**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**_______________**


**Form
      10-KSB**





**xAnnual
      Report Under
      Section 13 or 15 (d) of the Securities Exchange Act of 1934** **for
      the Fiscal Year Ended June 30, 2007.**




**or**




**oTransition
      Report Under
      Section 13 or 15 (d) of the Securities Act of 1934** **for
      the transition period from ________ to __________.**





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


________________


**Decorize,
      Inc.**


(Exact
      name of registrant as specified in its charter)


________________




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


**1938
      E. Phelps**


**Springfield,
      MO 65802**


**(417)
      879-3326**


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


**registrant’s
      principal executive offices)**


______________________





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


**None**





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


**None**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. þ





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





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes oNo x





The
      registrant’s revenues for the fiscal year ended June 30, 2007, were
      $15,919,683.





As
      of
      September 24, 2007, the total aggregate market value of the 11,218,599 shares
      of
      voting and non-voting common equity held by non-affiliates of the registrant
      was
      $4,038,695.60, **** based
      upon a closing bid of the registrant’s common stock as reported by The OTC
      Bulletin Board on that date of $0.36 per share. The term “affiliates” is deemed,
      for this purpose only, to refer to directors, officers and holders of 5% or
      more
      of the common stock of the registrant. The information provided shall in no
      way
      be construed as an admission that any person whose holdings are excluded from
      this figure is an affiliate of the registrant or that any person whose holdings
      are included in this figure is not an affiliate of the registrant and any such
      admission is hereby disclaimed. The information provided herein is included
      solely for record keeping purposes of the Securities and Exchange
      Commission.





At
      the
      close of business on September 24, 2007, there were issued and outstanding
      26,634,068 shares of the registrant’s common stock.





**Documents
      Incorporated By Reference:**




The
      information required by Part III of this report is incorporated by reference
      to
      portions of the registrant’s Proxy Statement on Schedule 14A for the 2007 Annual
      Meeting of Stockholders to the extent set forth herein.









**DECORIZE,
      INC.**




PART
                  IItem
                  1.
              
              
              Description
                  of Business
              
              
              2Item
                  2.
              
              
              Description
                  of Property
              
              
              11Item
                  3.
              
              
              Legal
                  Proceedings
              
              
              12Item
                  4.
              
              
              Submission
                  of Matters to a Vote of Security Holders
              
              
              12PART
                  IIItem
                  5.
              
              
              Market
                  for Common Equity and Related Stockholder Matters and SmallBusiness
                    Issuer Purchases of Equity Securities
              
              
              12Item
                  6.
              
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              
              13Item
                  7.
              
              
              Financial
                  Statements
              
              
              20Item
                  8.
              
              
              Changes
                  in and Disagreements with Accountants on Accountingand
                    Financial Disclosure
              
              
              21Item
                  8A.
              
              
              Controls
                  and Procedures
              
              
              21Item
                  8B.
              
              
              Other
                  Information
              
              
              24PART
                  IIIItem
                  9.
              
              
              Directors,
                  Executive Officers, Promoters, Control Persons and CorporateGovernance;
                    Compliance with Section 16(a) of the Exchange Act
              
              
              25Item
                  10.
              
              
              Executive
                  Compensation
              
              
              25Item
                  11.
              
              
              Security
                  Ownership of Certain Beneficial Owners and Managementand
                    Related Stockholder Matters
              
              
              25Item
                  12.
              
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              
              25Item
                  13.
              
              
              Exhibits
              
              
              25Item
                  14.
              
              
              Principal
                  Accountant Fees and Services
              
              
              26SIGNATURES
              
              
              
              
              
              27




i




**FORWARD-LOOKING
      STATEMENTS**





This
      Annual Report on Form 10-KSB 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 the end of Item 1 of
      this Annual Report for additional factors that may affect our forward-looking
      statements. In light of these risks, uncertainties and assumptions, the
      forward-looking events discussed in this Annual Report may not occur. We
      undertake no obligation to update or revise our forward-looking statements,
      whether as a result of new information, future events or otherwise.




1




**PART
      I**


**Item
      1. Description of Business.**





**General**





Our
      company, headquartered in Springfield, Missouri, is a manufacturer and
      wholesaler of imported home furnishings and accessories. We founded
      decorize.com, LLC, the company that became Decorize, Inc., in March 2000 to
      create a direct “source to business” home furnishings company to serve both
      large and small retailers in the United States, with products delivered from
      Asia. The Decorize business model relies on manufacturing and importing our
      home
      furnishings products direct from Asia to our retailers' sites in the United
      States. All of the products we sold during our most recent fiscal year were
      manufactured by suppliers located in Asia. Products primarily designed and
      marketed to 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 2007, the revenue mix of the two retail markets we serve was
      approximately 66% from independent retailers and 34% 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 are shipped direct to our
      customer 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 acquisition, Faith Walk
      sourced its products in unpainted form from domestic suppliers and added design
      finishing in its Houston, Texas manufacturing facility. Under our business
      model, all former Faith Walk branded designs are manufactured entirely by our
      suppliers in Asia and are marketed under the GuildMaster brand
      name.




2




**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 allows us to consistently provide a more unique and higher quality
      product than previously available from third party manufacturers within the
      country. In addition, through this new finishing facility, we are able to better
      package our finished products for shipping 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 throughout Asia. Our overseas employees
      are
      an integral part of the direct shipping method that we prefer. The oversight,
      management and first-hand knowledge of our foreign regional suppliers provided
      by our overseas manufacturing support team is integral to our business model’s
      success. Recently, Decorize has begun to expand the roles of our overseas
      support team beyond mere quality control into areas of product development
      and
      procurement 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 397 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.




3




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 1,000 unique items in our supply chain and
      periodically review, add and drop products based upon the demand in the
      marketplace.





Utilizing
      technology, we have assembled a world wide focus group of over 100 designers,
      sales professionals and retailers to participate in the semi-annual selection
      process of new products. We plan to increase the size of the focus group to
      over
      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.




4




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 100 supply partners in China, the Philippines,
      Indonesia and India that manufacture most of the products we sell to our
      customers. For the year ended June 30, 2007, Decorize's top ten vendors
      accounted for approximately 73.7% 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 twelve large
      retailers and more than 1,000 small retailers, designers and decorators. During
      the year ended June 30, 2007, our customer revenues were approximately $15.9
      million. Although our top five customers in the past year accounted for
      approximately 36% of our revenues, our business plan for growing our business
      is
      expected to result in greater revenue diversification. During fiscal 2007,
      our
      top five customers from the standpoint of revenues were Broyhill, Stein Mart,
      Klaussner, Neiman Marcus and Office Max. 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.




5




**Foreign
      Market Risks**





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





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





**Warehousing
      and Distribution**





Our
      ability to reduce or eliminate warehousing of our products and the related
      direct expenses and management costs that would be required is critical to
      our
      success. The greater part of the products we sell are shipped directly from
      our
      manufacturers in Asia to our customers’ stores or distribution centers, so we do
      not carry any inventory related costs.





In
      an
      attempt to provide more timely and efficient delivery to our customers, we
      have
      begun utilizing the services of UPS Trade Direct for our independent retail
      customers. Product is shipped from Asia, containers are cross docked and then
      individual customer shipments are made by UPS Trade Direct. This method allows
      us to remove 7-10 days from the delivery time to the customer. We recognize
      that
      quick and efficient distribution is important to our customers, and we are
      continually pursuing improvements in our delivery process.





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





**Management
      Information Systems**





We
      maintain a corporate 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.




6




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, 2007, our company and its subsidiaries employed 432 persons on a full
      time basis, including 397 at our overseas operations in Asia. Our employees
      are
      not represented by any union. We have not experienced any work stoppage due
      to
      labor disagreements, and we believe that our employee relations are
      good.





**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 $0.7 million for the fiscal year ended June 30, 2007,
      which was a decrease of 68% from the $2.2 million loss in fiscal 2006. Although
      our margins improved substantially during 2007, 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 twelve 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 2007 accounted for approximately
      36% 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.




7




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





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





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





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





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





As
      of
      June 30, 2007, our total number of employees was 432, including 397 employees
      at
      our overseas operations in Asia. 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.




8




*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,
      39.8% 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. Merchandise imported directly from these overseas manufacturers
      currently accounts for all of our total purchases. Because we import all of
      our
      products and deliver them directly to our customers, we believe that disruptions
      in shipping deliveries may have a greater effect on us than on competitors
      who
      manufacture and warehouse products in the United States. Deliveries of our
      products may be disrupted through factors such as:





·
            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 2007, marketing and advertising expenses were
      approximately $377,000, which represented 7.1% of our operational expenses
      for
      that year. If we fail to successfully market and promote our business, we could
      lose current customers to our competitors, or our growth efforts may be
      ineffective. However, if we incur significant expenses promoting and marketing
      Decorize, it could cause our profitability to decline in the short
      term.




9




*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;




10




·
            general
                economic and market conditions;




·
            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
      2. Description of Property.**





Our
      corporate headquarters are based in a single leased building of approximately
      9,600 square feet located in Springfield, Missouri. The rent for this space
      is
      $3,766 per month and the facilities are in good condition. The current term
      of
      the lease for our corporate headquarters ends in April 2008. 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 lease and operate a 22,000 square foot fulfillment center located
      in
      Springfield, Missouri on a month to month basis. 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 15,000 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. We continue to lease this facility on a month
      to
      month basis.





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




Pursuant
      to agreements with independent sales representative groups, we lease varying
      amounts of floor space at eight regional showrooms throughout the United States.
      The monthly rental payments vary between approximately $500 and
      $7,500.




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




11




**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, 2007.





**PART
      II**





**Item
      5. Market for Common Equity and Related Stockholder Matters and Small Business
      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 2007 (May 23 through June
              30)
            
            $
            0.60
            
            $
            0.50




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 85 record holders of our common stock as of September 17, 2007,
      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, 2007, the shares of common stock
      authorized for issuance under our equity compensation plans:




12




**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
            
            
            928,250
            
            $
            0.19
            
            
            1,944,750Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            928,250
            
            $
            0.19
            
            
            1,944,750





**Item
      6. Management’s Discussion and Analysis or Plan of
      Operation.**





**Critical
      Accounting Policies**





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





*Goodwill* -
      Effective July 2001, we adopted the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 142, *Goodwill
      and Other Intangible Assets* ,
      (“SFAS
      No. 142”) which was issued by the Financial Accounting Standards Board (FASB) in
      July 2001. SFAS No. 142 required that an intangible asset that is acquired
      shall
      be initially recognized and measured based on its fair value. SFAS No. 142
      also
      provided that goodwill should not be amortized, but shall be tested for
      impairment annually, or more frequently if circumstances indicate potential
      impairment, through a comparison of fair value to its carrying amount. As of
      June 30, 2007, 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* - Prior
      to July 1, 2005, we accounted for our stock option plan under the
      recognition and measurement principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. We used the intrinsic value-based method for measuring
      stock-based compensation cost with required pro forma disclosures of
      compensation expense determined under the fair value method of SFAS No. 123, *Accounting
      for Stock-based Compensation.* The
      Company generally did not recognize stock-based compensation cost in its
      statement of operations for periods prior to July 1, 2005, as most options
      granted had an exercise price equal to the market value of the underlying common
      stock on the date of grant. However, compensation expense was recognized under
      APB Opinion No. 25 for certain options based upon the intrinsic value (the
      difference between the exercise price and the deemed fair value of the common
      stock at the date of grant).




13




Effective
      July 1, 2005, Decorize adopted the fair value recognition provisions of SFAS
      No.
      123R, *Share-Based
      Payment* ,
      and we
      applied the modified prospective method of application. Accordingly, after
      July
      1, 2005, we began expensing the fair value of stock options granted, modified,
      repurchased or cancelled. Our valuation methodologies and assumptions after
      adoption of SFAS No. 123R are the same as those used prior to adoption for
      measuring pro-forma stock based compensation expense as required under SFAS
      No.
      123 except that the effects of future forfeitures are estimated when determining
      compensation cost under SFAS No. 123R. There was no one-time effect of adopting
      SFAS No. 123R as of July 1, 2005 because there was no compensation cost related
      to non-vested awards not yet recognized. The Company’s loss from operations,
      loss before income taxes, net loss, basic and diluted loss per share available
      to common stockholders were not different as a result of the adoption of SFAS
      123R for the year ended June 30, 2006 than if it had continued to account for
      share-based compensation under the recognition and measurement provisions of
      APBO 25, and related interpretations, as permitted by SFAS 123.





The
      fair
      value of options granted during the year ended June 30, 2007 was estimated
      on
      the date of the grant using the Black-Scholes-Merton option-pricing model with
      the following weighted average assumptions: Dividends per share, $0; Risk-free
      interest rate, 4.86%; Weighted-average expected life of options, 6.2 years;
      Expected volatility, 73%. A total of 1,112,500 and 0 options were granted under
      the Plan during the years ended June 30, 2007 and 2006, respectively.





Partially
      in anticipation of adopting SFAS No. 123R, on May 4, 2005 the Company replaced
      all of its unvested and many of its vested employee stock options by issuing
      new
      stock option awards. The new and modified options were fully vested and had
      substantially lower exercise prices than the previously outstanding options.
      This change was made to provide an increased incentive to our employees and
      encourage exercise of employee stock options and resulted in additional
      disclosed pro-forma stock based compensation expense during fiscal 2005. Had
      these modifications and new awards been made after adopting SFAS No. 123R,
      it
      would have resulted in additional recognized compensation expense.




**Results
      of Operations and Comparison of the Year Ended June 30, 2007 to the Year Ended
      June 30, 2006**





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 financial statements and accompanying notes.





**For
                the fiscal years ended June 30,****2007**
            
            **2006**
            
            **Change**Sales
                (net)
            
            $
            15,919,683
            
            
            100
            %
            $
            9,242,278
            
            
            100.0
            %
            $
            6,677,405
            
            
            -Cost
                of sales
            
            
            10,976,817
            
            
            68.9
            %
            
            6,744,131
            
            
            73.0
            %
            
            4,232,686
            
            
            (4.1
            )%Gross
                profit
            
            
            4,942,866
            
            
            31.1
            %
            
            2,498,147
            
            
            27.0
            %
            
            2,444,719
            
            
            4.1
            %Operating
                expenses
            
            
            4,902,737
            
            
            30.8
            %
            
            4,110,090
            
            
            44.5
            %
            
            792,647
            
            
            (13.7
            )%Operating
                income (loss)
            
            
            40,129
            
            
            0.3
            %
            
            (1,611,943
            )
            
            (17.4
            )%
            
            1,571,814
            
            
            17.7
            %Total
                other expense
            
            
            722,332
            
            
            4.5
            %
            
            629,795
            
            
            6.8
            %
            
            92,537
            
            
            (2.3
            )%Net
                loss
            
            
            (682,203
            )
            
            (4.2
            )%
            
            (2,241,738
            )
            
            (24.3
            )%
            
            1,559,535
            
            
            20.1
            %





Sales





Our
      sales
      are derived primarily from the sale of home furnishing and home décor products
      to large and independent retailers. Sales for fiscal 2007 increased $6.7
      million, or 72.1%, to $15.9 million compared to $9.2 million in fiscal 2006.
      Sales to independent retailers increased 85.3%, while sales to large retailers
      increased 51.5%. We believe our revenue growth is the result of a continued
      focus on sales efforts and constant improvements to our product selection and
      quality. Returns and allowances from both large and small retail customers
      decreased from 6.8% in fiscal 2006 to 6.1% in fiscal 2007. This decrease can
      be
      attributed to a quality issue on proprietary product for large retailers in
      fiscal 2006 that was resolved in fiscal 2007. Our sales growth to large retail
      customers was slower because the sales cycle is significantly longer than that
      of the small independent retailer. We believe that we have presented our product
      and services to only a small portion of a vast number of large- and medium-sized
      retailers who would find our offerings attractive and would order product from
      us. We intend to continue marketing our goods aggressively to current retail
      customers, and we expect that as a result, we will increase our sales to them
      substantially on a dollar-to-dollar comparative basis. In addition, we are
      implementing our plan to market our products to new customers, with the intent
      to develop a broader customer base and diminish the effect of one or more large
      retail customers on our results of operations.




14




Our
      company has existed in its present form only since July 2001, and, accordingly,
      we do not have an extensive history of sales information as a combined entity.
      In the past, approximately 55% of our sales came during the first two quarters
      of our fiscal year, and the remaining 45% shipped in the second half of the
      year. For fiscal year 2007 and 2006, 48% and 40%, respectively, of the sales
      shipped in the first half of the year. In fiscal 2006, the shift was due to
      the
      soft revenues from our large retailers in the first half of 2006. In 2007,
      large
      retailers followed the traditional pattern; however, specialty retailers
      shipments were still heavier in the second half of the year. This is due to
      the
      increased production and filling backorders in the second half of the year.
      In
      addition, faster delivery methods increased the shipments to specialty retailers
      in the last half of fiscal 2007. We do believe that generally there is a slight
      increase in sales for the quarters ending September 30 and December 31, compared
      to the two following quarters, due to the buying patterns of large retailers
      in
      preparation for the holiday months. However, this slight seasonal pattern can
      easily be negated by revenue growth or retraction as was the case during fiscal
      2006 and 2007.




Cost
      of Sales





The
      cost
      of sales for fiscal 2007 decreased as a percentage of sales to 68.49%, compared
      to 73.0% for fiscal 2006. We believe that the percentage decrease in costs
      for
      fiscal 2007 compared to the prior year was the result of management’s concerted
      efforts to run efficient manufacturing facilities in Asia and successful vendor
      negotiations. In addition, we eliminated slow moving product offerings and
      improved our designs, providing faster inventory turnover and fewer markdowns
      on
      aging inventory.




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 2007, our operating expenses increased $0.8 million to $4.9 million,
      compared to $4.1 million for fiscal 2006. The majority of this increase is
      related to selling expense and the 72% increase in sales. SEC filing expenses,
      legal costs and investor relations expenses increased $0.1 million. All other
      expenses were flat or slightly decreased.





Other
      Expense





Other
      expense for fiscal 2007 increased to $0.7 million compared to $0.6 million
      for
      fiscal 2006. The increase is attributed to an increase in interest related
      to
      additional debt in fiscal 2007.





Net
      Loss





Income
      from operations was $0.04 million in fiscal 2007, a $1.6 million increase over
      the operating loss of $1.6 million in fiscal 2006. The increase was a direct
      result of our increase in sales and our ability to hold our general and
      administrative costs constant while our sales increased. In addition, we
      continued to improve our production efficiencies. Basic and diluted loss per
      share decreased $0.09 per share to $0.03 per share for fiscal 2007, compared
      to
      $0.12 per share in fiscal 2006.




15




Inflation





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




**Liquidity
      and Capital Resources**





We
      had
      working capital of approximately $(0.49) million at June 30, 2007, compared
      with
      $(0.8) million at June 30, 2006. Cash and cash equivalents and short-term
      investments were $0.8 million at June 30, 2007, compared to $0.1 million at
      June
      30, 2006. Cash used in operating activities decreased from $2.3 million in
      fiscal year 2006 to $0.8 million in fiscal year 2007. The principal operating
      uses of cash during fiscal year 2007 were attributable to the net loss of $0.7
      million, and a $1.40 million increase in receivables. Inventories and prepaid
      expenses consumed an additional $0.2 million. The amount of cash used during
      the
      current fiscal year was reduced by a $0.7 million increase in payables and
      accrued expenses. Furthermore, $0.3 million in depreciation, amortization of
      financing costs and stock option expense did not require cash.





Investing
      activities during the year ended June 30, 2007 used $0.2 million in cash. This
      amount related primarily to the acquisition of computer equipment and expanding
      our production facilities in Indonesia.




During
      the year ended June 30, 2006, net cash provided from financing activities were
      $1.7 million. We raised $0.5 million from the issuance of common stock and
      $0.9
      million from short term notes payable. Our credit facility with Bibby Financial
      Services (Midwest), Inc. (“Bibby”)   provided an additional $0.4 million.





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
      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 February of this year, after we had disclosed our plans to move
      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.





Factoring
      and Credit Arrangements





On
      March
      31, 2006, Decorize and Bibby entered into a new Master Purchase and Sale
      Agreement (the “Factoring Agreement”) to govern the exclusive global factoring
      arrangements provided by Bibby to Decorize and our subsidiaries. The new
      agreement replaces the Master Purchase and Sale Agreement entered into between
      Decorize and Bibby in August 2005. In December 2006, the agreement was amended
      to increase the maximum credit facility from $2,000,000 to $3,000,000. The
      Company paid a fee of $10,000 in connection with the amendment, which was
      charged to financing expense.





Under
      the
      Factoring Agreement, Decorize submits accounts receivable to be purchased by
      Bibby, and Bibby pays Decorize up to 90% of the aggregate net face value of
      accounts receivable purchased, less applicable fees charged by Bibby and a
      reserve withheld by Bibby to serve as security in the event that Bibby receives
      less than full payment for accounts purchased due to returns, allowances,
      deductions, disputes or chargebacks. All accounts submitted for purchase must
      be
      approved by Bibby. Accounts are purchased on a recourse basis, and Bibby has
      the
      right to charge back accounts purchased from Decorize at any time. The Factoring
      Agreement requires Decorize and its subsidiaries to grant Bibby a first lien
      security interest in all their accounts receivable, inventory, equipment and
      all
      cash held in bank accounts and certain related intangibles.




16




Bibby
      charges Decorize interest on amounts advanced to Decorize under the Factoring
      Agreement at a rate of 1.00% above the prime rate of interest as published
      in
      the Wall Street Journal. Bibby receives a factoring administration fee equal
      to
      1.00% of the gross invoice amount of each account submitted. If total
      receivables are more than 60% for any one account debtor, Bibby may charge
      Decorize an additional 0.5% discount for accounts from that specific account
      debtor.





The
      Factoring Agreement requires Decorize to maintain a level of accounts submitted
      for purchase each month that is equal to $500,000, on average, during each
      calendar quarter. If the level of purchased accounts falls below the $500,000
      minimum average requirement in any calendar month, Decorize is required to
      pay
      Bibby a monthly purchase fee equal to the amount by which the fees paid to
      Bibby
      for each month that does not meet the minimum requirements on average during
      a
      calendar quarter is less than $10,000, and Decorize shall not pay less than
      $10,000 in such fees on average for any month in a calendar
      quarter.





The
      initial term of the Factoring Agreement is twelve months and will be
      automatically extended for successive periods of twelve months unless terminated
      by Decorize more than 60 but less than 90 days prior to the end of the term.
      Bibby may terminate the Factoring Agreement at any time on 30 days prior notice
      to Decorize. If Decorize terminates the Factoring Agreement more than 60 days
      prior to the end of the then-current term, Decorize will pay a termination
      fee
      equal to $10,000 for each month remaining during the term.





Decorize
      believes that the factoring arrangements will enhance its working capital
      situation. It is possible, however, that Decorize will continue to require
      additional equity and debt financing in order to provide it sufficient operating
      capital until such time as it can become sufficiently cash flow positive to
      fund
      operations on a stand-alone basis.





On
      May 5,
      2006, Decorize entered into a Commercial Security Agreement with Quest
      Commercial Finance, L.L.C. (“Quest Commercial”), which provides for Quest
      Commercial to make a revolving credit line in the amount of up to $750,000
      available to Decorize (the “Credit Facility”). The Credit Facility matures on
      May 5, 2009, and is evidenced by a promissory note dated May 5, 2006, issued
      by
      Decorize to Quest Commercial. In consideration of Quest Commercial providing
      the
      Credit Facility, Decorize paid Quest Commercial a commitment fee of $30,000.
      Outstanding principal that is due from time to time will bear interest at a
      rate
      that is equal to the prime rate of interest plus a margin of 5%, but the
      interest rate shall not be less than 10% per annum at any time. Accrued interest
      is payable monthly on the last day of each calendar month, beginning May 31,
      2006. Any payments that are more than 5 days late shall be assessed a late
      fee
      equal to 5% of the late payment. Decorize and Quest Commercial entered into
      a
      modification agreement with respect to the related promissory note on September
      26, 2007, which sets the interest rate at 13.75% per annum and provides for
      the
      payment of a $7,500 annual lender fee on September 26, 2007, and thereafter
      on
      May 5 of each year under the note is paid in full.




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. Quest Commercial shall have a prior
      right in the inventory relative to Decorize’s factor, Bibby, except for any
      proceeds of the collateral.




17




As
      of
      June 30, 2007, our working capital was approximately $(0.8) million. Decorize
      believes that the factoring arrangements will enhance its working capital
      situation and increase the likelihood that it may expand its current operations
      in Asia. However, we first require cash to fund the purchase and manufacturing
      of products for shipment to customers. It is possible that Decorize will
      continue to require additional equity and debt financing in order to provide
      it
      sufficient operating capital until such time as it can become sufficiently
      cash
      flow positive to fund operations on a stand-alone basis. There is no assurance
      that such financing will be available on terms that will be acceptable to us.
      The inability to secure such financing could have a material adverse effect
      on
      our ability to maintain our business or to achieve our growth
      objectives.




Note
      Payable





On
      August
      17, 2006, Decorize issued a three-month promissory note, payable to the order
      of
      Quest Capital II, in the original principal amount of $75,000. The maturity
      date
      for the Promissory Note is November 17, 2006. Outstanding principal due under
      the Promissory Note shall accrue interest until the date of maturity at a rate
      equal to 13.25% per annum. In consideration of Quest Capital II providing the
      Promissory Note, Decorize paid Quest Capital II a loan fee of $250. If a default
      occurs under the Promissory Note as a result of Decorize’s failure to pay any
      amount when due, or because of any other event of default, the unpaid
      outstanding principal balance will thereafter accrue interest at a rate equal
      to
      16.25% per annum, and Quest Capital II may declare the Promissory Note to be
      due
      and payable immediately. This note was paid in full when the September 11,
      2006
      note was issued.





On
      September 11, 2006, Decorize issued a promissory note (the “Promissory Note”),
      payable to the order of Quest Capital Alliance II, L.L.C. (the “Quest Capital
      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)
      eighteen percent (18%) per annum, from January 9, 2007 to February 12, 2007,
      and
      then at a rate of twenty-one percent (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 thirteen and three quarters percent (13.75%) and to extend the maturity
      date to March 15, 2008, at which time the Company paid a renewal fee of $7,500.
      The default interest rate is equal to twenty-one percent (21%) per
      annum.





The
      Promissory Note is secured by a security interest in Decorize’s inventory and
      proceeds from inventory pursuant to the terms and conditions of a Commercial
      Security Agreement (the “Security Agreement”) entered into between Decorize and
      Quest Capital II on September 11, 2006. The Security Agreement provides that
      upon an event of default, Quest Capital II may accelerate the indebtedness
      owed
      under the Promissory Note, assemble and sell the collateral, have a receiver
      appointed to take possession of any or all of the collateral, collect remedies,
      obtain a deficiency judgment and exercise all other rights and remedies
      available to Quest Capital II.





On
      December 13, 2005, Decorize obtained a four-month, $500,000 revolving line
      of
      credit. The maturity date for the line of credit is April 13, 2006. The line
      of
      credit is evidenced by a promissory note dated December 13, 2005, issued to
      Quest Capital II in the principal amount of $500,000. In consideration of
      providing the line of credit, Decorize paid Quest Capital II a commitment fee
      of
      $33,333.33. After April 13, 2006, any outstanding principal and interest become
      convertible into the Company’s common stock at a rate of $0.20 per share at the
      sole option of Quest Capital II. The note was converted into 2,500,000 shares
      of
      common stock on May 5, 2006.





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.




18




On
      May 5,
      2006, the Company entered into agreements to convert an aggregate $900,000
      that
      was owed to a principal stockholder and one of the Company’s executive officers
      into 3,333,000 shares of common stock. The Company issued 2,500,000 shares
      of
      common stock to Quest as payment in full of an existing convertible term note,
      in the original principal amount of $500,000, which was issued by the Company
      on
      December 13, 2005. The shares were issued at a price of $0.20 per share, which
      was the conversion price under the December 2005 promissory note. In addition,
      James K. Parsons, a former director and the current Executive Vice President
      of
      the Company, exchanged $400,000 in principal owed to him under an existing
      promissory note, which was last amended in August 2004, for 833,333 shares
      of
      common stock issued to him on May 5, 2006. The exchange was made in accordance
      with a stock exchange agreement entered into on May 5, 2006. As a result of
      the
      exchange, the outstanding principal amount of Mr. Parson's note was reduced
      to
      $609,468, which is reflected in an amended note issued to him at the
      closing.





During
      the fiscal year ended June 30, 2006, we received an aggregate $1,160,629 upon
      the exercise of outstanding warrants held by certain of our stockholders. Nest
      USA, Inc. exercised warrants for an aggregate 996,000 shares of common
      stock at an aggregate price of $199,200, or $0.20 per share; SRC exercised
      warrants for an aggregate 3,000,000 shares of common stock at an aggregate
      price
      of $600,000, or $0.20 per share; and Quest exercised warrants for an aggregate
      1,807,143 shares of common stock at an aggregate price of $361,429, or $0.20
      per
      share.







In
      each
      of the private placements, the investors represented that they were “accredited
      investors” for purposes of the Securities Act, and indicated that they were
      acquiring the shares for investment and not with a view to distribution. We
      provided each investor with appropriate financial and operating information.
      Each of the investors was an existing stockholder of Decorize. Accordingly,
      we
      believe 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.





**Total
      Contractual Cash and Other Obligations**





The
      following table summarizes our long-term debt, capital lease obligations and
      operating lease obligations as of June 30, 2007:





**Total**
            
            **Less
                than**
              **1
                Year**
            
            **1-3
                Years**
            
            **4
                - 5 Years**
            
            **After
                5**
              **Years******Aggregate
                amount of principal to be paid on the outstanding long-term
                debt
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            -
            
            $
            -Principal
                payments due on notes payable to stockholders
            
            
            3,765,919
            
            
            1,556,451
            
            
            2,209,468
            
            
            -
            
            
            -Future
                minimum lease payments under capital leases
            
            
            8,245
            
            
            8,245
            
            
            0
            
            
            -
            
            
            -Future
                minimum lease payments under noncancelable operating
                leases
            
            
            330,072
            
            
            156,056
            
            
            44,637
            
            
            -
            
            
            -Totals
            
            $
            4,105,036
            
            $
            1,720,752
            
            $
            2,254,105
            
            $
            -
            
            $
            -





**Off-Balance
      Sheet Arrangements**





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




19




**Item
      7. Financial Statements.**







**DECORIZE,
      INC.**


**Index
      to Financial Statements**


**June
      30, 2007 and 2006**




PageReport
                of Independent Registered Public Accounting Firm
            
            
            F-1Consolidated
                Balance Sheets as of June 30, 2007 and 2006
            
            
            F-2Consolidated
                Statements of Operations for the years ended June 30, 2007 and
                2006
            
            
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit) for the years ended June 30,
                2007 and 2006
            
            
            F-5Consolidated
                Statements of Cash Flows for the years ended June 30, 2007 and
                2006
            
            
            F-6Notes
                to Consolidated Financial Statements for the years ended June 30,
                2007 and
                2006
            
            
            F-8





20




**Report
      of Independent Registered Public Accounting Firm**






Audit
      Committee, Board of Directors


and
      Stockholders


Decorize,
      Inc.


Springfield,
      Missouri





We
      have
      audited the accompanying consolidated balance sheets of Decorize, Inc. as of
      June 30, 2007 and 2006, and the related consolidated statements of operations,
      stockholders’ equity (deficit) and cash flows for the years then ended. These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Decorize, Inc. as of June
      30, 2007 and 2006, 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
      27, 2007




F-1


**Decorize,
        Inc.**
 **Consolidated
        Balance Sheets**
 **June
        30, 2007 and 2006**


**ASSETS**




**2007**
            
            **2006**Current
                AssetsCash
                and cash equivalents
            
            $
            781,011
            
            $
            102,337ReceivablesTrade
                accounts receivable, net of allowance2007
                - $120,250; 2006 - $250,000
            
            
            2,425,547
            
            
            1,494,103Other
            
            
            8,052
            
            
            11,146Inventories
            
            
            933,104
            
            
            822,285Prepaid
                expenses and other
            
            
            214,973
            
            
            212,342Total
                current assets
            
            
            4,362,687
            
            
            2,642,213Property
                and equipment, net of accumulated depreciation 2007 - $813,684; 2006
                -
                $730,132
            
            
            311,264
            
            
            207,328Goodwill
            
            
            3,258,938
            
            
            3,258,938Other
            
            
            36,261
            
            
            35,8243,606,463
            
            
            3,502,090Total
                Assets
            
            $
            7,969,150
            
            $
            6,144,303






*See
      accompanying notes to the consolidated financial statements*




F-2




**Decorize,
      Inc.**


**Consolidated
        Balance Sheets**
 **June
        30, 2007 and 2006**


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




**2007**
            
            **2006**Current
                LiabilitiesAccounts
                payable
            
            $
            1,803,035
            
            $
            1,450,925Accrued
                salaries and commissions
            
            
            51,103
            
            
            44,457Other
                accrued expenses
            
            
            495,179
            
            
            130,303Revolving
                line of credit
            
            
            1,302,564
            
            
            921,506Current
                portion of long-term debt
            
            
            —
            
            
            6,015Current
                portion of capital lease obligations
            
            
            8,245
            
            
            16,741Current
                portion of stockholders’ notes
            
            
            1,556,451
            
            
            830,726Total
                current liabilities
            
            
            5,216,577
            
            
            3,400,673Capitallease
                obligations, less current portion
            
            
            —
            
            
            8,514Notespayable
                to stockholders, less current portion
            
            
            2,209,468
            
            
            2,039,468Total
                liabilities
            
            
            7,426,045
            
            
            5,448,655Preferred
                Stock, 8% Cumulative, Convertible, Redeemable $.001 Par Value; authorized
                10,000,000 shares; issued and outstanding 500,000 shares
            
            
            635,121
            
            
            595,121Stockholders’equity
                (deficit)Common
                stock, $.001 par value; 50,000,000 shares authorized; issued and
                outstanding 2007 - 26,634,068 shares; 2006 - 25,239,211 shares
            
            
            26,634
            
            
            25,239Additional
                paid-in capital
            
            
            13,219,000
            
            
            12,730,735Accumulated
                deficit
            
            
            (13,337,650
            )
            
            (12,655,447
            )Total
                stockholders’ equity (deficit)
            
            
            (92,016
            )
            
            100,527Total
                liabilities and stockholders’ equity
            
            $
            7,969,150
            
            $
            6,144,303






*See
      accompanying notes to the consolidated financial statements*




F-3




**Decorize,
      Inc.**


**Consolidated
        Statements of Operations**
 **Years
        Ended June 30, 2007 and 2006**


**2007**
            
            **2006**Net
                Sales
            
            $
            15,919,683
            
            $
            9,242,278Cost
                of Goods Sold
            
            
            10,976,817
            
            
            6,744,131Gross
                Profit
            
            
            4,942,866
            
            
            2,498,147Operating
                Expenses:Selling,
                general and administrative
            
            
            4,838,494
            
            
            4,002,653Depreciation
                and amortization
            
            
            64,243
            
            
            107,437Total
                operating expenses
            
            
            4,902,737
            
            
            4,110,090Operatingincome
                (loss)
            
            
            40,129
            
            
            (1,611,943
            )Otherincome
                (expense):Interest
                income
            
            
            1,194
            
            
            1,467Interest
                expense
            
            
            (646,023
            )
            
            (571,894
            )Amortization
                of debt discount and financing cost
            
            
            (69,187
            )
            
            (57,934
            )Other
            
            
            (8,316
            )
            
            (1,434
            )Total
                other expense
            
            
            (722,332
            )
            
            (629,795
            )Netloss
            
            
            (682,203
            )
            
            (2,241,738
            )Add:
                Dividendsdeclared
                on preferred stock
            
            
            (40,000
            )
            
            (40,000
            )Lossavailable
                to common stockholders
            
            $
            (722,203
            )
            $
            (2,281,738
            )Basic
                anddiluted
                loss per common share
            
            $
            (0.03
            )
            $
            (0.12
            )Basic
                anddiluted
                weighted average common shares outstanding
            
            
            25,796,808
            
            
            18,866,739






*See
      accompanying notes to the consolidated financial statements*




F-4




**Decorize,
      Inc.**


**Consolidated
        Statements of Stockholders’ Equity (Deficit)**
 **Years
        Ended June 30, 2007 and 2006**


**Additional****Common
                Stock**
            
            **Paid-in**
            
            **Accumulated****Shares**
            
            **Par
                Value**
            
            **Capital**
            
            **Deficit**
            
            **Total**Balances,
                June 30, 2005
            
            
            16,041,735
            
            $
            16,042
            
            $
            10,687,582
            
            $
            (10,413,709
            )
            $
            289,915Exercise
                of common stock warrants and options
            
            
            5,864,143
            
            
            5,864
            
            
            1,186,487
            
            
            —
            
            
            1,192,351Issuance
                of common stock in exchange for debt
            
            
            3,333,333
            
            
            3,333
            
            
            896,666
            
            
            —
            
            
            899,999Dividends
                declared
            
            
            —
            
            
            —
            
            
            (40,000
            )
            
            —
            
            
            (40,000
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,241,738
            )
            
            (2,241,738
            )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
            
            
            435,630
            
            
            —
            
            
            436,898Dividends
                declared
            
            
            —
            
            
            —
            
            
            (40,000
            )
            
            —
            
            
            (40,000
            )Issuance
                of common stock warrants and options
            
            
            —
            
            
            —
            
            
            71,172
            
            
            —
            
            
            71,172Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (682,203
            )
            
            (682,203
            )Balances,
                June 30, 2007
            
            
            26,634,068
            
            $
            26,634
            
            $
            13,219,000
            
            $
            (13,337,650
            )
            $
            (92,016
            )






*See
      accompanying notes to the consolidated financial statements*




F-5
 
  **Decorize,
        Inc.**
 **Consolidated
          Statements of Cash Flows**
 **Years
          Ended June 30, 2007 and 2006**


**2007**
            
            **2006****Operating
                Activities**Net
                loss
            
            $
            (682,203
            )
            $
            (2,241,738
            )Items
                not requiring (providing) cashDepreciation
                and amortization
            
            
            64,243
            
            
            129,094Compensatory
                issuance of common stock and stock options
            
            
            59,472
            
            
            —Issuance
                of warrants in exchange for consulting services
            
            
            11,700
            
            
            —Amortization
                of debt discount and financing costincluded
                in interest expense
            
            
            69,187
            
            
            57,934(Gain)
                loss on disposal of property and equipment
            
            
            15,814
            
            
            (127
            )Changes
                inTrade
                accounts receivable
            
            
            (928,350
            )
            
            (359,682
            )Inventories
            
            
            (110,819
            )
            
            (86,076
            )Prepaid
                expenses and other current assets
            
            
            (54,789
            )
            
            (60,501
            )Accounts
                payable
            
            
            352,110
            
            
            142,254Accrued
                expenses and other
            
            
            343,080
            
            
            81,802Net
                cash used in operating activities
            
            
            (860,555
            )
            
            (2,337,040
            )**Investing
                Activities**Purchase
                of property and equipment
            
            
            (203,896
            )
            
            (43,609
            )Redemption
                of certificate of deposit
            
            
            —
            
            
            750,000Proceeds
                from sale of equipment
            
            
            9,937
            
            
            2,060Net
                cash provided by (used in) investing activities
            
            
            (193,959
            )
            
            708,451**Financing
                Activities**Principal
                payments on long-term debt
            
            
            (30,290
            )
            
            (63,616
            )Proceeds
                from issuance of stockholders’ notes payable
            
            
            920,000
            
            
            1,180,000Net
                repayments on revolving line of credit
            
            
            —
            
            
            (1,193,478
            )Deferred
                fees associated with bank financing
            
            
            (7,500
            )
            
            (63,333
            )Principal
                payments on capital lease obligations
            
            
            (17,010
            )
            
            (36,393
            )Issuance
                of common stock, net of related expenses
            
            
            486,930
            
            
            942,348Advances
                from (repayments to) factor, net
            
            
            381,058
            
            
            921,506Net
                cash provided by financing activities
            
            
            1,733,188
            
            
            1,687,034**Increase
                in Cash and Cash Equivalents**
            
            
            678,674
            
            
            58,445**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            102,337
            
            
            43,892**Cash
                and Cash Equivalents, End of Year**
            
            $
            781,011
            
            $
            102,337






*See
      accompanying notes to the consolidated financial statements*




F-6




**Decorize,
      Inc.**


**Consolidated
        Statements of Cash Flows**
 **Years
        Ended June 30, 2007 and 2006**


**2007**
            
            **2006****Supplemental
                Cash Flows Information**Interest
                paid
            
            $
            584,069
            
            $
            496,392Capital
                lease obligations incurred for property and equipment
            
            
            —
            
            $
            4,698Dividend
                accrued on preferred stock
            
            $
            40,000
            
            $
            40,000Accrued
                fees associated with stock registration
            
            $
            28,442
            
            
            —Debt
                and accrued interest converted to common stock
            
            
            —
            
            $
            1,146,667







*See
      accompanying notes to the consolidated financial statements*




F-7




**Decorize,
      Inc.**


**Notes
        to Consolidated Financial Statements**
 **Years
        Ended June 30, 2007 and 2006**


**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, 2007 and 2006, the Company
      had no cash equivalents.




***Accounts
      Receivable***




Accounts
      receivable are stated at the amount billed to customers. The Company provides
      an
      allowance for doubtful accounts, which is based upon a review of outstanding
      receivables, historical collection information and existing economic conditions.
      Accounts receivable are ordinarily due 30 to 60 days after the issuance of
      the
      invoice. Delinquent receivables are written off based on individual credit
      evaluation and specific circumstances of the customer. Provision for bad debts
      was $36,211 and $212,336 for the years ended June 30, 2007 and 2006,
      respectively.




The
      Company has established relationships with several major customers. Sales to
      Company’s top customer accounted for 19.5% of total sales for the year ended
      June 30, 2007, and no other customer accounted for as much as 10% of total
      sales
      for that period. Sales to the Company’s top customer accounted for 16.6% of
      total sales for the year ended June 30, 2006. 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
      Pricing***




Inventories
      consist primarily of finished and unfinished home furnishings and accessories.
      Inventories are stated at the lower of cost or market. Cost is determined using
      the first-in, first-out (FIFO) method and includes the cost of ocean freight
      and
      duties.




***Property
      and Equipment***




Property
      and equipment are stated at cost less accumulated depreciation and are
      depreciated over the estimated useful life of each asset. Leasehold improvements
      are amortized over the shorter of the lease term or the estimated useful lives
      of the improvements. Depreciation has been computed by applying the
      straight-line method to each asset category over their estimated lives, as
      follows:




F-8




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


**Category**
            
            **Estimated
                Life**
            
            **Balance
                at**
              **June
                30, 2007**
            
            **Balance
                at**
              **June
                30, 2006**Automobiles
            
            
            5
                years
            
            $
            28,480
            
            $
            34,728Warehouse
                and production equipment
            
            
            5-7
                years
            
            
            54,464
            
            
            55,668Computer
                software
            
            
            3
                years
            
            
            178,482
            
            
            178,482Office
                and computer equipment
            
            
            3-7
                years
            
            
            576,926
            
            
            523,395Leasehold
                improvements
            
            
            Lease
                term
            
            
            151,316
            
            
            145,187Construction
                in progress
            
            
            
            
            
            135,278
            
            
            —Total
            
            
            
            
            
            1,124,947
            
            
            937,460Less
                accumulated depreciation
            
            
            
            
            
            813,684
            
            
            730,132Property
                and equipment, net
            
            
            
            
            $
            311,264
            
            $
            207,328




***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 2007 and
      2006.




***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 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 2007 or 2006.




***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.




F-9




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


***Advertising
      Costs***




The
      Company expenses advertising costs as they are incurred. Advertising and
      marketing expenses for the years ended June 30, 2007 and 2006, totaled $371,542
      and $303,346, respectively.




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




Accounts
      payable included amounts due to employees and stockholders totaling $3,442
      and
      $52,607 as of June 30, 2007 and 2006, respectively. Other accounts receivable
      from employees totaled $4,534 and $11,146 as of June 30, 2007 and 2006,
      respectively.




***Loss
      Per Share***




Basic
      and
      diluted loss per share are computed by dividing the net loss increased by
      dividends declared on preferred stock by the weighted average number of common
      shares outstanding during the period and excludes the otherwise dilutive effects
      of outstanding stock options and warrants as their effects would be
      antidilutive.




**June
                30, 2007**
            
            **June
                30, 2006**Net
                loss, as reported
            
            $
            (682,203
            )
            $
            (2,241,738
            )Add:
                Dividends declared on preferred stock
            
            
            (40,000
            )
            
            (40,000
            )Loss
                available to common shareholders
            
            
            (722,203
            )
            
            (2,281,738
            )Divided
                by weighted average shares outstanding
            
            
            25,796,808
            
            
            18,866,739Basic
                and diluted loss per share
            
            $
            (0.03
            )
            $
            (0.12
            )




***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, 2007 and 2006, the Company had a stock-based employee compensation plan,
      which is described more fully in *Note
      8* .
      Prior
      to July 1, 2005, the Company accounted for this plan under the recognition
      and
      measurement principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations.




***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
      (see *Note
      6* ).




F-10




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


***Financial
      Instruments***




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




***Reclassifications***




Certain
      reclassifications have been made to the 2006 financial statements to conform
      to
      fiscal 2007 presentation. These reclassifications have no effect upon net
      loss.




***Recent
      Accounting Standards***




In
      March
      2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments.* SFAS 155
      resolves certain accounting issues related to various hybrid financial
      instruments. The Company expects to adopt the provisions of SFAS No. 155
      effective for its fiscal year beginning July 1, 2007. Adoption of this standard
      will have no 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). Interpretation 48 provides clarifying guidance on the
      accounting for uncertainty in income taxes recognized in financial statements
      in
      accordance with SFAS 109, *Accounting
      for Income Taxes* ,
      and
      prescribes recognition and measurement guidance in determining amounts to be
      recorded in the financial statements. This Interpretation applies to all income
      based tax items and is effective for fiscal years beginning after
      December 15, 2006. The Company expects to adopt Interpretation 48 on
      July 1, 2007. The Company has determined that the effect of adopting FIN 48
      will not be material to the Company’s financial condition, results or 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 provisions of SAB 108 are effective for
      the
      Company’s fiscal year ending June 30, 2007. The Company adopted SAB 108 during
      the first quarter of its fiscal year ended June 30, 2007, which had no material
      impact on the Company's consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      SFAS
      No. 157 defines fair value, establishes a framework for measuring fair value
      in
      United States generally accepted accounting principles (“GAAP”), and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements;
      however, this statement does not require any new fair value measurements. The
      definition of fair value retains the exchange price notion in earlier
      definitions of fair value. This Statement emphasizes that fair value is a
      market-based measurement, not an entity-specific measurement, and establishes
      a
      fair value hierarchy that distinguishes between (1) market participant
      assumptions based on market data and (2) the reporting entity’s own assumptions
      about market participant assumptions developed based on the best information
      available in the circumstances. This Statement clarifies that market participant
      assumptions include assumptions about risk and assumptions about the effect
      of a
      restriction on the sale or use of an asset and clarifies that a fair value
      measurement for a liability reflects its nonperformance risk. This Statement
      expands disclosures about the use of fair value to measure assets and
      liabilities in interim and annual periods subsequent to initial recognition.
      SFAS No. 157 is effective for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. We do not expect the adoption
      of
      this statement to have a material effect on our financial position or results
      of
      operations.




F-11




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


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.
      SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
      We
      do not expect the adoption of this statement to have a material effect on our
      financial position or results of operations.





**Note
      2:** **Inventories**




**2007**
            
            **2006**Raw
                materials
            
            $
            89,581
            
            $
            33,234Work
                in process
            
            
            95,637
            
            
            8,500Finished
                units
            
            
            747,886
            
            
            780,551$
            933,104
            
            $
            822,285




**Note
      3:** **Due
      to Factor and Line of Credit**




On
      March
      31, 2006, the Company and Bibby Financial Services (Midwest), Inc. (“Bibby”)
      entered into a
      new Master Purchase and Sale Agreement (the “Factoring Agreement”) to govern the
      exclusive global factoring arrangements provided by Bibby. The new agreement
      replaces the Master Purchase and Sale Agreement entered into between the Company
      and Bibby in August 2005.




Under
      the
      Factoring Agreement, the Company submits accounts receivable to be purchased
      by
      Bibby, and Bibby pays the Company up to 90% of the aggregate net face value
      of
      accounts receivable purchased, less applicable fees charged by Bibby and a
      reserve withheld by Bibby to serve as security in the event that Bibby receives
      less than full payment for accounts purchased due to returns, allowances,
      deductions, disputes or chargebacks. All accounts submitted for purchase must
      be
      approved by Bibby. Accounts are purchased on a recourse basis, and Bibby has
      the
      right to charge back accounts purchased from the Company at any time.




F-12




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


The
      Company accounts for this arrangement as a secured borrowing. The Factoring
      Agreement requires the Company to grant Bibby a first lien security interest
      in
      all of its accounts receivable, inventory, equipment and all cash held in bank
      accounts and certain related intangibles. Bibby charges interest on amounts
      advanced to the Company under the Factoring Agreement at a rate of 1.00% above
      the prime rate of interest as published in the *Wall
      Street Journal* .
      Bibby
      receives a factoring administration fee equal to 1.00% of the gross invoice
      amount of each account submitted. If total receivables are more than 60% for
      any
      one account debtor, Bibby may charge the Company an additional 0.5% discount
      for
      accounts from that specific account debtor. Receivables assigned to Bibby
      totaled $1,784,168 and $1,027,719 as of June 30, 2007 and 2006, respectively,
      and were included in accounts receivable on the balance sheet. Assigned
      receivables continue to be serviced by the Company. All risk related to
      collection of assigned receivables remains with the Company. The balance due
      to
      factor on the Company’s balance sheets of $1,302,564 and $921,506 as of June 30,
      2007 and 2006, respectively, represents outstanding advances from Bibby against
      assigned receivables.




The
      Factoring Agreement requires the Company to maintain a level of accounts
      submitted for purchase each month that is equal to $500,000, on average, during
      each calendar quarter. If the level of purchased accounts falls below the
      $500,000 minimum average requirement in any calendar month, the Company is
      required to pay Bibby a monthly purchase fee equal to the amount by which the
      fees paid to Bibby for each month that does not meet the minimum requirements
      on
      average during a calendar quarter is less than $10,000, and the Company shall
      not pay less than $10,000 in such fees on average for any month in a calendar
      quarter.




The
      initial term of the Factoring Agreement is 12 months and will be automatically
      extended for successive periods of 12 months unless terminated by the Company
      more than 60 but less than 90 days prior to the end of the term. Bibby may
      terminate the Factoring Agreement at any time on 30 days prior notice to the
      Company. If the Company terminates the Factoring Agreement more than 60 days
      prior to the end of the then-current term, the Company will pay a termination
      fee equal to $10,000 for each month remaining during the term.




On
      January 12, 2005, the Company obtained a line of credit from Bank of America,
      N.A. (the “Bank”) in the amount of up to $4,000,000 through May 31, 2005, and
      then decreasing to $3,000,000 from June 1, 2005, through maturity on December
      31, 2005. Interest was payable monthly at the average of daily fluctuating
      interest rates offered by major banks in London for U.S. dollar deposits, as
      determined by the Bank, plus two percentage points. The interest rate as of
      June 30, 2005, was 5.69%. The line of credit was secured by substantially
      all of the assets of the Company and its subsidiaries pursuant to a commercial
      security agreement.




The
      line
      of credit was guaranteed by a shareholder, SRC Holdings Corporation (“SRC”),
      in an amount
      limited to $750,000 pursuant to a commercial guarantee. Quest Capital Alliance,
      L.L.C. (“Quest”),
      also a
      shareholder of the Company, agreed to provide a supplemental guarantee for
      $250,000 of the amount guaranteed by SRC, pursuant to an agreement between
      Quest
      and SRC. In addition, SRC and James K. Parsons, a director, officer and
      shareholder of the Company, each agreed to subordinate all present and future
      indebtedness owed to them by the Company to the Bank, pursuant to subordination
      agreements entered into by each of them in favor of the Bank.




In
      June
      2005, the Company established a certificate of deposit with Bank of America,
      N.A. in the amount of $750,000 in exchange for termination of the guarantee.
      This certificate of deposit was liquidated in August 2005 when the Bank of
      America line of credit was terminated.




**Note
      4:** **Notes
      Payable**




**2007**
            
            **2006**Note
                payable, bank (A)
            
            $
            0
            
            $
            6,015Less
                current maturities
            
            
            —
            
            
            6,015$
            0
            
            $
            0




F-13




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


(A)
            Note
                payable to bank in monthly installments of $2,951, including interest
                at
                the bank’s prime rate plus 1% (9.25% at June 30, 2006) through August
                2006, secured by inventories and accounts receivable. This loan requires
                the Company to maintain certain covenants, the more important of
                which
                restrict certain capital transactions and payment of dividends. The
                note
                was paid in full as of August 2006, as
                scheduled.




Notes
      payable to stockholders at June 30, 2007 and 2006, consists of the following
      unsecured notes:




**2007**
            
            **2006**Inventory
                line of credit (B)
            
            $
            600,000
            
            $
            430,000Note
                payable (C)
            
            
            —
            
            
            24,275Note
                payable (D)
            
            
            609,468
            
            
            609,468Note
                payable (E)
            
            
            56,451
            
            
            56,451Note
                payable (F)
            
            
            1,000,000
            
            
            1,000,000Note
                payable (G)
            
            
            750,000
            
            
            750,000Note
                payable (H)
            
            
            750,000
            
            
            —$
            3,765,919
            
            $
            2,870,194





(B)
            Revolving
                credit line of up to $750,000 due on May 5, 2009, to Quest Commercial
                Finance L.L.C. with monthly interest at prime plus 5%, subject to
                a
                minimum of 10% (13.25% at June 30, 2006) secured by inventories.
                Deferred
                financing costs charged to expense in connection with this note totaled
                $10,000 and $1,667 for the years ended June 30, 2007 and 2006,
                respectively.Decorize
                and Quest Commercial entered into a modification agreement with respect
                to
                the related promissory note on September 26, 2007, which sets the
                interest
                rate at 13.75% per annum and provides 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.




(C)
            The
                Company issued a convertible term note in the amount of $750,000
                and three
                year warrants to purchase an aggregate of 300,000 shares of common
                stock
                to Nest USA, Inc. (“Nest USA”) on February 26,
                2002.




The
      estimated fair value of the warrants and beneficial conversion terms related
      to
      this convertible note payable amounted to $276,515 and $473,485, respectively,
      and were recorded as a discount on the note. The discount was amortized to
      interest expense over the two-year term of the convertible note payable using
      the interest method.




On
      January 1, 2003, an amended and restated convertible term note was issued which
      created new payment terms, extended the conversion option and required issuance
      of three year warrants for an additional 216,000 shares of the Company’s common
      stock at an exercise price of $2.80 per share that expire February 26, 2005.
      Principal and interest at 6% per annum were payable monthly in the amount of
      $17,500 commencing on January 31, 2003, continuing until January 31, 2004,
      when the monthly payments were scheduled to increase to $53,351. In April 2003,
      the note holder agreed to defer $5,000 of the monthly payments of principal
      for
      April, May and June, which were paid as additional $5,000 principal payments
      in
      July, August and September of 2003.




As
      of
      January 1, 2003, the estimated fair values of the warrants and beneficial
      conversion terms related to this convertible note were recognized as additional
      discounts to the carrying value of the note of $113,126 and $199,374,
      respectively, with an offsetting credit to paid-in capital. The aggregate
      discount on the convertible note as of January 1, 2003, was equal to its
      $750,000 face value. This discount is being amortized to interest expense over
      the revised note term using the interest method.




In
      February 2004, the Company issued 409,700 shares of common stock to Nest USA
      in
      exchange for a $409,700 principal reduction in the existing convertible term
      note. The second amended and restated convertible note to Nest USA had an
      initial principal balance of $210,497, bears interest at 6% and provides for
      monthly payments of $10,000 each beginning February 1, 2004, with the balance
      due December 31, 2005. The balance due on the note is convertible into common
      stock at $1.00 per share for the term of the note. In connection with this
      transaction, the Company also amended certain outstanding warrants held by
      Nest
      USA to extend their expiration date to December 31, 2005, and issued another
      set
      of warrants to Nest USA exercisable for 400,000 shares of common stock at $1.40
      per share, that expire on December 31, 2006. The fair value of the new and
      extended warrants was recorded as a discount, reducing the carrying value of
      the
      note to zero. The discount was amortized to interest expense over the revised
      term of the note using the interest method.




F-14




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


(D)
            Stockholder
                note payable, monthly interest at prime plus 1%, due July 31, 2008.




(E)
            Stockholder
                note payable, matured December 31, 2004. Interest is paid monthly
                at prime
                plus 1%.




(F)
            Stockholder
                note payable, interest at prime plus 1.25%, due July 31, 2006. On
                July 31,
                2006, this note was amended and restated with a due date of July
                31, 2008.




(G)
            Stockholder
                note payable, interest at prime plus .5%, due upon demand. During
                2005,
                this note was amended to allow the holder to convert outstanding
                principal
                and unpaid interest into the Company’s common stock for $0.20 per share.
                This note is convertible for 3,750,000 shares of common stock.




(H)
            On
                August 17, 2006, Decorize issued a three-month 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 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)
      eighteen percent (18%) per annum from January 9, 2007 to February 12, 2007,
      then
      at a rate of twenty-one percent (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
      thirteen and three quarters percent (13.75%) and to extend the maturity date
      to
      March 15, 2008, at which time the Company paid a renewal fee of $7,500. The
      default interest rate is equal to twenty-one percent (21%) per
      annum.





The
      Promissory Note is secured by a security interest in Decorize’s inventory and
      proceeds from inventory pursuant to the terms and conditions of a Commercial
      Security Agreement (the “Security Agreement”) entered into between Decorize and
      Quest Capital II on September 11, 2006. The Security Agreement provides that
      upon an event of default, Quest Capital II may accelerate the indebtedness
      owed
      under the Promissory Note, assemble and sell the collateral, have a receiver
      appointed to take possession of any or all of the collateral, collect remedies,
      obtain a deficiency judgment, and exercise all other rights and remedies
      available to Quest Capital II.





The
      prime
      rate of interest at June 30, 2007, was 8.25%. The aggregate annual maturities
      of
      stockholder notes payable at June 30, 2007, are as follows:




**Year
                Ended June 30, 2007**
            
            **Aggregate
                Principal Maturities**2008
            
            $
            1,556,4512009
            
            
            2,209,468Total
                principal due on stockholder notes payable
            
            
            3,765,919Less
                current portion
            
            
            1,556,451Long-term
                stockholder notes payable
            
            $
            2,209,468




F-15




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


**Note
      5:** **Leases**





The
      Company leases various plant, office and showroom facilities and certain other
      equipment under agreements accounted for as operating leases. These leases
      expire through November 2013 and certain leases contain renewal
      options.




The
      Company also leases equipment under agreements accounted for as capital leases.
      The assets under capital leases are amortized on a straight-line basis over
      the
      term of the lease and lease amortization is included in depreciation expense.
      Property and equipment included $226,968 and $226,968 of assets under capital
      lease less $193,693 and $179,476 of accumulated depreciation at June 30, 2007
      and 2006, respectively.




Future
      minimum payments for noncancellable capital and operating leases with initial
      or
      remaining terms of one year or more at June 30, 2007, are as
      follows:




**Operating**
              **Leases**
            
            **Capital**
              **Leases**2008
            
            $
            156,056
            
            $
            8,4972009
            
            
            130,179
            
            
            —2010
            
            
            44,637
            
            
            —$
            330,872
            
            
            8,497Less
                amount representing interest
            
            
            
            
            
            252Present
                value of future minimum lease payments
            
            
            
            
            
            8,245Less
                current portion
            
            
            
            
            
            8,245$
            0




Total
      rent expense incurred under operating leases amounted to $260,643 and $248,900
      for the years ended June 30, 2007 and 2006, respectively.




**Note
      6:** **Stockholders’
      Equity**




In
      consideration of SRC providing a commercial guarantee (the “Guarantee”) for a
      bank line of credit on January 12, 2005 (see *Note
      3)* ,
      the
      Company agreed to obtain life insurance policies on Steve Crowder, the President
      and Chief Executive Officer of the Company, with SRC, Quest and the Company
      as
      the beneficiaries under those policies. The Company also issued warrants to
      SRC
      to acquire 1,500,000 shares of the Company’s common stock and warrants to Quest
      to acquire 750,000 shares (the “New Warrants”). The New Warrants had an initial
      exercise price of $0.40 per share and were exercisable for five years. The
      Company also agreed to reduce the exercise price of warrants currently
      outstanding in favor of SRC and Quest that were exercisable for an aggregate
      1,500,000 shares of common stock and an aggregate 1,057,143 shares of common
      stock, respectively (the “Existing Warrants”), to $0.40 per share. The exercise
      period of the Existing Warrants was reduced such that 50% would have expired
      six
      months from the date of issuance and the remaining 50% would have expired one
      year from the date of issuance. The Company also reduced the applicable
      conversion price of all outstanding shares of its Series A Convertible Preferred
      Stock, $.001 par value (the “Series A Preferred”), to a conversion price of
      $0.40 per share.




Also
      in
      connection with the Guarantee, the Company issued a second amended and restated
      promissory note to SRC in the principal amount of $750,000 (the “Amended Note”),
      in replacement of a first amended and restated promissory note issued on
      September 30, 2004. Amounts outstanding under the Amended Note were convertible
      into shares of common stock at an initial conversion price of $0.40.




F-16




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


The
      fair
      value of the new warrants and the beneficial conversion feature of the second
      amended and restated promissory note, combined with the relative increase in
      the
      fair value of the modified outstanding warrants represented the aggregate fair
      value of the guarantees provided by SRC and Quest, $410,000. This asset was
      to
      be amortized to expense on the straight-line method over the term of the
      guarantee.




On
      May
      31, 2005, the Company completed the private placement of 1,000,000 shares of
      its
      common stock to Nest USA. In connection with this transaction, the Company
      agreed to amend certain outstanding warrants held by Nest USA exercisable for
      an
      aggregate 996,000 shares of common stock, in order to reduce the exercise price
      of the warrants to $0.20 per share and extend the period during which the
      warrants were exercisable to May 31, 2007. The total purchase price for the
      shares and the amended warrants was $400,000.




On
      June
      15, 2005, the Company completed the private placement of 1,875,000 shares of
      its
      common stock pursuant to the terms of a Securities Purchase Agreement (the
      “Purchase Agreement”) entered into between the Company, SRC and Quest on that
      same date. The Purchase Agreement provides for the Company to issue 1,250,000
      of
      the shares to SRC and 625,000 of the shares to Quest. The Company also agreed
      to
      amend certain outstanding warrants held by SRC and Quest (the “Amended
      Warrants”), which are exercisable for an aggregate 3,000,000 shares of common
      stock and 1,807,143 shares of common stock, respectively, in order to reduce
      the
      exercise price of the Amended Warrants to $0.20 per share and extend the period
      during which some the Amended Warrants are exercisable.




At
      the
      closing of the sale of the shares, SRC received certificates representing
      Amended Warrants that were exercisable, in whole or in part, for 1,500,000
      shares of common stock, which terminate on May 31, 2007, and a second set of
      Amended Warrants that were exercisable, in whole or in part, for another
      1,500,000 shares of common stock, which terminate on April 11, 2010. Quest
      also
      received certificates representing Amended Warrants that were exercisable,
      in
      whole or in part, for 1,807,143 shares of common stock, which terminate on
      May
      31, 2007, and a second set of Amended Warrants that were exercisable, in whole
      or in part, for another 750,000 shares of common stock, which terminate on
      April
      11, 2010. The initial exercise price of the Amended Warrants is $0.20 per share.




A
      further
      condition to closing under the Purchase Agreement was for the Company to obtain
      a release of a $750,000 commercial guarantee executed by SRC in connection
      with
      the bank line of credit (see *Note
      3* ).
      Decorize obtained the release of the commercial guarantee in connection with
      the
      termination of its line of credit with Bank of America. The unamortized balance
      of the asset representing the fair value of the guarantee was charged to
      interest expense when the guarantee was released.




As
      a
      condition to closing the sale of the shares, the Company agreed to file an
      amendment to its Certificate of Designation for its Series A Convertible
      Preferred Stock, $.001 par value per share, in order to reduce the applicable
      conversion price of all outstanding shares of its preferred stock to a
      conversion price of $0.20 per share. Of the Series A Convertible Preferred
      Stock, 500,000 shares were outstanding as of June 30, 2006, which are
      convertible into an aggregate 2,500,000 shares of common stock.




The
      increase in the value of the beneficial conversion feature of the second amended
      and restated promissory note of $150,000 was charged to interest expense. The
      increase in the value of the beneficial conversion feature of the Company’s
      Series A Convertible Preferred Stock of $100,000 was recognized as a
      constructive dividend and charged against paid-in-capital in the quarter ended
      June 30, 2005.




On
      November 16, 2005, SRC exercised stock purchase warrants for 1,500,000 shares
      of
      the common stock of the Company at a price of $0.20 per share, for a total
      purchase price of $300,000.




On
      December 13, 2005, the Company obtained a four-month revolving line of credit
      from Quest Capital Alliance II, L.L.C., in an amount up to $500,000. In
      consideration of providing the line of credit, the Company paid Quest Capital
      Alliance II, L.L.C. a commitment fee of $33,333. After April 13, 2006, any
      outstanding principal and interest became convertible into the Company’s common
      stock at a rate of $0.20 per share at the sole option of Quest Capital Alliance
      II, L.L.C. The note was converted into 2,500,000 shares of common stock on
      May
      5, 2006.




F-17


**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


On
      January 9, 2006, Nest USA, Inc. exercised common stock purchase warrants for
      625,000 shares of common stock at a price of $0.20 per share, for a total
      purchase price of $125,000.




On
      March
      7, 2006, Quest Capital Alliance, L.L.C. exercised common stock purchase warrants
      for an aggregate 1,807,143 shares of common stock at a price of $0.20 per share,
      for a total purchase price of $361,429.




On
      March
      14, 2006, SRC exercised warrants for the purchase of an aggregate 1,500,000
      shares of the common stock at a price of $0.20 per share, for a total purchase
      price of $300,000.




On
      March
      20, 2006, Nest USA exercised warrants for the purchase of 371,000 shares of
      common stock at a price of $0.20 per share, for a total purchase price of
      $74,200.




James
      K.
      Parsons, a director and the Executive Vice President of the Company, exchanged
      $400,000 in principal owed to him under an existing promissory note, which
      was
      last amended in August 2004, for 833,333 shares of common stock issued to him
      on
      May 5, 2006. The exchange was made in accordance with a stock exchange agreement
      entered into on May 5, 2006. As a result of the exchange, the outstanding
      principal amount of Mr. Parson’s note was reduced to $609,468.




Also
      on
      May 5, 2006, the Company completed a private placement of 2,500,000 shares
      of
      its common stock to Quest Capital Alliance II, L.L.C. for an aggregate price
      of
      $500,000. The proceeds were used to pay off a short-term note that the Company
      owed to Quest Capital Alliance II, L.L.C.





The
      Company uses its stock-based employee compensation plan to compensate its
      executives and employees and also as a method to align the interests of those
      executives and employees with those of the Company’s stockholders, by granting
      equity awards that increase in value upon increases in the market price of
      the
      Company’s common stock. Since the beginning of fiscal 2003, the Company’s stock
      price has continued to experience significant declines, in particular since
      the
      beginning of fiscal 2006. After evaluating the circumstances surrounding this
      decline, the directors believe the weakness in the market for the Company’s
      common stock is due to performance and economic factors that impacted the
      Company, but were not within the control of its management team. As a result
      of
      those declines, the existing equity grants made by the Company in prior years
      had no market value, since the relative exercise prices were well in excess
      of
      the trading price for the Company’s common stock. During the final quarter of
      fiscal 2006, the Board of Directors began to discuss the equity compensation
      plan and what changes may be appropriate to address the significant decrease
      in
      the Company’s market price.





During
      a
      meeting of the Board of Directors on July 27, 2006, the directors discussed
      a
      proposal to lower the exercise price of all outstanding stock options under
      the
      plan, which had an average exercise price of $0.52. The directors discussed
      a
      proposal for the compensation committee to consider decreasing the exercise
      price of all outstanding options and granting additional options at the current
      market price, which had fluctuated from $0.23 to $0.27 during the month of
      the
      meeting. Because one of the members of the compensation committee was not
      present at the July 27 meeting, the Board of Directors instructed the
      compensation committee to meet and consider the proposal at its next
      opportunity.





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 vest 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 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.




F-18




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


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.





**Note
      7:** **Income
      Taxes**




The
      provision for income taxes includes these components :




**2007**
            
            **2006**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:




**2007**
            
            **2006**Computed
                at the statutory rate (34%)
            
            $
            (231,950
            )
            $
            (762,191
            )Increase
                (decrease) resulting from
            
            
            164,762Nondeductible
                expenses
            
            
            (2,607
            )
            
            201,895State
                income taxes
            
            
            
            
            
            (9,309
            )Changes
                in the deferred tax asset valuation allowance including adjustments
                to
                prior net operating loss carryforwards
            
            
            53,084
            
            
            630,298Other
            
            
            16,711
            
            
            (60,693
            )Actual
                tax expense
            
            $
            0
            
            $
            0




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




**2007**
            
            **2006**Deferred
                tax assetsAllowance
                for doubtful accounts
            
            $
            45,694
            
            $
            95,000Accrued
                compensated absences
            
            
            12,312
            
            
            9,500Reserve
                for obsolete inventories
            
            
            52,479
            
            
            19,000Net
                operating loss carryforwards
            
            
            3,488,009
            
            
            3,456,572Property
                and equipment
            
            
            23,260
            
            
            7,257Charitable
                contribution carryforwards and other
            
            
            5,844
            
            
            5,844Additional
                inventory costs capitalized
            
            
            11,695
            
            
            —3,639,293
            
            
            3,593,173Deferred
                tax liabilitiesPrepaid
                insurance
            
            
            (18,832
            )
            
            (15,728
            )Inventory
                adjustments
            
            
            —
            
            
            (10,386
            )Stock
                option expense
            
            
            (318
            )
            
            —(19,150
            )
            
            (26,114
            )Net
                deferred tax asset before valuation allowance
            
            
            3,620,143
            
            
            3,567,059Valuation
                allowanceBeginning
                balance
            
            
            (3,567,059
            )
            
            (2,936,761
            )Increase
                during the period
            
            
            (53,084
            )
            
            (630,298
            )Ending
                balance
            
            
            (3,620,143
            )
            
            (3,567,059
            )Net
                deferred tax asset
            
            $
            0
            
            $
            0




F-19




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


For
      the
      years ended June 30, 2007 and 2006, 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, 2007 and 2006, the Company had approximately
      $9,200,000 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 2027, 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.




**Note
      8:** **Stock-based
      Compensation**




***Adoption
      of SFAS 123(R)***




Prior
      to
      July 1, 2005, the Company’s stock-based employee compensation plan was
      accounted for under the recognition and measurement provisions of Accounting
      Principles Board Opinion (APBO) No. 25, *Accounting
      for Stock Issued to Employees* (APBO
      25), and related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      (SFAS
      123). The Company generally did not recognize stock-based compensation cost
      in
      its statement of operations for periods prior to July 1, 2005, as most
      options granted had an exercise price equal to the market value of the
      underlying common stock on the date of grant. However, compensation expense
      was
      recognized under APBO 25 for certain options based upon the intrinsic value
      (the
      difference between the exercise price and the deemed fair value of the common
      stock at the date of grant).




Effective
      July 1, 2005, the Company adopted the fair value recognition provisions of
      SFAS No. 123 (Revised 2004), *Share-Based
      Payment* ,
      (SFAS
      123(R)), using the modified-prospective-transition method. Results for prior
      periods have not been restated.




The
      Company’s loss from operations, loss before income taxes, net loss, basic and
      diluted loss per share available to common stockholders were not different
      as a
      result of the adoption of SFAS 123(R) for the year ended June 30, 2006, than
      if
      it had continued to account for share-based compensation under the recognition
      and measurement provisions of APBO 25, and related Interpretations, as permitted
      by SFAS 123.




F-20




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


***Equity
      Incentive Plan***




The
      Company’s 1999 Equity Incentive Plan (the “Plan”), which is shareholder
      approved, permits the grant of nonqualified options to its employees,
      consultants and directors for up to 3 million shares of common stock. The
      Company believes that such awards better align the interests of its employees
      with those of its shareholders. Option awards are generally granted with an
      exercise price equal to the market price of the Company’s stock at the date of
      grant; those option awards generally vest based on three years of continuous
      service and typically have seven-year contractual terms. All outstanding stock
      options were fully vested as of June 30, 2007.




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 1,112,500 and 0 options were granted under the Plan during the years ended
      June 30, 2007 and 2006. The fair value of options granted during the year ended
      June 30, 2007, was estimated on the date of the grant date using the
      Black-Scholes-Merton option-pricing model with the following weighted average
      assumptions:




Dividend
                per share
            
            $
            0Risk
                free interest rate
            
            
            4.86
            %Weighted
                average expected life of options
            
            
            6.2
                yearsExpected
                volatility of the Company’s common stock market price
            
            
            73
            %Weighted
                average fair value of options granted during the year
            
            $
            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 during the current quarter 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 vest 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 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.




F-21




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


A
      summary
      of option activity under the Plan as of June 30, 2007 and 2006, and changes
      during the years then ended, is presented below:




**2007**
            
            **2006****Shares**
            
            **Weighted**
              **Average**
              **Exercise
                Price**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**Outstanding,
                beginning of year
            
            
            708,500
            
            $
            0.52
            
            
            916,207
            
            $
            0.56Granted
            
            
            1,112,500
            
            
            0.18
            
            
            —
            
            
            —Exercised
            
            
            (127,000
            )
            
            0.17
            
            
            (61,000
            )
            
            .52Forfeited
            
            
            (765,750
            )
            
            0.49
            
            
            (146,707
            )
            
            .78Outstanding,
                end of year
            
            
            928,250
            
            
            0.19
            
            
            708,500
            
            
            .52Options
                exercisable, end of year
            
            
            817,000
            
            
            0.18
            
            
            708,500
            
            
            .52







Stock
      based compensation recognized in connection with the Plan was $59,472 and $0
      for
      the years ended June 30, 2007 and 2006.




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, 2007 and
      2006.




The
      aggregate intrinsic value of options outstanding and exercisable as of June
      30,
      2007 and 2006, was $560,856 and $0, 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, 2007 and 2006,
      was $60,310 and $100, respectively.




Cash
      generated through the exercise of stock options totaled $21,590 and $31,750
      for
      the years ended June 30, 2007 and 2006, respectively. No cash was used in the
      settlement of shared-based obligations during 2007 and 2006.




The
      Company had a total of 111,250 and 0 unvested options outstanding as of June
      30,
      2007 and 2006, respectively. As
      of
      June 30, 2007 and 2006, total unrecognized compensation cost related to
      nonvested share-based compensation arrangements granted under the Plan was
      $12,691 and $0, respectively. The total fair value of shares vested during
      the
      years ended June 30, 2007 and 2006, was $27,172 and $0,
      respectively.




Prior
      to
      the adoption of SFAS 123(R), the Company presented all tax benefits of
      deductions resulting from the exercise of stock options as operating cash flows
      in its statement of cash flows. In accordance with guidance in SFAS 123(R),
      the
      cash flows resulting from excess tax benefits (tax benefits related to the
      excess of proceeds from employee’s exercises of stock options over the
      stock-based compensation cost recognized for those options) are classified
      as
      financing cash flows. The Company recorded no excess tax benefits as financing
      cash inflows during the years ended June 30, 2007 and 2006, because of the
      full
      valuation allowance established against the Company’s deferred tax
      assets.




F-22




**Decorize,
        Inc.**
 **Notes
          to Consolidated Financial Statements**
 **Years
          Ended June 30, 2007 and 2006**


The
      following table summarizes information about stock options under the Plan
      outstanding at June 30, 2007:




**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**$0.17
                - 0.47
            
            
            928,250
            
            
            6.2
                years
            
            $
            0.17
                - 0.47
            
            
            817,000
            
            $
            0.17
                - 0.47






**Note
      9:** **Significant
      Estimates and Concentrations**




Accounting
      principles generally accepted in the United States of America require disclosure
      of certain significant estimates and current vulnerabilities due to certain
      concentrations. Those matters include the following:




***Major
      Supplier***




The
      Company purchased approximately 40% and 28% of its principal products from
      one
      supplier during the years ending June 30, 2007 and 2006, respectively. There
      are
      a limited number of suppliers for these products.




***Foreign
      Assets***




As
      of
      June 30, 2007, net assets located outside the United States totaled
      approximately $795,000. These assets consisted principally of the inventory
      and
      equipment of Pt. Niaga Merapi facility in Indonesia totaling approximately
      $534,000 and products in transit from Indonesia to the United States of
      approximately $203,000. The equipment located in China totaled approximately
      $58,000.




As
      of
      June 30, 2006, net assets located outside the United States totaled
      approximately $524,000. These assets consisted principally of the inventory
      and
      equipment of Pt. Niaga Merapi facility in Indonesia totaling approximately
      $167,000 and products in transit from Indonesia to the United States of
      approximately $345,000. The equipment located in China totaled approximately
      $12,000.




**Note
      10:** **Profit-sharing
      Plan**




***Profit-sharing
      Plan***




The
      Company has a 401(k) profit-sharing plan covering substantially all employees.
      The Company’s contributions to the plan are determined annually by the Board of
      Directors. There were no Company contributions to the plan for 2007 or
      2006.




**Note
      11:** **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,
      2007. Management is continuing to evaluate and implement strategies to mitigate
      these conditions during the next fiscal year. These include establishing and
      expanding relationships with key customers, renewed focus on specialty retail
      customers, better margin management through improved operational processes,
      selective reductions of operating overhead and seeking additional sources of
      equity and debt financing.




Management
      believes that additional financing may be needed to meet the capital
      requirements associated with the Company’s growth objectives or to retire
      existing debt. Management is evaluating alternatives for obtaining new debt
      and
      equity financing to meet future capital requirements, or to retire debt as
      deemed appropriate.




F-23




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




None.




**Item
      8A. Controls and Procedures.**





We
      carried out an evaluation of the effectiveness of the design and operation
      of
      our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
      and
      15d-15 as of June 30, 2007, the end of our fourth fiscal quarter, which is
      the
      last period presented in this report. The evaluation was carried out under
      the
      supervision of our Chief Executive Officer and Principal Financial Officer
      and
      with the participation of our management group and our audit committee. Our
      disclosure controls and procedures are designed to ensure that information
      that
      is required to be included in our filings with the SEC is recorded, processed,
      summarized and reported within the time periods specified by the SEC, and that
      such information is accumulated and communicated to our management, including
      our Chief Executive Officer and Principal Financial Officer, as appropriate
      to
      allow timely decisions regarding required disclosure. Based on that evaluation,
      our Chief Executive Officer and Principal Financial Officer concluded that
      Decorize’s disclosure controls and procedures were not effective as of June 30,
      2007, for the reasons described below.





During
      the completion of its audit procedures for the fiscal year ended June 30, 2005,
      BKD, LLP, our independent registered public accountants (“BKD”), notified the
      audit committee of the Board of Directors that its audit of the fiscal year
      ended June 30, 2005 revealed certain matters that BKD considered to be control
      deficiencies, significant deficiencies or material weaknesses in Decorize’s
      internal control over financial reporting. The items noted included the failure
      to document accounting processes and policies, the inability to segregate
      accounting duties due to lack of available personnel, the lack of resources
      available to apply new and complex accounting standards, and the need for
      improvement to overhead allocation and inventory accounting. The audit committee
      of our Board of Directors held a special meeting to discuss the matters raised
      by BKD and thereafter instructed management to review the control deficiencies,
      significant deficiencies and material weaknesses that BKD communicated and
      to
      determine the appropriate corrective actions to be taken. The audit committee
      subsequently instructed management to make a determination regarding the
      corrective actions that should be taken in order to address the significant
      deficiencies, control deficiencies and material weaknesses noted by BKD. After
      BKD completed its audit procedures for the fiscal year ended June 30, 2006,
      BKD
      sent another written notice to the audit committee indicating that its audit
      had
      revealed the continued existence of substantially all of the matters that BKD
      had raised following its audit procedures for the 2005 fiscal year as being
      control deficiencies, significant deficiencies or material weaknesses in
      Decorize’s internal control over financial reporting. BKD specifically referred
      to material weakness with respect to our failure to segregate accounting duties
      and the lack of resources, research tools and personnel to evaluate the proper
      application of new and complex accounting standards, and it noted significant
      deficiencies with respect to our failure to properly document accounting
      processes and policies and the failure to segregate accounting duties at our
      Indonesian production facility. In response to BKD’s identification of
      continuing internal control deficiencies and material weaknesses, the audit
      committee again instructed management to review the control deficiencies,
      significant deficiencies and material weaknesses that BKD communicated and
      to
      discuss possible remedial actions with BKD, with the further instruction that
      management take steps to implement remedial actions following its determination
      of appropriate corrective actions that could address the issues raised by
      BKD.




During
      fiscal 2007, management began taking more defined steps to attempt to address
      the deficiencies and weaknesses noted by BKD in its most recent reports on
      our
      audit procedures. However, we are still in the process of creating controls
      and
      procedures to address all the matters that are raised by BKD. Management is
      addressing the documentation of accounting policies and procedures by hiring
      additional personnel in the accounting department. Management has also added
      personnel to address the weaknesses in overhead allocation and inventory
      accounting at our Indonesian production facility. We anticipate that these
      additions will help alleviate the pressures on current accounting personnel.





Management
      and our audit committee believe that the segregation of duties is extremely
      difficult in a small company with limited financial resources such as Decorize,
      and, consequently, we are unlikely to be able to eliminate all of those risks
      entirely while Decorize continues to develop its operations and improve its
      financial position. However, certain compensating controls have been put into
      place in order to minimize these risks. In addition, we assign duties to our
      personnel in a manner that we feel provides the best segregation possible;
      however, our limited resources require that our personnel be cross-trained
      in
      order to provide adequate coverage at all times. This cross coverage results
      in
      system access being available to individuals to an extent that may violate
      segregation of duties principles. The lack of segregation of duties that results
      from our limited personnel resources has been identified by BKD as a material
      weakness in our internal control over financial reporting.




21




The
      impact on segregation of duties caused by our policy of allowing cross coverage
      of financial reporting by our personnel creates a risk that cash or other assets
      may be misappropriated, which could be concealed by an expense misstatement
      or
      the misstatement of one or more balance sheet entries. In order to compensate
      for the potential risk of cash being misappropriated, Decorize initially put
      the
      following detective controls in place:





(i)
            the
                requirement that checks drawn against Decorize’s operating account have a
                physical signature for any amount and two signatures for amounts
                in excess
                of $10,000;





(ii)
            the
                policy of having our accounting personnel located overseas provide
                our
                domestic accounting department with bank reconciliations that tie
                to the
                corresponding cash payments made from the United States; and





(iii)
            the
                practice of our management team reviewing the financial statements
                and
                selected general ledger transaction detail each month.





We
      believe that management’s review of our financial statements and general ledger,
      in particular, provides a strong detective control because of the small size
      of
      Decorize’s business operations. Decorize has relatively few revenue sources, and
      our expenses from period to period are predictable, which makes it easier for
      management to recognize any discrepancies in the expected revenues or expenses
      during its review of a particular period. We believe that in a small business
      such as ours, management can be much more informed of what details to expect
      in
      the financials than would be true in a larger organization with more varied
      revenue sources and expenses.





Another
      material weakness identified by BKD is a lack of adequate resources, research
      tools or personnel with experience or time to devote to reviewing and ensuring
      the proper application of new accounting standards and for analysis of complex
      accounting issues. Specifically, BKD has suggested that our current staff would
      have difficulty completing our financial statements in accordance with GAAP
      without outside assistance. As a consequence, there is a risk that we might
      have
      an unintentional misstatement or omission in our financial statements as a
      result of the misapplication of GAAP. During fiscal 2007, we developed,
      documented and incorporated policies and procedures with respect to the
      following matters in order to help compensate for the risk of an unintentional
      misstatement or omission in our financial statements:





(i)
            the
                institution of a policy for determining and periodically re-evaluating
                the
                valuation of our reserves and allowances for bad debt and sales
                returns;





(ii)
            the
                institution of a policy for determining and periodically re-evaluating
                the
                valuation of our inventory reserve;





(iii)
            the
                reconciliation of all balance sheet accounts on a monthly basis and
                the
                preparation of supporting documentation for all
                balances;





(iv)
            the
                circulation of a documented schedule for close items to related parties
                each month to ensure proper cut offs and accurate accruals, which
                enables
                the accounting department to close the month in a timely manner and
                to
                prepare accurate reporting within a reasonable time
                frame;





(v)
            a
                monthly reporting process that includes detailed departmental reports
                that
                allow managers to review their results for accuracy and confirm expenses
                that are coded to their respective departments; and




22




(vi)
            the
                creation of a documented policy of expenses eligible for reimbursement
                by
                Decorize and a form to be completed and signed by the employee’s manager
                prior to reimbursement.





The
      procedures noted under (v) and (vi) above also act as a preventative control
      for
      the risk of cash being misappropriated. In addition, we developed the following
      controls and procedures to address that same risk during fiscal
      2007:





(i)
            the
                policy of requiring that all wire transfers must be approved by the
                Corporate Controller before they can be initiated; and





(ii)
            the
                requirement that all miscellaneous check requests have a completed
                form
                that is signed by the Corporate Controller before being
                issued.





In
      addition, controls over the invoicing process were altered to compensate for
      a
      new process. Decorize began utilizing a cross docking service, and this new
      process required changes to the existing controls. The cross docking service
      is
      provided with a distribution for the product on ocean containers and then
      returns the list with shipping tracking information to Decorize for invoicing.
      A
      reconciliation process was developed to ensure all products on the pack list
      had
      been invoiced or otherwise categorized and tracked.





Management
      has committed to provide the audit committee with documented policies and
      procedures that have identified controls for all areas affecting the financial
      statements by the end of the calendar year 2007, which will be the end of the
      second quarter of our 2008 fiscal year. Within that same time period, management
      intends to develop written policies regarding the valuation of reserves and
      documented controls within the invoicing process. Specifically, we intend that
      the policies for valuation will allow for development of a consistent allowance
      that is supported by all available evidence and is in compliance with GAAP.
      Decorize
      intends to develop and incorporate additional detective controls, and ultimately
      preventative controls, as it determines to be appropriate during the development
      and testing of policies, procedures and related controls to address any existing
      or potential internal control weaknesses to the extent practically possible.Testing of any controls we develop will take place during calendar year
      2008. Each policy will be developed after the analysis of operations data over
      a
      24-month period ending in 2007.





Personnel
      that were added to our foreign business units in the first and second fiscal
      quarters of fiscal 2007 have resulted in a significant improvement in controls
      within those entities, including more timely and accurate reporting. The
      principal change in our overseas accounting department resulting from those
      additions was the employment of a local plant controller. One of the roles
      of
      this position is to prepare monthly inventories prior to the month end close
      each month, which we anticipate will result in more accurate and consistent
      costing information. Prior to hiring this controller, we had encountered a
      high
      level of problems with the reporting of the costing information from our
      overseas entities, and we anticipate that this risk has been addressed by the
      creation of this position. We filled the plant controller position with an
      accountant who has an understanding of GAAP, our accounting policies and the
      accrual method of accounting. Our overseas clerks previously had trouble
      understanding the accrual method, which resulted in swings between the financial
      months that did not properly reflect the operating results of the overseas
      entities for the same period. We also anticipate that the additional personnel
      will relieve some of the segregation of duties issues, such as the cash
      disbursement and bank reconciliations for that department, which can now be
      separated.





We
      have
      now implemented new close procedures that allow Decorize to close the monthly
      books in a few days. This was accomplished by providing a detailed schedule
      of
      when each close item would be completed. A tight schedule is particularly
      important when closing activities are reliant upon others. Without a proper
      cutoff and timely completion, other activities are either re-done multiple
      times
      or delayed. A documented schedule ensures that monthly entries are made
      consistently and are given the proper review. A quick close process allows
      for
      timely reporting to departmental managers allowing them the opportunity to
      take
      more timely action on deviations and makes the accounting department more
      efficient.





Despite
      the steps taken by Decorize during fiscal 2007 to address the matters raised
      by
      BKD with respect to our internal controls and procedures, BKD has advised the
      audit committee and management that additional work is still required in order
      to address the material weaknesses, significant deficiencies and control
      deficiencies that exist with our internal controls. On September 26, 2007,
      after
      completing its audit procedures for the fiscal year ended June 30, 2007, BKD
      notified the audit committee that its audit had revealed the continued existence
      of matters that it considers to be control deficiencies, significant
      deficiencies or material weaknesses in Decorize’s internal control over
      financial reporting. BKD specifically referred to material weaknesses with
      respect to our failure to segregate accounting duties and our lack of resources,
      research tools and personnel to evaluate the proper application of new and
      complex accounting standards. BKD suggested that Decorize evaluate its
      accounting resources and personnel in order to ensure that they are sufficient
      to consistently meet our internal information and external financial reporting
      requirements and
      noted
      limitations of certain controls implemented by Decorize. BKD also noted
      an additional material weakness with respect to our recording of adjustments
      in
      response to certain errors and differences in accounting estimates that were
      identified during the audit by management and our external auditors, which
      increases the risk of an unintentional misstatement or omission in our financial
      statements. BKD also identified significant deficiencies with respect to our
      failure to segregate accounting duties and our accounting for inventory. BKD
      noted a lack of segregation of duties with respect to our reconciliation of
      accounts payable and bank balances to our general ledger, which in each case
      results in a risk of theft or the misappropriation of assets that could be
      concealed by fraudulent journal entries. BKD also indicated that our accounting
      for inventory continues to require adjustments during the year end audit
      process, which raises the risk of an unintentional misstatement or omission
      in
      our financial statements. Currently, we manually input item costs in our
      inventory management system, which can lead to input error and material costing
      changes that are not documented or updated in the bill of material. BKD did
      note
      improvement in our accounting for inventories at our Indonesian facility, but
      also noted that opportunities for improvement remain with respect to various
      pricing issues, preparation of cost build-ups, updates to overhead application
      rates and improvement in the documentation of methodologies for costing
      inventories and allocating overhead at this facility. Finally, BKD noted certain
      control deficiencies with respect to a lack of segregation of accounting duties,
      which could result in a misappropriation of assets, and a lack of a satisfactory
      policy or procedure for the retention of supporting documents related to
      significant corporate transactions.




23




The
      audit
      committee and management have already met to discuss the substance of BKD’s
      noted material weaknesses, significant deficiencies and control deficiencies
      and
      to begin the process of identifying appropriate remedial steps to address the
      matters raised by BKD. Management continues to believe that it can develop
      and
      implement appropriate policies and actions to address the items raised by its
      auditors before the end of the current calendar year.




Progress
      is continuing, and the development of procedures and controls relying on the
      input of management and our external auditors and the audit committee has
      continued through the filing date of this report. Management reports the
      progress on the improvements in its control procedures to the audit committee
      on
      a monthly basis.




**Item
      8B. Other Information.**





None.





24




**PART
      III**





**Item
      9.   Directors, Executive Officers, Promoters, Control Persons and
      Corporate Governance; Compliance With Section 16(a) of the Exchange
      Act.**





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2007 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, 2007.




**Item
      10. Executive Compensation.**





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2007 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, 2007.





**Item
      11. 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 2007 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, 2007.





**Item
      12. 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 2007 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, 2007.





**Item
      13. Exhibits.**




The
      exhibits listed below are filed with or incorporated by reference into this
      Annual Report on Form 10-KSB. Exhibits denominated with numbered footnotes
      are
      incorporated by reference to the other filings with the 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)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)




25




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. *10.8
            
            Third
              Amended and Restated Promissory Note, issued by Decorize, Inc. to James
              K.
              Parsons on May 5, 2006. (7)21.1
            
            Subsidiaries of the Registrant.
              *23.1
            
            Consent of Registered Public Accounting
              Firm.
              *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 Billie J. Montle, Interim
              Vice President of Finance and Corporate Controller of the Registrant,
              pursuant to 17 CFR 240.13a - 14(a) or 17 CFR 240.15d - 14(a).
              *32.1
            
            Certification of CEO pursuant to 18
              U.S.C.
              Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
              Act
              of 2002. *32.2
            
            Certification of CFO pursuant to 18
              U.S.C.
              Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
              Act
              of 2002. *









(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.


*
            Filed
                herewith.





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





The
      information required by this item is incorporated by reference to Decorize’s
      Proxy Statement for its 2007 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, 2007.





26




**SIGNATURES**





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




**DECORIZE,
              INC.**Date:September
              28, 2007
            
            */s/
              Stephen R. Crowder*Stephen
              R. CrowderChief
              Executive Officer and President




In
      accordance with the Securities Exchange Act of 1934, this Annual 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
            
            September
                28, 2007Stephen
                R. Crowder
            
            Director
              *(principal
                executive officer)**/s/
                Billie J. Montle*
            
            Interim
                Vice President of Finance and
            
            September
                28, 2007Billie
                J. Montle
            
            Corporate
                Controller
              *(principal
                financial officer and principal accounting
                officer)**/s/
                Richard B. Chalker*
            
            Director
            
            September
                28, 2007Richard
                B. Chalker*/s/
                Steven W. Fox*
            
            Director
            
            September
                28, 2007Steven
                W. Fox*/s/
                Marwan M. Atalla*
            
            Director
            
            September
                28, 2007Marwan
                M. Atalla





27