            
            35,557
            
            
            36,2613,594,297
            
            
            3,606,463Total
                Assets
            
            $
            8,593,694
            
            $
            7,969,150






*See
      accompanying notes to the consolidated financial statements*




F-2
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
        Balance Sheets**
 **June
        30, 2008 and 2007**


**LIABILITIES
      AND STOCKHOLDERS’ EQUITY** **(DEFICIT)**




**2008**
            
            **2007**CurrentliabilitiesAccounts
                payable
            
            $
            1,931,132
            
            $
            1,803,035Accrued
                salaries and commissions
            
            
            75,694
            
            
            51,103Other
                accrued expenses
            
            
            337,409
            
            
            495,179Due
                to factor
            
            
            —
            
            
            1,302,564Bank
                line of credit
            
            
            2,061,728
            
            
            —Current
                portion of capital lease obligations
            
            
            —
            
            
            8,245Current
                portion of stockholders’ notes
            
            
            2,705,000
            
            
            1,556,451Total
                current liabilities
            
            
            7,110,963
            
            
            5,216,577Notespayable
                to stockholders, less current portion
            
            
            1,151,968
            
            
            2,209,468Total
                liabilities
            
            
            8,262,931
            
            
            7,426,045Preferredstock,
                8% cumulative, convertible, redeemable$.001
                par value; authorized 10,000,000 shares; issued and outstanding 500,000
                shares
            
            
            675,121
            
            
            635,121Stockholders’equity
                (deficit)Common
                stock, $.001 par value; 50,000,000 shares authorized; issued and
                outstanding 2008 - 28,751,693 shares; 2007 - 26,634,068 shares
            
            
            28,752
            
            
            26,634Additional
                paid-in capital
            
            
            13,551,612
            
            
            13,219,000Accumulated
                deficit
            
            
            (13,924,722
            )
            
            (13,337,650
            )Total
                stockholders’ equity (deficit)
            
            
            (344,358
            )
            
            (92,016
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            8,593,694
            
            $
            7,969,150






*See
      accompanying notes to the consolidated financial statements*




F-3
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
        Statements of Operations**
 **Years
        Ended June 30, 2008 and 2007**


**2008**
            
            **2007**Net
                Sales
            
            $
            15,233,457
            
            $
            15,919,683Cost
                of Goods Sold
            
            
            9,988,023
            
            
            10,976,817Gross
                Profit
            
            
            5,245,434
            
            
            4,942,866Operating
                Expenses:Selling,
                general and administrative
            
            
            5,200,086
            
            
            4,838,494Depreciation
                and amortization
            
            
            57,405
            
            
            64,243Total
                operating expenses
            
            
            5,257,491
            
            
            4,902,737Operatingincome
                (loss)
            
            
            (12,057
            )
            
            40,129Otherincome
                (expense):Interest
                income
            
            
            6,377
            
            
            1,194Interest
                expense
            
            
            (580,098
            )
            
            (646,023
            )Amortization
                of debt discount and financing costs
            
            
            (44,023
            )
            
            (69,187
            )Gain
                on debt retirement
            
            
            53,604
            
            
            —Other
            
            
            (10,875
            )
            
            (8,316
            )Total
                other expense
            
            
            (575,015
            )
            
            (722,332
            )Netloss
            
            
            (587,072
            )
            
            (682,203
            )Add:
                Dividendsdeclared
                on preferred stock
            
            
            (40,000
            )
            
            (40,000
            )Lossavailable
                to common stockholders
            
            $
            (627,072
            )
            $
            (722,203
            )Basic
                and diluted loss per common share
            
            $
            (0.02
            )
            $
            (0.03
            )Basic
                and diluted weighted-average
                common shares outstanding
            
            
            27,079,539
            
            
            25,796,808






*See
      accompanying notes to the consolidated financial statements*




F-4
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
        Statements of Stockholders’ Equity
        (Deficit)**
 **Years
        Ended June 30, 2008 and 2007**


**Additional****Common
                Stock**
            
            **Paid-in**
            
            **Accumulated****Shares**
            
            **Par
                Value**
            
            **Capital**
            
            **Deficit**
            
            **Total**Balances,
                June 30, 2006
            
            
            25,239,211
            
            $
            25,239
            
            $
            12,730,735
            
            $
            (12,655,447
            )
            $
            100,527Exercise
                of common stock warrants and options
            
            
            127,000
            
            
            127
            
            
            21,463
            
            
            —
            
            
            21,590Issuance
                of common stock
            
            
            1,267,857
            
            
            1,268
            
            
            536,233
            
            
            —
            
            
            537,501Dividends
                declared
            
            
            —
            
            
            —
            
            
            (40,000
            )
            
            —
            
            
            (40,000
            )Issuance
                of common stock warrants and options
            
            
            —
            
            
            —
            
            
            71,172
            
            
            —
            
            
            71,172Registration
                costs related to issuance of common stock
            
            
            —
            
            
            —
            
            
            (100,603
            )
            
            —
            
            
            (100,603
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (682,203
            )
            
            (682,203
            )Balances,
                June 30, 2007
            
            
            26,634,068
            
            $
            26,634
            
            $
            13,219,000
            
            $
            (13,337,650
            )
            $
            (92,016
            )Exercise
                of common stock options
            
            
            117,625
            
            
            118
            
            
            19,879
            
            
            —
            
            
            19,997Issuance
                of common stock
            
            
            2,000,000
            
            
            2,000
            
            
            398,000
            
            
            —
            
            
            400,000Dividends
                declared
            
            
            —
            
            
            —
            
            
            (40,000
            )
            
            —
            
            
            (40,000
            )Issuance
                of common stock options
            
            
            —
            
            
            —
            
            
            31,983
            
            
            —
            
            
            31,983Registration
                costs related to issuance of common stock
            
            
            —
            
            
            —
            
            
            (77,250
            )
            
            —
            
            
            (77,250
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (587,072
            )
            
            (587,072
            )Balances,
                June 30, 2008
            
            
            28,751,693
            
            $
            28,752
            
            $
            13,551,612
            
            $
            (13,924,722
            )
            $
            (344,358
            )




*See
      accompanying notes to the consolidated financial statements*




F-5
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
        Statements of Cash Flows**
 **Years
        Ended June 30, 2008 and 2007**


**2008**
            
            **2007****Operating
                Activities**Net
                loss
            
            $
            (587,072
            )
            $
            (682,203
            )Items
                not requiring (providing) cashDepreciation
                and amortization
            
            
            127,974
            
            
            98,549Provision
                for bad debts
            
            
            10,945
            
            
            26,689Provision
                for sales returns and allowances
            
            
            956,480
            
            
            1,017,009Compensatory
                issuance of common stock and stock options
            
            
            31,983
            
            
            59,472Issuance
                of warrants in exchange for consulting services
            
            
            —
            
            
            11,700Amortization
                of debt discount and financing costs
              included
                in interest expense
            
            
            47,148
            
            
            69,187Gain
                on debt retirement
            
            
            (53,604
            )
            
            —(Gain)
                loss on disposal of property and equipment
            
            
            (1,500
            )
            
            15,814Changes
                inTrade
                accounts receivable
            
            
            (1,384,287
            )
            
            (1,994,942
            )Inventories
            
            
            (759,493
            )
            
            (110,819
            )Prepaid
                expenses and other current assets
            
            
            29,355
            
            
            (66,201
            )Accounts
                payable
            
            
            128,097
            
            
            352,110Accrued
                expenses and other
            
            
            (87,584
            )
            
            343,080Net
                cash used in operating activities
            
            
            (1,541,558
            )
            
            (860,555
            )**Investing
                Activities**Purchase
                of property and equipment
            
            
            (116,512
            )
            
            (203,896
            )Proceeds
                from sale of equipment
            
            
            1,500
            
            
            9,937Net
                cash used in investing activities
            
            
            (115,012
            )
            
            (193,959
            )**Financing
                Activities**Principal
                payments on stockholders’ notes payable
            
            
            (72,500
            )
            
            (30,290
            )Proceeds
                from issuance of stockholders’ notes payable
            
            
            600,000
            
            
            920,000Net
                borrowings on bank line of credit
            
            
            2,061,728
            
            
            —Deferred
                fees associated with bank financing
            
            
            (48,060
            )
            
            (7,500
            )Principal
                payments on capital lease obligations
            
            
            (8,245
            )
            
            (17,010
            )Issuance
                of common stock, net of related expenses
            
            
            19,997
            
            
            559,091Payment
                of registration costs related to issuance of common stock
            
            
            (105,692
            )
            
            (72,161
            )Advances
                from (repayments to) factor, net
            
            
            (1,302,564
            )
            
            381,058Net
                cash provided by financing activities
            
            
            1,144,664
            
            
            1,733,188**Increase****(Decrease) in Cash**
            
            
            (511,906
            )
            
            678,674**Cash****,
                Beginning of Year**
            
            
            781,011
            
            
            102,337**Cash,
                End of Year**
            
            $
            269,105
            
            $
            781,011






*See
      accompanying notes to the consolidated financial statements*




F-6
 *Table
          of Contents*




**Decorize,
      Inc.**


**Consolidated
      Statements of Cash Flows**


**Years
      Ended June 30, 2008 and 2007**




**2008**
            
            **2007****Supplemental
                Cash Flows Information****:**Interest
                paid
            
            $
            516,191
            
            $
            584,069Dividends
                accrued on preferred stock
            
            $
            40,000
            
            $
            40,000Accrued
                fees associated with stock registration
            
            
            —
            
            $
            28,442Debt
                converted to common stock
            
            $
            400,000
            
            
            —




*See
      accompanying notes to the consolidated financial statements*




F-7
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
        to Consolidated Financial Statements**
 **Years
        Ended June 30, 2008 and 2007**


**Note
      1:** **Nature
      of Operations and Summary of Significant Accounting
      Policies**




***Nature
      of Operations***




Decorize,
      Inc. (“Decorize”) together with 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 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, 2008 and 2007, 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. The Company also provides
      an allowance for sales returns and allowances, which is based on upon a review
      of outstanding receivables, historical returns and allowances information and
      specific allowances granted to customers.




The
      Company’s trade accounts receivable allowances as of June 30, 2008 and 2007 were
      as follows:




**2008**
            
            **2007**Allowance
                for doubtful accounts
            
            $
            81,385
            
            $
            36,211Allowance
                for returns and allowances
            
            
            237,734
            
            
            84,039$
            319,119
            
            $
            120,250




The
      Company has established relationships with several major customers. Sales to
      the
      Company’s top two customers during the year ended June 30, 2008, as measured by
      sales volume, respectively accounted for 6.4% and 5.7% of total net sales for
      the year. Neither of these two customers accounted for more than 5.0% of total
      net sales during the year ended June 30, 2007. Sales to the Company’s top two
      customers during the year ended June 30, 2007, as measured by sales volume,
      respectively accounted for 19.5% and 5.9% of total net sales for the year.
      Neither of these two customers accounted for more than 5.0% of total net sales
      during the year ended June 30, 2008. No other customers accounted for 5.0%
      of
      the Company’s total net sales in either of the years ended June 30, 2008 and
      2007.




F-8
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


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.




***Inventory***




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, 2008**
            
            **Balance
                at**
              **June
                30, 2007**Automobiles
            
            
            5
                years
            
            $
            21,480
            
            $
            28,480Warehouse
                and production equipment
            
            
            5-7
                years
            
            
            56,426
            
            
            54,464Computer
                software
            
            
            3
                years
            
            
            178,482
            
            
            178,482Office
                and computer equipment
            
            
            3-7
                years
            
            
            613,898
            
            
            576,928Leasehold
                improvements
            
            
            Lease
                term
            
            
            364,174
            
            
            151,316Construction
                in progress
            
            
            
            
            
            —
            
            
            135,278Total
            
            
            
            
            
            1,234,460
            
            
            1,124,948Less
                accumulated depreciation
            
            
            
            
            
            934,658
            
            
            813,684Property
                and equipment, net
            
            
            
            
            $
            299,802
            
            $
            311,264


***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 2008 and
      2007.




***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 using a two-step process annually, or more frequently if
      circumstances indicate potential impairment, through a comparison of fair value
      to its carrying amount. The Company consists of a single reporting unit as
      defined in SFAS No. 142. As the first step in the process, management compares
      the estimated fair value of the Company based upon the market price of its
      common stock to the carrying value of its equity to determine whether a
      potential impairment of goodwill




F-9
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


exists.
      The Company’s evaluations have not indicated a potential impairment, so the
      Company did not record a charge to reduce the carrying value of goodwill during
      2008 or 2007.




***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***





The
      Company’s revenue is generated through the sale of merchandise to customers for
      prices that are fixed at the time the order is placed. Revenue is recognized
      when pervasive evidence of the sale exists, the earnings process is complete
      and
      the risks and rewards of ownership of the goods have transferred to the
      customer, which is considered to have occurred when the customer receives title
      to the products. Depending upon the specific terms of the transaction, title
      may
      transfer upon shipment of the products to the customer or upon receipt of the
      products by the customer. Sales are billed and our services are complete upon
      receipt of title by the customer. Collectibility of the amounts billed to
      customers is reasonably assured. The Company provides an allowance for expected
      sales returns, which is estimated based upon our historical experience. Deposits
      received in advance for orders from customers are recorded as deferred revenue
      and are not recognized in income until title to the products passes to the
      customer.




***Cost
      of Goods Sold***




The
      Company’s cost of goods sold includes substantially all costs incurred in our
      Indonesian and Chinese subsidiaries and transportation costs incurred in
      transferring goods from our subsidiaries to the United Sates. Cost of goods
      sold
      includes depreciation expense of $70,569 and $34,306 for the years ended June
      30, 2008 and 2007, respectively.




***Advertising
      Costs***




The
      Company expenses advertising costs as they are incurred. We incurred advertising
      and marketing expenses during the years ended June 30, 2008 and 2007, totaling
      $551,152 and $371,542, respectively.




***Amounts
      Due To and From Related Parties***




Accounts
      payable included amounts due to employees and stockholders totaling $106,546
      and
      $32,434 as of June 30, 2008 and 2007, respectively. Other accounts receivable
      from employees totaled $6,731 and $5,822 as of June 30, 2008 and 2007,
      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.




F-10
 *Table
          of Contents*


**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**June
                30, 2008**
            
            **June
                30, 2007**Net
                loss, as reported
            
            $
            (587,072
            )
            $
            (682,203
            )Add:
                Dividends declared on preferred stock
            
            
            (40,000
            )
            
            (40,000
            )Loss
                available to common shareholders
            
            
            (627,072
            )
            
            (722,203
            )Divided
                by weighted average shares outstanding
            
            
            27,079,539
            
            
            25,796,808Basic
                and diluted loss per share
            
            $
            (0.02
            )
            $
            (0.03
            )


***Foreign
      Currency Translation***




The
      functional currency for our foreign subsidiaries is the United States dollar.
      We
      remeasure those assets and liabilities denominated in foreign currencies using
      exchange rates in effect at each balance sheet date. Fixed assets and the
      related depreciation or amortization charges are recorded at the exchange rates
      in effect on the date we acquired the assets. Revenues and expenses denominated
      in foreign currencies are remeasured using average exchange rates for all
      periods presented. We recognize the resulting foreign exchange gains and losses
      as a component of cost of goods sold in the consolidated statements of
      operations.




***Stock-based
      Compensation***




At
      June
      30, 2008 and 2007, the Company had a stock-based employee compensation plan,
      which is described more fully in *Note
      10, Stock-Based Compensation* .




***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). The Company carries
      its
      Series A Convertible Preferred Stock on its balance sheet at the current
      redemption amount. Holders of Series A Convertible 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 Convertible 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 Convertible 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.




***Financial
      Instruments***




The
      carrying amounts of the Company’s financial instruments, which consist
      principally of cash, accounts receivable, accounts payable and notes payable,
      approximate fair value.




***Reclassifications***




Certain
      reclassifications have been made to the 2007 financial statements to conform
      to
      fiscal 2008 presentation. These reclassifications have no effect upon net
      loss.




F-11
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


***Recent
      Accounting Standards***




In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments.* SFAS No.
      155 resolves certain accounting issues related to various hybrid financial
      instruments. The Company adopted the provisions of SFAS No. 155 on July 1,
      2007.
      The adoption of this standard did not have a material impact on the Company’s
      financial condition, results of operations or cash flows.




In
      June 2006, the FASB issued FASB Interpretation 48, *Accounting
      for Uncertainty in Income Taxes* .
      Interpretation 48 provides clarifying guidance on the accounting for uncertainty
      in income taxes recognized in financial statements in accordance with SFAS
      No.
      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 adopted Interpretation 48 on July 1,
      2007. The adoption of FIN 48 did not have a material impact on the Company’s
      financial condition, results of operations or cash flows.




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements in Current Year Financial
      Statements,* which
      requires registrants to consider the effect of all carryover and reversing
      effects or prior year misstatements when quantifying errors in current year
      financial statements. The cumulative effective of initial application is to
      be
      reported in the carrying amount of assets and liabilities as of the beginning
      of
      the fiscal year, and the offsetting is to be made to the opening balance of
      retained earnings for that year. The Company adopted SAB 108 during the first
      quarter of its fiscal year ended June 30, 2007. The adoption of SAB No. 108
      did
      not have a material on the Company's financial condition, results of operations
      or cash flows.




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      accordance with U.S. generally accepted accounting principles, and enhances
      disclosures about fair value measurements. SFAS No. 157 applies when other
      accounting pronouncements require fair value measurements; it does not require
      new fair value measurements. In February 2008, the FASB issued FASB Staff
      Position No. 157-2, *Effective Date of FASB Statement No. 157,* which delays the effective date of SFAS No. 157 for all nonfinancial assets
      and nonfinancial liabilities, except for items that are recognized or disclosed
      at fair value in the financial statements on a recurring basis (at least
      annually).  SFAS No. 157 is effective for us beginning July 1,
      2008; however, FSP No. 157-2 delays the effective date for certain items to
      July 1, 2009.  We do not expect the adoption of this statement to have
      a material effect on our financial position or results of
      operations.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      including an amendment of SFAS No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities.* SFAS No.
      159 permits entities to choose to measure many financial instruments and certain
      other items at fair value. The objective of which is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions. Eligible items
      for
      the measurement option include all recognized financial assets and liabilities
      except: investments in subsidiaries, interests in variable interest entities,
      employers’ and plans’ obligations for pension benefits, assets and liabilities
      recognized under leases, deposit liabilities, financial instruments that are
      a
      component of shareholder’s equity. Also included are firm commitments that
      involve only financial instruments, nonfinancial insurance contracts and
      warranties and host financial instruments. The statement permits all entities
      to
      choose at specified election dates, after which the entity shall report
      unrealized gains and losses on items for which the fair value option has been
      elected in earnings, at each subsequent reporting date. The fair value option
      may be applied instrument by instrument; however, the election is irrevocable
      and is applied only to entire instruments and not to portions of instruments.
      The Company adopted SFAS No. 159 on July 1, 2008, as required. The Company
      did
      not choose to report additional assets and liabilities at fair value other
      than
      those required to be accounted for at fair value prior to the adoption of SFAS
      No. 159. Therefore, the adoption of this standard did not have a material effect
      on our financial position or results of operations.


F-12
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements—An Amendment of
      ARB No. 51.  SFAS No. 160* establishes new accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary.
 Among other matters, it also requires the recognition of a noncontrolling
      interest (sometimes called “minority interest”) as equity in the consolidated
      financial statements and separate from the parent’s equity.  The amount of
      net income attributable to the noncontrolling interest will be included in
      consolidated net income on the face of the income statement.  SFAS No. 160
      is effective for fiscal years, and interim periods within those fiscal years,
      beginning on or after December 15, 2008.  We do not expect the
      adoption of this statement to have a material effect on our financial position
      or results of operations.




In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), *Business
      Combinations (“SFAS No.* 141R”),
      which replaces SFAS No. 141, *Business
      Combinations.* SFAS No. 141R will significantly change the accounting for business combinations
      and will impact financial statements both on the acquisition date and in
      subsequent periods.  Under SFAS No. 141R, an acquiring entity will be
      required to recognize the assets acquired, the liabilities assumed, and any
      noncontrolling interest in the acquiree measured at their fair values as of
      the
      acquisition date, with limited exceptions.  SFAS No. 141R also includes a
      substantial number of new disclosure requirements.  SFAS No. 141R applies *prospectively* to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after
      December 15, 2008.  We are currently evaluating the potential impact
      that the provisions of SFAS No. 141R may have on our consolidated financial
      statements.




In
      March 2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities* .
      SFAS
      No. 161 requires disclosure of the fair values of derivative instruments
      and their gains and losses in a tabular format. It also requires disclosure
      of
      derivative features that are credit risk-related and cross-referencing within
      footnotes to enable financial statement users to locate important information
      about derivative instruments. SFAS No. 161 is effective for financial
      statements issued for fiscal years and interim periods after November 15,
      2008, with early application encouraged. The Company is evaluating the impact
      of
      SFAS No. 161 on its consolidated financial statements.




In
      April 2008, the FASB issued FASB Staff Position FSP No. 142-3, *Determination
      of the Useful Life of Intangible Assets* .
      FSP
      No. 142-3 amends the factors that should be considered in developing
      renewal or extension assumptions used to determine the useful life of a
      recognized intangible asset under SFAS No. 142, *Goodwill
      and Other Intangible Assets* .
      FSP
      No. 142-3 is effective for financial statements issued for fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years. The Company is evaluating the impact of FSP No. 142-3.




In
      May 2008, the FASB issued SFAS No. 162, *The
      Hierarchy of Generally Accepted Accounting Principles* .
      SFAS
      No. 162 improves financial reporting by identifying a consistent framework,
      or hierarchy, for selecting accounting principles to be used in preparing
      financial statements that are presented in conformity with U.S. generally
      accepted accounting principles for nongovernmental entities. SFAS No. 162
      is effective sixty days following the SEC’s approval of the Public Company
      Accounting Oversight Board auditing amendments to AU Section 411, *The
      Meaning of Present Fairly in Conformity with Generally Accepted Accounting
      Principles* .
      The
      Company is evaluating the impact of SFAS No. 162.




In
      June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, *Determining
      Whether Instruments Granted in Share-based Payment Transactions are
      Participating Securities* .
      FSP
      No. EITF 03-6-1 states that unvested share-based payment awards that
      contain nonforfeitable rights to dividends or dividend equivalents (whether
      paid
      or unpaid) are participating securities and shall be included in the computation
      of EPS pursuant to the two-class method. FSP No. EITF 03-6-1 is effective
      for financial statements issued for fiscal years beginning after
      December 15, 2008. All prior-period EPS data presented shall be adjusted
      retrospectively (including interim financial statements, summaries of earnings,
      and selected financial data) to conform to the provisions of this FSP. Early
      application is not permitted. The Company is evaluating the impact of FSP
      No. EITF 03-6-1.




F-13
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**Note
      2: Inventories**




The
      Company’s inventories as of June 30, 2008 and 2007 were as follows:




**2008**
            
            **2007**Raw
                materials
            
            $
            183,296
            
            $
            89,581Work
                in process
            
            
            136,714
            
            
            95,637Finished
                units
            
            
            1,372,587
            
            
            747,886$
            1,692,597
            
            $
            933,104




**Note
      3:**  **Bank
      Line of Credit**





On
      October 19, 2007, the Company obtained a $3,000,000 revolving credit facility
      from Guaranty Bank, which was subsequently amended on December 27, 2007 (as
      amended, the “Credit Facility”), to fund the Company’s ongoing working capital
      needs.




The
      Company retired its existing indebtedness under a factoring arrangement with
      Bibby Financial Services (Midwest), Inc. with a portion of the proceeds from
      the
      Credit Facility (see *Note
      4, Due to Factor* ).
      The
      terms of the Credit Facility prohibit the Company from using Credit Facility
      proceeds for the purpose of repaying any other third party indebtedness,
      including indebtedness that is subordinate to the Credit Facility, without
      the
      prior approval of Guaranty Bank.




The
      Company can borrow, repay and re-borrow principal under the Credit Facility
      from
      time to time during its term. The aggregate principal amount drawn under the
      Credit Facility at any given time may not exceed the lesser of $3,000,000 or
      the
      borrowing base. The borrowing base is equal to the sum of (a) 80% of the value
      of eligible accounts receivable, plus (b) 50% of the value of eligible
      inventory. Eligible accounts receivable includes the Company’s accounts
      receivable generated in the ordinary course of business that satisfy certain
      conditions of Guaranty Bank, and excludes certain unacceptable accounts
      receivable, such as accounts of an account debtor when 20% of the outstanding
      balance owed by such account debtor is more than 90 days past due. Eligible
      inventory includes the Company’s inventory that is in good, new and saleable
      condition and is not obsolete or unmerchantable, in Guaranty Bank’s reasonable
      opinion. As of June 30, 2008, the amount available to be advanced under the
      Credit Facility was $2,358,364.




The
      annual interest rate on the Credit Facility was initially equal to the prime
      rate of interest (5.0% at June 30, 2008) plus a prime margin of 1.5% (the “Prime
      Margin”). Pursuant to the amendment made on December 27, 2007, the Prime Margin
      was 2.0% for the period from December 27, 2007 through March 31, 2008. The
      Prime
      Margin was recalculated on April 1, 2008 and will be recalculated on the first
      day of each succeeding fiscal quarter thereafter based upon the Company’s
      trailing four quarters “cash flow”, defined as operating income or loss plus
      depreciation expense deducted in arriving at operating income or operating
      loss
      for the relevant period. Prime Margin being: 0.0% if “cash flow” is equal to or
      greater than $1,000,000; 0.5% if “cash flow” is equal to or greater than
      $750,001 and equal to or less than $1,000,000; 1.0% if “cash flow” is equal to
      or greater than $500,001 and equal to or less than $750,000; 1.50% if “cash
      flow” is equal to or greater than $250,001 and equal to or less than $500,000;
      2.0% if “cash flow” is equal to or greater than $1 or equal to or less than
      $250,000; and 2.50% if “cash flow” is $0 or less. Interest accrued on the
      outstanding principal balance is due monthly. The Credit Facility expires,
      and
      any and all principal outstanding under the Credit Facility is due and payable,
      on the maturity date of December 31, 2008.


F-14
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


The
      Company paid Guaranty Bank a loan origination fee and certain other costs
      totaling $25,000, which were recorded as deferred financing fees and are being
      amortized to interest expense on a straight-line basis over the term of the
      Credit Facility.




The
      Company is not required to pay any fees based upon any unused portion of the
      amount available for borrowing under the Credit Facility.




The
      Credit Facility is secured by substantially all of the assets of the Company
      and
      is guaranteed by Merapi and WestWay.




The
      Credit Facility contains covenants, including financial covenants, with which
      the Company must comply. The financial covenants include a minimum fixed charge
      coverage ratio, a limitation on payment of dividends and a transactional
      limitation on capital expenditures. With certain exceptions, the Company is
      prohibited under the Credit Facility from, among other things, incurring or
      assuming any indebtedness, entering into any merger or reorganization and
      acquiring any stock or assets of any other entity. The Company was not in
      compliance with the minimum fixed charge coverage ratio covenant as of June
      30,
      2008. At the Company’s request, Guaranty Bank agreed to waive the minimum fixed
      charge coverage ratio requirement for the quarter ended June 30, 2008. The
      Company anticipates that it will not be in compliance with the minimum fixed
      charge coverage ratio for the quarter ending September 30, 2008 and will again
      request Guaranty Bank to waive the requirement for compliance. Although Guaranty
      Bank has expressed a willingness to waive the requirement for the quarter ending
      September 30, 2008 there can be no assurance that Guaranty Bank will actually
      do
      so.




Certain
      notes payable to stockholders (see *Note
      5, Notes Payable to Stockholders* )
      contain
      cross-default provisions, which, as a result of the Company’s non-compliance
      with the minimum fixed charge coverage ratio requirement in the Credit Facility,
      have caused the Company to be in default under the terms of the notes. At the
      Company’s request, the respective note holders agreed to waive the specific
      cross-default provisions as they relate to the Company’s non-compliance with the
      minimum fixed charge coverage ratio requirement in the Credit
      Facility.




In
      connection with the Credit Facility, all holders of the Company’s notes payable
      to stockholders (see *Note
      5, Notes Payable to Stockholders* )
      agreed
      to subordinate outstanding indebtedness owed to them by the Company pursuant
      to
      separately executed subordination agreements in favor of Guaranty
      Bank.




**Note
      4:**  **Due
      to Factor**





On
      March
      31, 2006, the Company and Bibby Financial Services (Midwest), Inc. (“BFS”)
      entered into a new Master Purchase and Sale Agreement (the “BFS Factoring
      Agreement”) to govern the exclusive global factoring arrangements provided by
      BFS. The new agreement replaced the Master Purchase and Sale Agreement entered
      into between the Company and BFS in August 2005. The BFS Factoring Agreement,
      under which BFS purchased certain accounts receivable of the Company on a full
      recourse basis, was accounted for as a secured borrowing and provided the
      Company with a maximum credit facility of $3,000,000.




On
      October 19, 2007, upon obtaining the revolving credit facility from Guaranty
      Bank (see *Note
      3, Bank Line of Credit* ),
      the
      Company terminated the BFS Factoring Agreement. Pursuant to the terms of the
      BFS
      Factoring Agreement the Company incurred interest expense and factoring fees
      totaling $92,620 and $379248 during the years ended June 30, 2008 and 2007,
      respectively. Additionally, the Company incurred fees of $44,273 during the
      year
      ended June 30, 2008 to terminate the agreement before its scheduled maturity
      date.


F-15
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**Note
      5:** **Notes
      Payable to Stockholders**




The
      Company’s notes payable to stockholders as of June 30, 2008 and 2007 were as
      follows:




**2008**
            
            **2007**Revolving
                line of credit (A)
            
            $
            700,000
            
            $
            600,000Note
                payable (B)
            
            
            256,968
            
            
            609,468Note
                payable (C)
            
            
            —
            
            
            56,451Note
                payable (D)
            
            
            1,000,000
            
            
            1,000,000Note
                payable (E)
            
            
            500,000
            
            
            —Note
                payable (F)
            
            
            750,000
            
            
            750,000Note
                payable (G)
            
            
            650,000
            
            
            750,000$
            3,856,968
            
            $
            3,765,919




(A)
            Revolving
                line of credit promissory note in the principal sum of $750,000 issued
                by
                the Company in favor of a certain stockholder on May 5, 2006, interest
                payable monthly at a rate per annum of prime plus 5.0%, maturing
                on May 5,
                2009, secured by inventories. On September 26, 2007, the note was
                modified
                so that the interest payable on the note accrues at the rate of 13.75%
                per
                annum and to provide for a recurring lender fee of $7,500 due on
                September
                26, 2007, and thereafter on May 5thof
                each succeeding year until the note is paid in full. On April 1,
                2008, the
                note was further modified so that the interest payable on the note
                accrues
                at the prime rate per annum and to provide for the suspension of
                monthly
                interest payments until January 1, 2009 at which time all accrued
                unpaid
                interest is due and to provide for monthly interest payments thereafter
                until maturity.




(B)
            Stockholder
                note payable, bearing interest at a rate per annum of prime plus
                1.25%,
                requiring bi-weekly principal payments of $4,038 (“Parsons Note One”). On
                April 28, 2008, the note was amended and restated to account for
                that
                certain stock exchange agreement (see*Note
                7, Stockholders’ Equity*)
                pursuant to which the Company issued 1,5000,000 shares of its common
                stock
                in exchange for a $300,000 reduction in the outstanding principal
                balance
                of the note.




(C)
            Stockholder
                note payable, bearing interest at prime plus 1%. The note matured
                on
                December 31, 2004. On April 21, 2008, the Company paid $20,000 in
                full
                satisfaction of the outstanding principal balance and all accrued
                unpaid
                interest, recognizing a gain on debt retirement of
                $53,604.




(D)
            Stockholder
                note payable, interest payable monthly at a rate per annum of prime
                plus
                1.25%. On April 28, 2008, the note was amended and restated to extend
                the
                maturity date to July 31, 2009.




(E)
            Stockholder
                note payable issued by the Company on April 30, 2008 in the principal
                amount of $500,000, bearing interest at the prime rate per annum,
                maturing
                on April 30, 2009.




(F)
            Convertible
                stockholder note payable, interest payable monthly at a rate per
                annum of
                prime plus 0.5%, due upon demand. On April 30, 2008, the note was
                amended
                so that the interest payable on the note accrues at the prime rate
                per
                annum and so that the Company is no longer required to make monthly
                installment payments of interest over the term of the note. The note
                is
                convertible, at the option of the holder, into 3,750,000 shares of
                the
                Company’s common stock.




(G)
            On
                August 17, 2006, Decorize issued a promissory note, payable to the
                order
                of Quest Capital Alliance II, L.L.C. (“Quest Capital II”), in the original
                principal amount of $75,000. The maturity date for this note was
                November
                17, 2006. Outstanding principal due under this note accrued interest
                until
                the date of maturity at a rate equal to 13.25% per annum. In consideration
                of Quest Capital II providing the






F-16
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


Promissory
      Note, Decorize paid Quest Capital II a loan fee of $250. This note was paid
      in
      full September 11, 2006.





On
                September 11, 2006, Decorize issued a promissory note (the “Promissory
                Note”), payable to the order of Quest Capital II, in the original
                principal amount of $750,000. Quest Capital II 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 II , is also a director of
                Decorize.





Interest
      on the outstanding principal under the Promissory Note accrued at a rate of
      (i)
      18.0% per annum from January 9, 2007 to February 12, 2007, then at a rate of
      21.0% per annum from February 12, 2007 to March 15, 2007. The note was amended
      on March 15, 2007 to lower the interest rate to 13.75% and to extend the
      maturity date to March 15, 2008. The Company paid a renewal fee of $7,500 in
      connection with this amendment. The note was further modified on March 15,
      2008
      so that the interest payable on the note accrued at the rate of 9.75% per annum
      and to extend the maturity date to March 15, 2009. On April 1, 2008, the note
      was amended and restated 1) to account for that certain stock exchange agreement
      (see *Note
      7, Stockholders’ Equity* )
      pursuant to which the Company issued 500,000 shares of its common stock in
      exchange for a $100,000 reduction in the outstanding principal balance of the
      note; 2) so that the interest payable on the note accrues at the prime rate
      per
      annum; and 3) so that all interest accruing on the note is due at payable at
      maturity.




The
      prime
      rate of interest at June 30, 2008, was 5.0%. The aggregate annual maturities
      of
      stockholder notes payable at June 30, 2008, are as follows:




**Year
                Ended June 30**
            
            **Aggregate
                Principal Maturities**2009
            
            $
            2,705,0002010
            
            
            1,105,0002011
            
            
            46,968Total
                principal due on stockholder notes payable
            
            
            3,856,968Less
                current portion
            
            
            2,705,000Long-term
                stockholder notes payable
            
            $
            1,151,968




**Note
      6:** **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 March 2013 and certain leases contain renewal
      options.




The
      Company has, from time to time, also leased equipment under agreements accounted
      for as capital leases. As of June 30, 2008, the Company has no capital lease
      obligations.




F-17
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


Future
      minimum payments for noncancellable operating leases with initial or remaining
      terms of one year or more at June 30, 2008, are as follows:




**Minimum**
              **Payments**2009
            
            $
            496,9882010
            
            
            293,4842011
            
            
            188,7002012
            
            
            193,0072013
            
            
            64,697$
            1,236,876


Total
      rent expense incurred under operating leases amounted to $749,010 and $544,421
      for the years ended June 30, 2008 and 2007, respectively. Of these amounts,
      $78,637 and $38,967 is included in cost of goods sold for the years ended June
      30, 2008 and 2007, respectively.




**Note
      7:** **Stockholders’
      Equity**




On
      February 5, 2007, the Company sold 821,429 shares of common stock, $0.001 par
      value per share to an accredited investor for total consideration of $287,500,
      representing a purchase price of $0.35 per share. This investor also received
      warrants in this transaction, which are exercisable for an aggregate of 178,571
      shares of common stock at an initial exercise price of $0.70 per share. The
      warrants will expire on February 5, 2009.





Also
      on
      February 5, 2007, the Company sold 446,428 shares of common stock to another
      accredited investor, in a separate transaction for total consideration of
      $250,000, representing a purchase price of $0.56 per share. This investor also
      received warrants, which are exercisable for an aggregate of 297,620 shares
      of
      common stock at $0.80 per share. The warrants will expire on February 5,
      2009.





The
      Company executed a Stock Exchange Agreement, effective April 1, 2008, by and
      between the Company and Quest Capital Alliance II, L.L.C. (the “Quest II
      Exchange Agreement”). Pursuant to the Quest II Exchange Agreement, the Company
      sold 500,000 shares of its common stock to Quest II in exchange for a $100,000
      reduction in the outstanding principal balance of the September 11, 2006
      promissory note (see *Note
      5, Notes Payable to Stockholders* ).





The
      Company executed a Stock Exchange Agreement, effective April 28, 2008, by and
      between the Company and James K. Parsons (“Parsons”) (the “Parsons Exchange
      Agreement”). Pursuant to the Parsons Exchange Agreement, the Company sold
      1,500,000 shares of its common stock to Parsons in exchange for a $300,000
      reduction in the outstanding principal balance of the Parsons Note One (see *Note
      5, Notes Payable to Stockholders* ).





Professional
      fees totaling $77,250 and $100,603 incurred in connection with the registration
      of certain of the Company’s shares of common stock issued in private placements
      have been charged to additional paid in capital during the years ended June
      30,
      2008 and 2007, respectively.





See
      also, *Note
      10, Stock-Based Compensation* .


F-18
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**Note
      8:** **Related
      Party Transactions**




The
      Company subleases warehouse space in Springfield, Missouri from a company owned
      by SRC Holdings Corporation (“SRC”). SRC is the largest holder of the Company’s
      common stock and the sole holder of the Company’s outstanding shares of Series A
      Convertible Preferred Stock. The rental expense is determined monthly based
      on
      the actual square footage occupied by the Company during the month. The Company
      incurred lease expense totaling $211,495 and $103,348 during the years ended
      June 30, 2008 and 2007, respectively. Management believes the cost of this
      sublease is similar to what the Company would pay for leasing similar warehouse
      space from an unrelated party.




**Note
      9:** **Income
      Taxes**




The
      provision for income taxes includes these components :




**2008**
            
            **2007**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:




**2008**
            
            **2007**Computed
                at the statutory rate (34%)
            
            $
            (199,604
            )
            $
            (231,950
            )Increase
                (decrease) resulting fromForeign
                subsidiary operations
            
            
            156,811
            
            
            157,170Nondeductible
                expense
            
            
            18,074
            
            
            7,592State
                income taxes
            
            
            (3,000
            )
            
            (2,607
            )Changes
                in the deferred tax asset valuation allowance including adjustments
                to
                prior net operating loss carryforwards
            
            
            24,529
            
            
            53,084Other
            
            
            3,190
            
            
            16,711Actual
                tax expense
            
            $
            0
            
            $
            0







F-19
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


The
      tax
      effects of temporary differences related to deferred taxes shown on the balance
      sheets were:




**2008**
            
            **2007**Deferred
                tax assetsAllowance
                for doubtful accounts
            
            $
            30,926
            
            $
            45,694Allowance
                for sales returns
            
            
            90,338
            
            
            —Accrued
                compensated absences
            
            
            12,920
            
            
            12,312Reserve
                for obsolete inventories
            
            
            66,429
            
            
            52,479Net
                operating loss carryforwards
            
            
            3,370,578
            
            
            3,488,009Property
                and equipment
            
            
            28,833
            
            
            23,260Charitable
                contribution carryforwards and other
            
            
            5,844
            
            
            5,844Additional
                inventory costs capitalized
            
            
            25,935
            
            
            11,6953,631,803
            
            
            3,639,293Deferred
                tax liabilitiesPrepaid
                insurance and other
            
            
            (13,465
            )
            
            (19,150
            )Net
                deferred tax asset before valuation allowance
            
            
            3,618,338
            
            
            3,620,143Valuation
                allowanceBeginning
                balance
            
            
            (3,620,143
            )
            
            (3,567,059
            )(Increase)
                decrease during the period
            
            
            1,805
            
            
            (53,084
            )Ending
                balance
            
            
            (3,618,338
            )
            
            (3,620,143
            )Net
                deferred tax asset
            
            $
            0
            
            $
            0


For
      the
      years ended June 30, 2008 and 2007, 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, 2008 and 2007, the Company had approximately
      $8,800,000 and $9,100,000, respectively, of net operating loss carryforwards
      available to offset future federal income taxes. The carryforwards expire in
      varying amounts from 2021 to 2028, 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.




The
      Company adopted the provisions of FIN 48, *“Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109,”* (“FIN
      48”), on July 1, 2007. FIN 48 clarifies the accounting for income tax positions
      by prescribing a minimum recognition threshold that a tax position is required
      to meet before being recognized in the financial statements. FIN 48 also
      provides guidance on the derecognition of previously recognized deferred tax
      items, measurement, classification, interest and penalties, accounting in
      interim periods, disclosure and transition. Under FIN 48, the Company recognizes
      the tax benefit from an uncertain tax position only if it is more likely than
      not that the tax position will be sustained upon examination by the taxing
      authorities, based on the technical merits of the tax position. Any tax benefits
      recognized in the financial statements from such a position are measured based
      on the largest benefit that has a greater than 50% likelihood of being realized
      upon ultimate resolution. The adoption of FIN 48 had no impact upon the
      Company’s financial position, results of operations or cash flows. In connection
      with adopting FIN 48, the Company adopted the policy to recognize interest
      and
      penalties related to unrecognized tax benefits (if any) in income tax expense.
      No such interest and penalties have been accrued as of June 30,
      2008.


F-20
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**Note
      10:** **Stock-Based
      Compensation**




***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 two to three years of
      continuous service and typically have seven to ten year contractual terms.
      1,112,375 stock options were outstanding as of June 30, 2008, of which 773,625
      were fully vested.




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. 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.




A
      total
      of 465,000 and 1,112,500 options were granted under the Plan during the years
      ended June 30, 2008 and 2007. The fair values of the options granted during
      the
      years ended June 30, 2008 and 2007, were estimated on the date of the respective
      grants using the Black-Scholes-Merton option-pricing model with the following
      weighted average assumptions:




**2008**
            
            **2007**Dividend
                per share
            
            $
            0
            
            $
            0Risk-free
                interest rate
            
            
            3.06
            %
            
            4.86
            %Weighted-average
                expected life of options
            
            
            4.7
                years
            
            
            6.2
                yearsExpected
                volatility of the Company’s common stock market price
            
            
            132
            %
            
            73
            %Weighted-average
                fair value of options granted during the year
            
            $
            0.16
            
            $
            0.08




On
      August
      25, 2006, the compensation committee met and approved a proposal to modify
      all
      of the 648,000 outstanding employee stock options, all of which were fully
      vested, by reducing the applicable exercise price to $0.17 per share, which
      was
      the closing market price of the common stock on that date. The fair value of
      the
      modification was calculated using the Black-Scholes model, and the Company
      recorded a one-time expense of $32,300. The compensation committee also approved
      the issuance of another 429,000 employee stock options at an exercise price
      of
      $0.17 per share. The Company only issued 413,000 of those options, as one grant
      to an employee in another country was subsequently rescinded, with the approval
      of the compensation committee. These employee stock options vested ratably
      on
      the first day of each quarter from October 1, 2006 to October 1, 2007. The
      value
      of the employee stock options were again calculated utilizing




F-21
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


the
      Black-Scholes model, and the Company will recognize approximately $26,000 of
      expense associated with the issuance of the options over the service
      period.




A
      summary
      of option activity under the Plan as of June 30, 2008 and 2007, and changes
      during the years then ended, is presented below:




**2008**
            
            **2007****Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**Outstanding,
                beginning of year
            
            
            928,250
            
            $
            0.19
            
            
            708,500
            
            $
            0.52Granted
            
            
            465,000
            
            
            0.19
            
            
            1,112,500
            
            
            0.18Exercised
            
            
            (117,625
            )
            
            0.17
            
            
            (127,000
            )
            
            0.17Forfeited
            
            
            (163,250
            )
            
            0.23
            
            
            (765,750
            )
            
            0.49Outstanding,
                end of year
            
            
            1,112,375
            
            
            0.18
            
            
            928,250
            
            
            0.19Options
                exercisable, end of year
            
            
            773,625
            
            
            0.18
            
            
            817,000
            
            
            0.18


Stock
      based compensation recognized in connection with the Plan was $31,983 and
      $59,472 for the years ended June 30, 2008 and 2007.




No
      income
      tax benefits were recognized and no stock-based compensation was capitalized
      as
      part of the cost of an asset during the years ended June 30, 2008 and
      2007.




The
      aggregate intrinsic value of options outstanding and exercisable as of June
      30,
      2008 and 2007, was $0 and $560,856, 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, 2008 and 2007,
      was $8,393 and $60,310, respectively.




Cash
      generated through the exercise of stock options totaled $19,997 and $21,590
      for
      the years ended June 30, 2008 and 2007, respectively. No cash was used in the
      settlement of shared-based obligations during 2008 and 2007.




The
      Company had a total of 338,750 and 111,250 unvested options outstanding as
      of
      June 30, 2008 and 2007, respectively. As of June 30, 2008 and 2007, total
      unrecognized compensation cost related to nonvested share-based compensation
      arrangements granted under the Plan was $53,713 and $12,691, respectively.
      The
      total fair value of shares vested during the years ended June 30, 2008 and
      2007,
      was $41,614 and $27,172, respectively.




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,
      2008 and 2007, because of the full valuation allowance established against
      the
      Company’s deferred tax assets.




F-22
 *Table
          of Contents*




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


The
      following table summarizes information about stock options under the Plan
      outstanding at June 30, 2008:




**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise Prices**
            
            **Number
                Outstanding**
            
            **Weighted
                Average Remaining Contractual Life**
            
            **Range
                of Exercise Price**
            
            **Number
                Exercisable**
            
            **Range
                of Exercise Price**$0.15
                - 0.47
            
            
            1,112,375
            
            
            5.6
                years
            
            $
            0.17
                - 0.47
            
            
            773,625
            
            $
            0.17
                - 0.47


**Note
      11:** **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 6% and 15% of its principal products from one
      China-based supplier during the years ending June 30, 2007 and 2006,
      respectively. There are a limited number of suppliers for these
      products




***Foreign*** **Operations**




All
      of
      the Company’s manufacturing operations are conducted in Indonesia and China and
      all of the Company’s products are imported from Indonesia, China and to a lesser
      extent, other Asian countries.




As
      of
      June 30, 2008, net assets located outside the United States totaled
      approximately $1,393,000. These assets consisted principally of inventory and
      equipment at our Indonesian subsidiary totaling approximately $841,000,
      equipment at our Chinese subsidiary totaling approximately $50,000 and inventory
      in transit from our subsidiaries to the United States totaling approximately
      $502,000.




As
      of
      June 30, 2007, net assets located outside the United States totaled
      approximately $795,000. These assets consisted principally of inventory and
      equipment at our Indonesian subsidiary totaling approximately $534,000,
      equipment at our Chinese subsidiary totaling approximately $58,000 and inventory
      in transit from our subsidiaries to the United States totaling approximately
      $203,000.




**Note
      12:** **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 2008 or
      2007.




F-23
 *Table
          of Contents*




**Decorize,
      Inc.**


**Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2008 and 2007**


**Note
      13:** **Future
      Liquidity Needs**




The
      Company has incurred net losses and negative cash flows from operating
      activities since its formation and had a working capital deficit at June 30,
      2008. 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.




At
        June
        30, 2008, the Company’s short-term debt consisted of borrowings under a line of
        credit agreement which matures during the next year and short term and demand
        notes payable to shareholders. As of September 25, 2008 the Company had not
        obtained commitments from the lenders to renew these loans nor had the
        Company received any indication that these loans would not continue to be
        extended with substantially similar terms.




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.






F-24
 *Table
          of Contents*




**Item****9. Changes In and Disagreements With Accountants on Accounting and Financial
      Disclosure.**




None.




**Item****9A(T).
      Controls and Procedures.**





**Disclosure
      Controls and Procedures**





We
      maintain disclosure controls and procedures designed to provide reasonable
      assurance that information required to be disclosed in reports filed under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,
      processed, summarized and reported within the specified time periods and
      accumulated and communicated to our management, including our principal
      executive officer and principal financial officer, as appropriate to allow
      timely decisions regarding disclosure.





Our
      management, with the participation of our Chief Executive Officer (“CEO”) and
      our Chief Financial Officer (“CFO”), evaluated the effectiveness of our
      disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
      promulgated under the Exchange Act) as of June 30, 2008, the end of our fiscal
      year. Based on that evaluation, our CEO and CFO concluded that, as of that
      date,
      our disclosure controls and procedures required by paragraph (b) of Rules 13a-15
      or 15d-15 were not effective at the reasonable assurance level because of the
      identification of a material weakness in our internal control over financial
      reporting, which we view as an integral component of our disclosure controls
      and
      procedures.





**Management’s
      Report on Internal Control over Financial Reporting**





Our
      management is responsible for establishing and maintaining effective internal
      control over financial reporting as defined in Rule 13a-15(f) and 15-15(f)
      under
      the Exchange Act. Our internal control over financial reporting is designed
      to
      provide reasonable assurance regarding the reliability of our financial
      reporting and the preparation of consolidated financial statements for external
      reporting purposes in accordance with U.S. generally accepted accounting
      principles





Our
      internal control over financial reporting includes those policies and procedures
      that: (1) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect our transactions and dispositions of our assets;
      (2) provide reasonable assurance that transactions are recorded as necessary
      to
      permit preparation of consolidated financial statements in accordance with
      U.S.
      generally accepted accounting principles, and that our receipts and expenditures
      are being made only in accordance with authorizations of our management and
      directors; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of our assets that
      could have a material effect on our consolidated financial
      statements.





Our
      management performed an assessment of the effectiveness of our internal control
      over financial reporting as of June 30, 2008. Management based its assessment
      on
      the criteria described in the “Internal Control - Integrated Framework” issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The objective of this assessment was to determine whether our internal control
      over financial reporting was effective as of June 30, 2008. Management’s
      assessment included evaluation of elements such as the design and operating
      effectiveness of key financial reporting controls, process documentation,
      accounting policies, and our overall control environment.





A
      material weakness is a deficiency, or combination of deficiencies, in internal
      control over financial reporting, such that there is a reasonable possibility
      that a material misstatement of our annual or interim consolidated financial
      statements will not be prevented or detected on a timely basis. In our
      assessment of the effectiveness of internal control over financial reporting
      as
      of June 30, 2008, we identified the following material
      weakness:


-
          24 -
 *Table
          of Contents*




***Internal
      control structure over information technology*** -





Several
      significant deficiencies exist in the design and implementation of our internal
      controls over information technology which, when considered in the aggregate,
      amount to a material weakness in the Company’s internal control over financial
      reporting.





A.
            Lack
                of qualified information technology personnel.
                The Company’s former Director of Information Technology terminated his
                employment with the Company shortly prior to June 30, 2008. As of
                June 30,
                2008, the Company had no qualified information technology professional
                on
                its corporate staff, leaving our CFO to perform all information technology
                related functions with the assistance of a third party
                consultant.





B.
            Lack
                of disaster recovery plan.
                The Company does not currently have written policies and procedures
                in
                place for disaster recovery over its information systems and system
                backups are not currently performed on a regular basis which poses
                a
                significant risk to the Company in the event of a disaster or system
                failure.





C.
            Inadequate
                restrictions to technology assets, systems and data.
                The Company does not adequately restrict physical access to key hardware
                components such as servers, routers and backup systems. Additionally,
                the
                Company lacks a formal process to create, modify and delete user
                accounts
                and does not adequately restrict access to data or prevent unauthorized
                access. Also, as of June 30, 2008, our CFO was performing all information
                technology related functions, which in combination with the CFO’s other
                duties, created a situation where the Company’s normal internal controls
                could be circumvented.





***Conclusion*** -





Based
      on
      our assessment, and because of the material weakness described above, we have
      concluded that our internal control over financial reporting was not effective
      as of June 30, 2008.





The
      effectiveness of our internal control over financial reporting has not been
      audited by BKD, LLP, our independent registered public accounting
      firm.




**Remediation
      and Changes in Internal Control**





As
      reported in our Annual Report on Form 10-KSB for the year ended June 30, 2007,
      BKD, LLP identified several material weaknesses in our internal control over
      financial reporting that existed as of June 30, 2007. The identified material
      weaknesses are noted below. During the year ended June 30, 2008 we developed
      and
      implemented remediation plans to address these material weaknesses and improve
      our internal control over financial reporting. These actions caused management
      to conclude that these items no longer rise to the level of material weaknesses
      in our internal control over financial reporting as of June 30,
      2008.




A.
            Failure
                to segregate accounting duties.A
                material weakness existed at June 30, 2007 because we did not adequately
                segregate certain accounting duties. Specifically, our Controller
                had the
                ability to authorize a purchase, issue a check and authorize payments
                and
                had access to signed checks to be issued to vendors. Additionally,
                the
                Controller had the ability to record accounts payable transactions,
                record
                checks issued and electronic funds transfers, change accounts payable
                master files and post journal entries to adjust inventory, expense
                and
                cash accounts. This situation resulted in a risk of misappropriation
                of
                assets concealed by journal entry or false transaction records and
                a
                reasonable possibility that a material misstatement of our annual
                or
                interim consolidated financial statements would not have been prevented
                or
                detected on a timely basis. Since June 30, 2007, we have hired additional
                accounting personnel, realigned certain accounting duties among our
                accounting staff and instituted certain compensating controls so
                that we
                now believe that it is no longer reasonably
                possible


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that
      our
      consolidated financial statements will be materially misstated as a result
      of a
      lack of segregation of accounting duties.





B.
            Lack
                of resources in the accounting function.
                A
                material weakness existed at June 30, 2007 because the Company did
                not
                have the resources, research tools or personnel with adequate experience
                or time dedicated to evaluating the proper application of new accounting
                standards and for analysis of complex accounting issues. This lack
                of
                resources and qualified personnel caused the Company to have difficulty
                drafting financial statements and footnote disclosures in accordance
                with
                accounting principles generally accepted in the United Sates and
                resulted
                in a reasonable possibility that a material misstatement of our annual
                or
                interim consolidated financial statements would not have been prevented
                or
                detected on a timely basis. Since June 30, 2007 we have hired an
                experienced Chief Financial Officer charged with, among other things,
                evaluating the appropriate application of new accounting standards
                and for
                analysis of complex accounting issues. We now believe we have sufficient
                competent personnel with an appropriate level of technical accounting
                knowledge such that it is no longer reasonably possible that our
                consolidated financial statements will be materially misstated as
                a result
                of a lack of technical accounting
                resources.





C.
            Audit
                adjustments.
                A
                material weakness existed at June 30, 2007 because we recorded several
                audit adjustments for errors and differences in accounting estimates
                that
                were identified during the audit of our consolidated financial statements
                for the year ended June 30, 2007. The audit adjustments included
                the
                correction of inventory balances, cost of goods sold and accrued
                expenses.
                The aggregate effect of these adjustments was material to our financial
                statements, taken as a whole. Since June 30, 2007, we have hired
                additional accounting personnel, instituted additional account
                reconciliation procedures and developed more thorough month-end and
                year-end closing processes. As a result of these actions, in the
                aggregate, the audit adjustments recorded in connection with the
                audit of
                our consolidated financial statements for the year ended June 30,
                2008,
                were not material to our financial statements, taken as a whole.




**Limitations
      on the Effectiveness of Controls**





Our
      management, including our CEO and CFO, does
      not
      expect that our disclosure controls or our internal control over financial
      reporting will prevent or detect all errors and all fraud. A control system,
      no
      matter how well designed and operated, can provide only reasonable, not
      absolute, assurance that the control system’s objectives will be met. The design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their costs.
      Further, because of the inherent limitations in all control systems, no
      evaluation of controls can provide absolute assurance that misstatements due
      to
      error or fraud will not occur or that all control issues and instances of fraud,
      if any, within the company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty and that
      breakdowns can occur because of simple error or mistake. Controls can also
      be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the controls. The design of any system
      of
      controls is based in part on certain assumptions about the likelihood of future
      events, and there can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions. Projections of any
      evaluation of controls effectiveness to future periods are subject to risks.
      Over time, controls may become inadequate because of changes in conditions
      or
      deterioration in the degree of compliance with policies or
      procedures.




**Item****9B.
      Other Information.**





None.


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**PART
      III**





**Ite****m
      10.   Directors, Executive Officers and Corporate
      Governance.**





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
      the
      SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
      year
      ended June 30, 2008.




**Ite****m
      11. Executive Compensation.**





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
      the
      SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
      year
      ended June 30, 2008.




**Item****12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.**




The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
      the
      SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
      year
      ended June 30, 2008.




**Item****13.
      Certain Relationships and Related Transactions, and Director
      Independence.**




The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
      the
      SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
      year
      ended June 30, 2008.




**Item****14. Principal Accountant Fees and Services.**





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
      the
      SEC pursuant to Regulation 14A within 120 days after the end of the fiscal
      year
      ended June 30, 2008.




**PART
      IV**




**Item****15. 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 SEC set forth
      below.




**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
            Second
                Amended and Restated Certificate of Designation of the Series A
                Convertible Preferred Stock of Decorize, Inc.
                (2)


4.2
            Amended
                and Restated Promissory Note dated December 10, 2003, issued by Decorize,
                Inc. in the name of James K. Parsons
                (3)






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4.3
            Subordinated
                Security Agreement dated as of December 10, 2003, between Decorize,
                Inc.
                and James K. Parsons (3)


4.4
            Form
                of Decorize, Inc. Stock Certificate
                (4)


10.1
            Promissory
                Note dated June 15, 2001 between Decorate, Inc. and Jon T. Baker.
                (1)


10.2
            Decorize,
                Inc. 1999 Stock Option Plan. (5)


10.3
            Form
                of Employee Incentive Stock Option Notice and Agreement.
                (5)


10.4
            Master
                Purchase and Sale Agreement between Decorize, Inc. and Bibby Financial
                Services (Midwest) Inc. dated March 31, 2006.
                (6)


10.5
            Commercial
                Security Agreement dated May 5, 2006, by and between Decorize, Inc.
                and
                Quest Commercial Finance, L.L.C.
                (7)


10.6
            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.
                (7)


10.7
            Modification
                Agreement dated September 26, 2007, by and between Decorize, Inc.
                and
                Quest Commercial Finance, L.L.C.
                (8)


10.8
            Third
                Amended and Restated Promissory Note, issued by Decorize, Inc. to
                James K.
                Parsons on May 5, 2006. (7)


10.9
            Credit
                Agreement, dated October 19, 2007, between Guaranty Bank, Decorize,
                Inc.,
                GuildMaster, Inc. and Faith Walk Designs, Inc.
                (9)


10.10
            Revolving
                Promissory Note, dated October 19, 2007, issued by Decorize, Inc.,
                GuildMaster, Inc. and Faith Walk Designs, Inc., to the order of Guaranty
                Bank in the principal amount of $3,000,000.
                (9)


10.11
            Security
                Agreement, dated October 19, 2007, among Decorize, Inc., GuildMaster,
                Inc.
                and Faith Walk Designs, Inc. for the benefit of Guaranty Bank.
                (9)


10.12
            Guaranty
                Agreement, dated October 19, 2007, among WestWay Enterprises, Ltd.
                and
                P.T. Niaga Merapi for the benefit of Guaranty Bank.
                (9)


10.13
            First
                Amendment to Credit Agreement, dated December 27, 2007, between Guaranty
                Bank, Decorize, Inc., GuildMaster, Inc. and Faith Walk Designs, Inc.
                (10)


10.14
            Stock
                Exchange Agreement dated as of April 28, 2008 by and between Decorize,
                Inc. and James K. Parsons. (11)


10.15
            Second
                Amended and Restated Promissory Note dated as of April 28, 2008 by
                and
                between Decorize, Inc. and James K. Parsons.
                (11)


10.16
            Fourth
                Amended and Restated Promissory Note dated as of April 28, 2008 by
                and
                between Decorize, Inc. and James K. Parsons.
                (11)


10.17
            Modification
                Agreement dated as of April 1, 2008 by and between Decorize, Inc.
                and
                Quest Commercial Finance, L.L.C.
                (11)


10.18
            Extension
                and Modification Agreement dated as of March 15, 2008 by and between
                Decorize, Inc. and Quest Capital Alliance II, L.L.C.
                (11)


10.19
            Stock
                Exchange Agreement dated as of April 1, 2008 by and between Decorize,
                Inc.
                and Quest Capital Alliance II, L.L.C.
                (11)


10.20
            Amended
                and Restated Promissory Note dated as of Aril 1, 2008 by and between
                Decorize, Inc. and Quest Capital Alliance II, L.L.C.
                (11)


10.21
            Subordinated
                Promissory Note Payoff Agreement dated as of April 21, 2008 by and
                between
                Decorize, Inc. and Jon T. Baker.
                (11)


10.22
            Unsecured
                Promissory Note dated as of April 30, 2008 by and between Decorize,
                Inc.
                and SRC Holdings Corporation. (11)


10.23
            Modification
                Agreement dated as of April 30, 2008 by and between Decorize, Inc.
                and SRC
                Holdings Corporation. (11)


21.1
            Subsidiaries
                of the Registrant. *


31.1
            Certification
                by Stephen R. Crowder, President and Chief Executive Officer of the
                Registrant, pursuant to 17 CFR 240.13a - 14(a) or 17 CFR 240.15d
                - 14(a).
                *


31.2
            Certification
                by Daniel F. Graham, Chief Financial Officer of the Registrant, pursuant
                to 17 CFR 240.13a - 14(a) or 17 CFR 240.15d - 14(a).
                *


32.1
            Certification
                of CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of 2002.
                *







(1)
            Incorporated
                by reference to the exhibits to the Annual Report on Form 10-KSB
                filed by
                Registrant on September 28, 2001.


(2)
            Filed
                previously as an exhibit to the Current Report on Form 8-K filed
                by
                Decorize, Inc., on June 21, 2005.


(3)
            Filed
                previously as an exhibit to the Quarterly Report on Form 10-QSB filed
                by
                Decorize, Inc. on February 17,
                2004.


(4)
            Filed
                previously as an exhibit to the Annual Report on Form 10-KSB filed
                by
                Decorize, Inc. on September 28,
                2001.


(5)
            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).


(6)
            Incorporated
                by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
                by
                Decorize, Inc. on April 6, 2006.


(7)
            Incorporated
                by reference to the exhibits filed with the Current Report on Form
                8-K
                filed by Decorize, Inc. on May 11,
                2006.


(8)
            Incorporated
                by reference to the exhibits filed with the Annual Report on Form
                10-KSB
                filed by Decorize, Inc. on September 28,
                2007.


(9)
            Incorporated
                by reference to the exhibits filed with the Current Report on Form
                8-K
                filed by Decorize, Inc. on October 24,
                2007.


(10)
            Incorporated
                by reference to the exhibits filed with the Quarterly Report on Form
                10-QSB filed by Decorize, Inc. on February 14,
                2008.


(11)
            Incorporated
                by reference to the exhibits filed with the Current Report on Form
                8-K
                filed by Decorize, Inc. on May 2,
                2008.


*
            Filed
                herewith.








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**SIGNA****TURES**




Pursuant
      to the requirements of Section 15(d) of the Securities Exchange Act of 1934,
      the
      registrant duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.




**DECORIZE,
      INC.**


Date:  September
      26, 2008




*/s/
      Stephen R. Crowder*


Stephen
      R. Crowder


Chief
      Executive Officer and President




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




Name
            
            Title
            
            Date*/s/
                Stephen R. Crowder*
            
            President,
                Chief Executive Officer and Director
            
            September
                26, 2008Stephen
              R. Crowder
            
            *(principal
                executive officer)**/s/
                Daniel F. Graham*
            
            Chief
                Financial Officer
            
            September
                26, 2008Daniel
              F. Graham
            
            *(principal
                financial officer and**principal
                accounting officer)**/s/
                Richard B. Chalker*
            
            Director
            
            September
                26, 2008Richard
              B. Chalker*/s/
                Steven W. Fox*
            
            Director
            
            September
                26, 2008Steven
              W. Fox*/s/
                Ronald L. Jones*
            
            Director
            
            September
                26, 2008Ronald
              L. Jones*/s/
                Caroline Hipple*
            
            Director
            
            September
                26, 2008Caroline
              Hipple


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