SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                 FORM 10-KSB

Mark One

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [No Fee Required]

                  For the Fiscal Year ended December 31, 1998

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [No Fee Required]

                       Commission file number: 1-12840

                        CSL LIGHTING MANUFACTURING, INC.
                        --------------------------------
             (Exact name of registrant as specified in its charter)

         Delaware                                        95-4463033
---------------------------                 -----------------------------------
 (State of incorporation)                   (I.R.S. employer identification No.)

27615 Avenue Hopkins, Valencia, California                      91355-3447
-------------------------------------------                  ---------------
 (Address of principal executive offices)                       (Zip Code)

                                 (805) 257-4155
                 -----------------------------------------------
                (Issuer's telephone number, including Area Code)

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

     Title of each class               Name of each exchange on which registered
--------------------------------       -----------------------------------------
Common, par value $.01 per share                      NASDAQ

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

                    Common Stock, par value $.01 per share
                    --------------------------------------
                               (Title of class)
<PAGE>

       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 |_|

      Check if there is no disclosure or delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 
form 10-KSB |X|

       For the year ended December 31, 1998, the revenues of the Registrant were
$12,386,000.

       The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant, based on the average bid and ask price on
April 9, 1999, was approximately $540,000.

       As of April 12, 1999, the Registrant had a total of 2,376,384 shares of
Common Stock outstanding.

                           INCORPORATION BY REFERENCE

                                      None.


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<PAGE>

                        CSL LIGHTING MANUFACTURING, INC.

                                   Form 10-KSB

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----
PART I.......................................................................4
  Item 1.      Business .....................................................4
  Item 2.      Properties ..................................................15
  Item 3.      Litigation ..................................................15
  Item 4.      Submissions Of Matters To A Vote Of Security Holders ........15
PART II.....................................................................16
  Item 5.      Market for the Registrant's Common Stock and Related 
               Security Holder Matters .....................................16
  Item 6.      Management's Discussion and Analysis Of Financial 
               Conditions and Results of Operations ........................16
  Item 7.      Financial Statements ........................................21
  Item 8.      Changes In and Disagreements with Accountants on 
               Accounting and Financial Disclosure .........................22
PART III....................................................................23
  Item 9.      Directors and Executive Officers of the Registrant ..........23
  Item 10.     Executive Compensation.......................................25
  Item 11.     Security Ownership of Certain Beneficial.....................27
  Item 12.     Certain Transactions.........................................28
  Item 13.     Exhibits And Reports On Form 8-K.............................29

                    FORWARD LOOKING STATEMENT INFORMATION

      Certain statements made in this Annual Report on Form 10-KSB are
"forward-looking statements"(within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving judgements with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a statement by the
Company or any other person that the objectives and plans of the Company will be
achieved. Factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the factors set forth herein under the headings "Business,"
"Certain Factors That May Affect Future Growth" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


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<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

      CSL Lighting Manufacturing, Inc., (d.b.a. Creative Systems Lighting) (the
"Company") designs, manufactures and markets mid to high-end lighting fixtures
for both commercial and residential applications on a worldwide basis.

      The Company's product offerings consist of four core product categories
including recessed down lighting, accent linear lighting systems, surface system
coordinates, and task lighting. Approximately 60% of the Company's products use
halogen light sources, which are smaller, longer lasting and more energy
efficient light sources in comparison to traditional incandescent light sources.
The balance of the Company's core product categories primarily use compact
fluorescent, incandescent and xenon lamp sources.

      The Company's core products are specified for use in new construction and
in the renovation of commercial and residential properties by architects,
engineers, interior designers and lighting designers (the "Specification
Market"). The Company's products are also sold directly to contractors, builders
and to retail customers through electrical distributors, lighting showrooms,
retail specialty stores and Home Centers (the "Consumer Retail Market"). The
Company believes that historically, approximately 80% of the Company's sales
have been made to the Specification Market and 20% to the Consumer Retail
Market.

      In an effort to support its expansion overseas the Company established two
factory offices and showrooms in Shanghai, China and in Singapore. During 1997,
the Company entered a distribution agreement in Shanghai, China that resulted in
the distributor taking management and fiscal responsibility for the Shanghai
facility. In addition, during the first quarter of 1999, the Company reevaluated
its Singapore operation and closed its Singapore office. The Company may incur
certain liabilities as a result of the Singapore office closure which management
does not believe will be material to the Company's business and financial
results.

      The Company continues to have overseas joint venture and distribution
agreements in China, Hong Kong, Singapore, The Philippines, Vietnam, and Taiwan.
Management believes that its recent entry into these markets together with the
fiscal crisis in Southeast Asia has adversely impacted its ability to penetrate
many of these markets.

      In March 1999, the Company completed a private placement of 1,191,752
shares of its common stock, representing 51% of its outstanding shares, to
Interiors, Inc. ("Interiors") for total consideration of approximately $2
million. In conjunction with the transaction, Interiors and the Company entered
into a Standstill Agreement and the Company expanded its Board of Directors to
seven members, including three designees of Interiors.

      Interiors is a leading designer, manufacturer and marketer of a broad
range of decorative accessories for the residential, commercial, institutional
and contract markets. Interior's offerings include a wide range of products
including decorative lighting, table lamps, framed art, mirrors, and decorative
tabletop accessories. Interiors customers include furniture stores and home
furnishings centers, catalogue retailers, home improvement centers, department
stores and lighting retailers.


                                       4
<PAGE>

      The Company is exploring strategic opportunities with Interiors to expand
product sales through cross-marketing arrangements and opportunities to
consolidate administrative and manufacturing functions in an effort to improve
operating efficiencies, achieve profitability and enhance shareholder value.

The Lighting Industry

      The domestic lighting industry consists of five major segments:
industrial, outdoor, commercial/institutional, residential and automotive. This
market is estimated to represent approximately $7.0 billion in annual gross
sales. Within each segment of the lighting industry there are many specialized
market segments that may utilize distinct technologies and require specialized
products. Overall sales of lighting products are affected by a variety of
factors, including: (i) general economic conditions; (ii) energy costs and
availability; (iii) governmental programs and regulations; (iv) manufacturing
capacity utilization; (v) new construction and retrofit activity; and (vi)
infrastructure expenditures.

      The Company participates in the industrial, commercial/institutional and
residential segments of the lighting industry. While there are a large number of
competitors within each segment, the Company believes that it has an established
reputation and market presence in the segments in which it presently competes.

Product Categories and New Product Offerings

      The Company designs, manufactures and markets recessed down lighting,
accent linear lighting systems, surface system coordinates and task lighting
systems. Approximately 60% of the Company's product offerings utilize halogen
lamps. These light fixtures, which are generally smaller in size, produce a
superior quality and intensity of light while not sacrificing style and detail
for size. The balance of the Company's products primarily use compact
fluorescent, incandescent and xenon lamp sources. The Company markets its
lighting products under a variety of proprietary trade names directly and
indirectly to commercial and residential end users for installation in private
residences, office buildings, hotels, restaurants, stores and other public and
private facilities. The Company believes that it has established market niches
offering performance engineered and tasks oriented products. The Company
believes that historically, approximately 80% of the Company's sales have been
made to the Specification Market and 20% to the Consumer Retail Market.

      Substantially all of the Company's product offerings are available in both
United States and European/Asian standards.

      Recessed Down Lighting. The Company's most successful product offering is
its high-end, low voltage halogen recessed down lighting product line, "Jewel
Light", featuring a complete line of die cast trims. A trim is that portion of
the light fixture that protrudes from the ceiling. As the market evolved and
expanded in this product category, a substantial market for lesser quality
(stamped versus die cast trims) with reduced price points developed. To address
this market need the Company introduced its Echo 21 line of low voltage halogen
recessed down lighting with appropriate price points. Echo 21 specifically
addresses the budget-oriented market and complements the Company's higher
quality and successful "Jewel Light" line. In 1998, the Company continued to
expand this product offering to include a number of new applications.
Additionally, in 1998 the Company acquired substantially all of the assets of
"Ortek" Lighting. Ortek Lighting designs and manufactures 


                                       5
<PAGE>

a complete line of miniature low-voltage recessed downlights. The Company
believes it currently offers the broadest low voltage down light product-line in
the industry.

      Accent Linear Lighting Systems. This product category is dominated by the
Company's Invizilite product. The Invizilite product is a continuous, flexible
light source hidden from view to provide an upward or downward lighting or
"wash" part of a wall with light. Invizilite is available utilizing low voltage
halogen, incandescent and xenon bulbs. The Company introduced its third version
of Invizilite, "Invizilite 3" that utilizes xenon lamps allowing for longer
strip lengths between transformers and increased lamp life.

      Surface System Coordinates. The Company introduced a systems approach to
surface lighting for suspension pendant applications; surface, wall and ceiling
mounted units. Surface system coordinates is a series of light module holders
with a variety of glass shapes, sizes, colors and lamp sources. The Company also
markets its surface system coordinates products under the tradenames "Optica",
"Versailles" And "Primary Colors". In 1998, the Company introduced "Spotz" a
modular lighting system featuring an array of shades, finishes, holders,
mounting possibilities, and means of support such as cord, stem and flexible
conduit.

      Task Lighting. This product category includes many of the companies most
successful product offerings including under-cabinet lighting marketed under the
trade names Sure Task I and II, picture lights marketed under the trade name
"Pictura" and die-cast hockey puck styles light systems marketed under the trade
name "Apollo". In 1998, the Company introduced "Counter Attack" a low or line
voltage halogen dimmable under cabinet light, addressing mounting market demands
for a lower priced, utilitarian, under-counter lighting product. Additionally,
in 1998 the Company introduced a series of architectural accent table lamps
under the trade name "Tableau", offering a high design look at affordable price
points.

Manufacturing, Assembly, Design and Tooling

      Substantially all of the Company's products are designed and tooled by the
Company and are either manufactured directly by the Company or specifically on
its behalf. Approximately 50% of the Company's products are manufactured or
assembled in the United States either at its principal facility in Valencia,
California or by local subcontractors. The balance of the Company's products are
manufactured primarily in China, Taiwan and Europe. Additionally, much of the
glass used in the Company's lighting fixtures is made in Venice, Italy, and
Vianne, France.

      The Company owns all of the designs with respect to its line of products,
most of which were created by employees of the Company on a work-for-hire basis;
i.e., the design automatically becomes the property of the Company upon
creation. In addition, the Company also from time to time will retain outside
independent contractors to design lighting products. The Company owns such
designs and pays the independent designers on a consulting or royalty basis.

Sales and Marketing

      Historically, substantially all of the Company's products were sold in the
United States and Canada. During 1996 and 1997, the Company entered into a
number of joint venture and cooperative agreements outside the United States to
expand its sales and marketing effort worldwide. In 1998, the Company
experienced a significant decrease in foreign sales. In 1998 and 1997, 0.7% and
5.8%, respectively, of the Company's sales were to entities outside of the
United States and Canada.


                                       6
<PAGE>

      Domestically, the Company has over 1,700 customer accounts and is
primarily dependent on independent manufacturer's sales agencies and independent
lighting and electrical distributors in selling its products to retail and
commercial end users. Five distributors or affiliated group of distributors,
individually account for more than 5% of the Company's sales.

      The Company maintains business relationships with approximately 40
manufacturer's representatives who are often agencies employing a number of
sales personnel. The Company also has joint ventures and distribution agreements
in China, Hong Kong, Singapore, The Philippines, Vietnam, and Taiwan. With
respect to sale of the Company's products to the Consumer Retail Market, a
distributor generally places an order for the Company's product through a
manufacturer's sales agency, who forwards the order to the Company.
Alternatively, sales of the Company's products to the Specification Market are
typically initiated by a specifier (i.e., an architect, lighting designer,
interior designer or electrical engineer) notifying a contractor who contacts
either a distributor or manufacturer's sales agency to place the specifier's
order with the Company. All products sold to the Consumer Retail Market and the
Specification Market are typically sold on net 30 day terms.

      None of the Company's present manufacturer's sales agencies are exclusive
to the Company and any of them could terminate their relationship with the
Company at any time for any reason. In addition, manufacturer's sales agencies
typically represent and distribute competing products. The Company's ability to
expand its operations will depend in significant part on its ability to attract
and retain qualified manufacturer's sales agencies experienced in the sale of
lighting products. The Company presently employs one full-time sales personnel
to supervise its manufacturer's sales agencies.

Product Warranties: Customer Service and Support

      All of the Company's products are warranted by the Company from the date
of shipment. The Company's warranty provides that in the event its products as
delivered are defective, the Company has the right, in its sole discretion, to
either repair or replace the product; provided, however that in the event that
the Company's transformers or ballasts are not used in connection with the
product, the warranty is null and void.

      The Company presently has five 800 telephone numbers and employs eight
full-time individuals solely in connection with providing customer and technical
support for its customers, distributors and sales manufacturer's agencies. Such
personnel are available five days per week from 7:00 a.m. to 5:00 p.m. Pacific
Coast Time to respond to calls and provide assistance.

Research and Development

      The Company expended approximately $121,000 and $9,000 on research and
development during the years ended December 31, 1997 and 1998, respectively. The
Company subcontracts its research and development on an as needed basis.

Product Liability

      The manufacture and sale of the Company's products subjects the Company to
the risk of product liability claims. The costs of defending or settling such
claims could have a material adverse effect on the Company, even if the Company
ultimately were to prevail. Although the Company 


                                       7
<PAGE>

presently has an aggregate of $12 million in product liability insurance, there
can be no assurance that such insurance can be maintained at an acceptable cost
to the Company or that any damages assessed against the Company will not exceed
its coverage.

Competition

      The lighting industry is intensely competitive with respect to price,
design, quality and reliability. Among its competitors are numerous
international, national and regional manufacturers some of which have equivalent
products including Cooper Industries, Inc., Genlyte Group, Juno Lighting, Inc.,
Hubbell, Inc., Thomas Industries and Lithonia. The majority of the Company's
competitors are well established, and have substantially greater financial,
managerial, technical, marketing and other resources than the Company. The
Company competes based upon price, quality, design and its brand-name
recognition.

Underwriter's Laboratories and Other Testing Laboratories Listing

      Substantially all of the Company's products are approved by Underwriters
Laboratories Inc. ("UL"), Electrical Testing Laboratories ("ETL"), or the
Canadian Standards Association ("CSA"). UL and CSA are not-for-profit
independent organizations and ETL is a for profit independent organization, all
of which test a wide variety of consumer and commercial products for compliance
with recognized U.S. and Canadian safety standards. All of the Company's
products that are UL or ETL listed in the United States are CSA approved in
Canada. Listing of a product by UL, ETL and CSA indicates that samples of that
product have been tested according to the respective country's safety standards
and found to be reasonably free from foreseeable risk of fire and electric shock
related hazards. In the United States, the laws of certain states prohibit the
sale of products that have not obtained and maintained a UL or ETL listing. Even
in those states where the Company is not required by law to obtain UL or ETL
listing, if it is unable to obtain and maintain such UL or ETL listing on an
ongoing basis, its ability to market and sell the product may be adversely
affected.

Intellectual Property Rights

      Substantially all of the Company's products and their design, as well as
the design of the tooling used in the manufacturing of the Company's products,
are proprietary to the Company. Further, the Company has also sought to
establish certain proprietary rights with respect to the marks under which its
products and product categories are marketed. Consequently, the business of the
Company is dependent, to a certain extent, on the Company's ability to establish
and protect its intellectual property rights with respect to its products,
designs and trademarks and trade names under which it does business. The Company
currently has numerous patents and several patents pending. The Company
considers its patents to be a valuable asset. However, the Company believes that
its business is not dependent to any material extent upon any particular patent
or group of patents. The Company believes that its business is dependent upon
the technical and engineering skills of its employees, product differentiation,
reliability and performance, and on customer support and marketing.

Employees

      As of March 31, 1999 the Company had 40 full-time employees. The Company
believes that its relations with its employees are good. None of the Company's
employees are represented by a collective bargaining agreement.


                                       8
<PAGE>

                               Recent Developments

Sale of Equity to Interiors, Inc.

      On March 2, 1999, the Company, consummated the sale of 1,191,752
newly-issued shares of its common stock, par value $0.01 per share (the
"Shares"), to Interiors, Inc., a Delaware corporation ("Interiors"),
representing approximately 51.0% of the outstanding shares of the Company's
Common Stock as of such date (giving effect to such issuance), pursuant to the
terms of a Stock Purchase Agreement, dated as of March 1, 1999 (the "Purchase
Agreement"), by and between the Company and Interiors. Pursuant to the terms of
the Purchase Agreement, Interiors acquired the Shares from the Company in
exchange for (i) the cancellation of approximately $1.4 million of outstanding
Company convertible debt and related obligations and (ii) $600,000 in cash.

      As contemplated by the Purchase Agreement, the Company and Interiors
entered into a Standstill Agreement, dated as of March 1, 1999 (the "Standstill
Agreement"), at the time of the purchase of the Shares. Pursuant to the
Standstill Agreement, during a standstill period ending July 28, 1999 (which
period is subject to early termination in certain circumstances set forth in the
Standstill Agreement), Interiors and its "affiliates" (as such term is defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), executive
officers and directors (collectively, its "Affiliates") are prohibited from
acquiring additional shares of the Company's Common Stock (except by way of
stock dividends or other distributions or offerings made available to holders of
the Company's Common Stock generally) if the effect of such acquisition would be
to increase the number of shares of the Company's Common Stock then owned by
Interiors and its Affiliates to greater than 51.0% of the shares of the
Company's Common Stock then outstanding. Notwithstanding the foregoing, in the
event Interiors shall own less than 51.0% of the outstanding shares of the
Company's Common Stock during the standstill period, Interiors may acquire
additional shares of the Company's Common Stock during the standstill period,
provided that the effect of such acquisition would not increase the number of
shares of the Company's Common Stock then owned by Interiors and its Affiliates
to greater than 51.0% of the shares of the Company's Common Stock then
outstanding.

      In addition, pursuant to the terms of the Purchase Agreement, the Board of
Directors of the Company voted to expand the Board of Directors of the Company
from four to seven members and appointed four persons to fill vacancies on the
Board of Directors of the Company resulting from such expansion and the
resignation of one director, three of which persons were designated by the
Company and one of which was mutually designated by the Company and Interiors.
The Purchase Agreement provides that for a period of not less than 150 days
after the closing date of the transaction, six of the seven members of the Board
of Directors of the Company shall consist of (a) three persons designated by the
pre-closing members of the Board of Directors of the Company, and (b) three
persons designated by Interiors. From the date on which the Board of Directors
holds its first meeting following the closing of the transactions contemplated
by the Purchase Agreement to the date which is 150 days following such closing
date, the seventh member of the Board of Directors shall be the person
previously mutually agreed upon by the Company's designees and Interior's
designees.

      The terms of the Purchase Agreement and the Standstill Agreement, and the
transactions contemplated thereby, were determined as a result of arm's-length
negotiations between representatives of both the Company and Interior.


                                       9
<PAGE>

Management Changes

      In April 1999, the Company entered into a settlement and release agreement
(the "Agreement") with Mark Allen, the former Chief Executive Officer and a
Director of the Company following his resignation in March 1999 as Chief
Executive Officer. Pursuant to the Agreement, the Company has agreed to pay to
Mr. Allen the sum of $205,000 in full satisfaction of the Company's obligations
pursuant to Mr. Allen's employment agreement. The Company and Mr. Allen have
agreed to exchange general releases in connection with the transaction. In
connection with the payment to Mr. Allen, Interiors has agreed to loan to the
Company $205,000 pursuant to a convertible note bearing interest at 6.75% per
annum due April 30, 2001. The note will be convertible on or after July 28,
1999, at the election of the holder, into shares of Company Common Stock at a
conversion price of $0.345 per share (the closing price of the Common Stock on
the thirty trading days preceding March 22, 1999, the date the transaction was
approved).

      On March 9, 1999, at a Special Meeting of the Board of Directors, the
Board terminated Scott Searle as President of the Company. On March 12, 1999,
the Company received a letter from Mr. Searle's counsel alleging certain claims
against the Company in the amount of $377,600 in connection with his affiliation
with the Company. The Company believes the claims are without merit and/or that
it has defenses to such allegations and intends to defend itself vigorously.


                                       10
<PAGE>

                  CERTAIN FACTORS THAT MAY AFFECT FUTURE GROWTH

      The following factors may affect the future growth and profitability of
the Company and should be considered by any prospective purchaser of the
Company's securities:

Accumulated Deficit; Operating Losses; Independent Auditor's Comments 
Regarding Company's Ability to Continue as a Going Concern

      At December 31, 1998, the Company had an accumulated deficit of
$14,220,000. The Company also experienced approximately $2,934,000 and
$2,160,000, of operating losses, respectively, during the years ended December
31, 1997 and 1998. These losses and accumulated deficit was generated primarily
from lower than expected dollar sales on all product lines, expenditures
relating to the start up of overseas offices and operations, and the write-down
of certain assets. Further, the report of the Company's independent auditors in
connection with the Company's financial statements at December 31, 1998 contains
an explanatory paragraph as to Company's ability to continue as a going concern.
Among the factors cited by the independent auditors as to the Company's ability
to continue as a going concern are that the Company has suffered recurring
losses from operations. The Company is exploring opportunities to enhance
product sales and reduce operating expenses in an effort to achieve
profitability. However, no assurance can be given that the Company will not
continue to incur operating losses or that the Company will be able to continue
operations as a going concern.

Limited Liquidity

      At December 31, 1998 and March 31, 1999 the Company had working capital of
approximately $876,000 and $862,000. The Company continues to experience severe
working capital shortages which materially impair its ability to continue as a
going concern. The Company's credit facility provides for availability based
upon inventory and account receivable levels and, accordingly, the Company has
experienced limitations on the availability under this facility. If the Company
continues to experience working capital limitations it will materially impact
the Company's financial position and results of operations.

Additional Financing Requirements

      To date the Company has met its capital and operating requirements through
public sales of equity and through borrowings. Recently the Company sold
1,191,752 newly issued shares of its common stock, pursuant to which the Company
received $600,000 in cash and the cancellation of $1,400,000 in outstanding
convertible debt. (See "Recent Developments".) In the past the Company has used
convertible debt offerings primary source of funds for working capital and have
included "conversion at a discount" features which have had an adverse affect on
profit and loss. No assurance can be given that future financings will not
include similar "conversion at a discount" features. The Company's continued
operations will depend upon revenues, if any, from operations and the
availability of equity or debt financing. The Company has no commitments for
additional financing. Further, there can be no assurance that the Company will
be able to generate levels of revenues and cash flows sufficient to fund
operations or that the Company will be able to obtain additional financing on
satisfactory terms, if at all, to achieve profitable operations.


                                       11
<PAGE>

Expansion into New Markets; Need for Additional Financing

      The Company believes that a significant portion of its continued growth
and profitability is dependent upon its ability to successfully market and ship
new products for lighting markets domestically and overseas. The exploitation of
these new markets will require working capital in excess of that which the
Company has available. There can be no assurance that the Company will be able
to generate sufficient revenues from its current or proposed business operations
or raise additional moneys necessary to achieve its expansion plan.

No Certainty of New Markets or Market Acceptance of New Product Lines

      The Company has recently expanded operations worldwide, revamped its
product offerings and introduced new products for sale to the Specification and
the Consumer Retail lighting markets. Although the Company believes that its
products have been initially accepted by the Specification and the Consumer
Retail lighting markets, there can be no assurance that the Company will be able
to successfully manufacture and sell products for either or both of these
markets in sufficient quantities or at acceptable price levels to operate
profitably.

Highly Competitive Industry

      The lighting industry is intensely competitive with respect to pace,
design, quality and reliability. The majority of the Company's competitors are
substantially larger in size and have substantially greater financial,
managerial, technical, marketing and other resources than the Company.

Risk of International Operations

      The Company believes that there are material risks attendant to its
international expansion associated with the stability, both political and
economic, of any particular country. Principal among those risks are the
nationalization or privatization of any industry with which the Company does
business in that such changes tend to impact the time period in which
contractual commitments may be honored; currency crises with attendant exchange
rate turbulence; and sudden changes in interest rates which generally effect the
ability of customers to finance their purchases. There is no assurance that such
factors will not have a material adverse effect on the Company's business in the
future.

Risk of Foreign Vendors

      A significant portion of the products are manufactured by foreign vendors.
The Company believes that there are material risks attendant to its dependence
on foreign vendors associated with the stability, both political and economic,
of any particular country. Principal among those risks are the time period in
which contractual commitments may be honored; currency crises with attendant
exchange rate turbulence; and sudden changes in interest rates which generally
effect international financial transactions. To date the Company has not
experienced any material impact as a result of its reliance on foreign vendors,
however, there is no assurance that such factors will not have a material effect
on the Company's business in the future.

Dependence on Third Party Manufacturer's Sales Agencies and Distributors

      The Company is primarily dependent on independent manufacturer's sales
agencies and independent lighting and electrical distributors in selling the
Company's products to retail and 


                                       12
<PAGE>

commercial end users. Five distributors, or affiliated group of distributors,
independently accounted for more than 5% of the Company's sales during 1998.
Independent sales representative agencies accounted for approximately 34% of the
Company's sales during 1998. The Company is required to sustain relationships
with approximately 50 manufacturer's sales agencies worldwide, none of which are
exclusive to the Company and any of whom could terminate their relationship with
the Company at any time. In addition, manufacturer's sales agencies and
distributors typically represent and distribute competing products. In the event
the Company were to lose a substantial number of its independent distributors or
manufacturer's sales agencies, it could have a material adverse effect on the
Company if the Company were unable to find suitable, experienced replacements.
The Company's ability to expand its operations will depend in significant part
on its ability to attract and retain relationships with qualified manufacturers
sales agencies and independent distributors experienced in the sale of lighting
products. There is no assurance that the Company will be able to engage and
retain qualified manufacturer's sales agencies and independent distributors
capable of successfully marketing the Company's products.

Management Transition

      During 1999, the Company has installed a new management team to direct the
day-to-day operations of the Company's business. In addition, in March 1999, the
Board of Directors of the Company was reconstituted and is currently comprised
of a majority of new Directors. The lack of continuity in management of the
Company could adversely impact the Company's relationship with its vendors,
customers and employees. No assurance can be given that the new management team
and reconstituted Board will be successful in implementing the Company's
business plan and achieving profitability.

Intellectual Property Rights

      All of the Company's products and their design, as well as the design of
the tooling used in the manufacturing of the Company's products, are proprietary
to the Company. Further, the Company has sought to establish certain proprietary
rights with respect to the marks under which its products and product lines are
marketed. Consequently, the business of the Company is dependent, to a certain
extent, on the Company's ability to establish and protect its intellectual
property rights with respect to its products, designs and trademarks and trade
names under which it does business. The Company's failure or inability to
establish appropriate copyrights, trademarks and patents or to adequately
protect any of its intellectual property rights may have a material effect on
the Company.

Product Obsolescence

      The lighting industry has experienced the introduction of numerous new
products in recent years, particularly in the fields of energy efficient and
decorative lighting. As a consequence, the demand for lighting products is
affected by both energy conservation concerns and changing consumer preferences.
Accordingly, there can be no assurance that any or all of the Company's product
lines will be accepted by consumers, or if accepted, that they will not become
obsolete or out of style. In the event that the marketplace does not accept a
significant portion of the Company's products, the Company's sales could be
adversely affected.


                                       13
<PAGE>

Underwriter's Laboratories and Other Testing Laboratories Listing

      Substantially all of the Company's products are approved by Underwriter's
Laboratories Inc. ("UL"), Electrical Testing Laboratories ("ETL"), or the
Canadian Standards Association ("CSA"). These organizations test a wide variety
of consumer and commercial products for compliance with United States and
Canadian recognized safety standards. In the United States, the laws of certain
states prohibit the sale of products that have not obtained and maintained a UL
or ETL listing. Even in those states where the Company is not required by law to
obtain UL or ETL listing, if it is unable to obtain and maintain such UL or ETL
listing on an ongoing basis, its ability to market and sell its products may be
adversely affected.

Product Liability

      The manufacture and sale of the Company's products subjects the Company to
the risk of product liability claims. The costs of defending or settling such
claims could have a material adverse effect on the Company, even if the Company
ultimately were to prevail. Although the Company presently has product liability
insurance, there can be no assurance that such insurance can be maintained at an
acceptable cost to the Company or that any damages assessed against the Company
will not exceed its coverage.

Control by Principal Stockholders

      In March 1999, Interiors acquired 51.0% of the outstanding shares of the
Company's Common Stock. In conjunction therewith, Messrs. Munn, Belenski and
Schwartz, designees of Interiors, were appointed to the Board of Directors of
the Company. As a result of its ownership interest, Interiors may be able to
elect all of the Company's directors and generally control the affairs of the
Company.

Limited Trading Market

      During 1998, the Company's Common Stock was delisted from the Nasdaq
SmallCap market for failure to comply with the minimum listing maintenance
requirements. As a result thereof, the Company's Common Stock is traded on the
OTC Bulletin Board of the National Association of Security Dealers, Inc. (the
"OTC Bulletin Board") and there is a limited trading market in the Common Stock
and limited information is available on trading in the Company's Common Stock.
No assurances can be given that the Company's Common Stock will continue to
trade on the OTC Bulletin Board or that an orderly trading market will be
maintained for the Company's common stock.

"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
Common Stock.

      The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) of less than $5.00 per share, subject to certain exceptions. The
Company's Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such Common Stock to persons other than
established customers and accredited investors (generally, those persons with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
the Common Stock and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the 


                                       14
<PAGE>

rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Common Stock and accordingly
the market for the Company's Common Stock.

ITEM 2. PROPERTIES

      The Company occupies 52,663 square feet of space at its principal
executive offices and manufacturing facility located at 27615 Avenue Hopkins,
Valencia, California 91355, for $22,645 per month pursuant to a lease that
expires in May 2003. The Company is in discussions and negotiations with the
landlord of the property and has informed employees that it may be closing its
principal executive offices and manufacturing facility located in Valencia,
California. The Company is currently exploring alternative locations for its
operations, including the possibility of sharing space and certain
administrative functions with Interiors. The Company also leases a showroom at
the Dallas Trade Market, in Dallas, Texas occupying 855 square feet for $1,592
per month.

ITEM 3. LITIGATION

      The Company is not a party to any legal proceedings the result of which,
in the opinion of management, will have a material adverse effect on the
Company.

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

      None


                                       15
<PAGE>

                                     PART II

ITEM  5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
         MATTERS

      The following table sets forth, for the periods indicated, the high and
low closing prices in the over-the-counter market for the common stock of the
Company, as reported by the National Association of Securities Dealers. On
September 3, 1998, the Company effected a one-for-thirteen reverse split of its
Common Stock, and the information set forth below gives effect thereto for all
periods subsequent to September 3, 1998. Through September 22, 1998 the
Company's stock was traded on the NASDAQ Small Cap Market under the symbol
"CSLX." Effective September 23, 1998 the common stock was delisted from the
SmallCap Market for failure to meet the $1.00 minimum bid price listing
maintenance standard and has since traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol "CSLX". At
March 31, 1999 the Company believes that it had approximately 850 beneficial
holders of its common stock. The over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

                   Calendar 1997       High        Low
                   -------------       ----        ---

                First Quarter        1 9/16       11/16
                Second Quarter        15/16         1/2
                Third Quarter           5/8         1/4
                Fourth Quarter         7/16         1/8

                   Calendar 1998       High         Low
                   -------------       ----         ---

                First Quarter           1/4         1/8
                Second Quarter        15/16         1/8
                Third Quarter           1/8         1/8
                Fourth Quarter         5/16        2/32

Dividend Policy

      The Company has not paid any cash dividends in the past and has no present
intention of doing so in the immediate future. The Company's Board of Directors
intends for the foreseeable future to retain any earnings to finance the future
growth of the Company. Additionally, certain of the Company's credit agreements
with its lending institution prohibit the payment of dividends during their
term.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
        OF OPERATIONS

Cautionary Statement Identifying Important Factors That Could Cause The
Company's Actual Results to Differ From Those Projected in Forward Looking
Statements.

      Pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, readers of this report are advised that this
document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and


                                       16
<PAGE>

uncertainties, which could cause actual results to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to (i) projections of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital structure
and other financial items, (ii) statements of the plans and objectives of the
Company or its management or Board of Directors, including product offerings,
and market opportunities, or estimates or predictions of actions by customers,
suppliers, competitors or regulatory authorities, (iii) statements of future
economic performance, and (iv) statements of assumptions underlying other
statements and statements about the Company and its business.

      This report also identifies important factors which could cause actual
results to differ materially from those indicated by the forward looking
statements. These risks and uncertainties include the factors discussed under
the heading "Certain Factors That May Affect Future Growth" beginning at page 11
of this report.

      The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto appearing elsewhere in
this report.

Overview:

      The Company's strategy during 1998 was to exploit new markets for its
product offering, increase the size and scope of its product offerings and
maximize the efficiencies of its manufacturing and distribution network on a
worldwide basis. During 1996 and 1997 the Company expanded its operations to
include a presence in Asia, Europe and Africa. In 1997 and 1998, due in part to
the Asian fiscal crisis, the Company reduced its exposure overseas by closing
its Shanghai office and by focusing on domestic sales. In March 1999, the
Company closed its Singapore office. The Company may incur certain liabilities
as a result of the Singapore office closure which management does not believe
will be material to the Company's business and financial results. During the
year ended December 31, 1998 the Company developed four new product offerings,
"Spotz", "Tableau", "Primary Colors" and "Counter Attack" for release in the
third and fourth quarters of 1998 and in the first quarter of 1999. The Company
also purchased substantially all of the assets of "Ortek" Lighting thereby
expanding its low-voltage downlight product offerings. Additionally, management
continued to implement cost cutting procedures pertaining to general, selling
and administrative expenses. The Company is currently evaluating its core
product categories. For the year ended December 31, 1998 the Company realized
benefits from its cost cutting measures. As a result of these cost cutting
measures and continued management of its accounts receivables, accounts payables
and inventory for the year ended December 31, 1998 the Company generated cash
flow from operations of $619,000.

      The Company currently has overseas joint venture or distribution
agreements in China, Hong Kong, Singapore, The Philippines, and Taiwan.
Management believes that its recent entry into these markets together with the
current fiscal crisis in Asia has adversely impacted its ability to penetrate
many of these markets. As such, during 1998 the Company refocused its sales
effort into the domestic marketplace.

      In March 1999, the Company completed a private placement of 1,191,752
shares of its common stock, representing 51% of its outstanding shares, to
Interiors, Inc. ("Interiors") for total consideration of approximately $2
million. In conjunction with the transaction, Interiors and the Company entered
into a Standstill Agreement and the Company expanded its Board of Directors to
seven members, including three designees of Interiors.


                                       17
<PAGE>

      The Company is exploring strategic opportunities with Interiors to expand
product sales through cross-marketing arrangements and opportunities to
consolidate administrative and manufacturing functions in an effort to improve
operating efficiencies, achieve profitability and enhance shareholder value.

Going Concern Consideration

      The Company has suffered recurring losses from operations and had an
accumulated deficit at December 31, 1998 of $14,220,000 that raises substantial
doubt about the Company's ability to continue as a going concern. In addition,
the Company's common stock has been delisted from the Nasdaq SmallCap Market for
failure to meet the minimum bid price maintenance listing requirement. The
Company's common stock is currently traded on the OTC Bulletin Board of the
National Association of Securities Dealers, Inc. under the symbol CSLX. As a
consequence, it may be more difficult to sell or obtain quotations as to prices
of the Company's common stock, which may adversely impact the liquidity thereof.
In the past, the Company's cash flow requirements have been met by the
generation of capital through public sales of equity borrowings and the issuance
of convertible debentures issued with "conversion at a discount" features,
although no such securities were issued during 1998. No assurance can be given
that this source of financing will continue to be available and demand for the
Company's equity instruments will be sufficient to meet its capital needs. If
the Company is unable to generate profits and unable to continue to obtain
financing for its working capital requirements, it may have to curtail its
business sharply or cease business altogether.

      Management has evaluated its current operations and has focused the
Company's efforts and developed plans to generate operating income and continue
the Company's operations through fiscal 1999. Management's plan includes the
following:

o     The sale of a 51% interest in the Company to Interiors Inc., as a
      strategic investor (See "Recent Developments").
o     To reduce general and administrative expense, including management
      expense.
o     To evaluate its current product offerings and distribution arrangements.
o     To negotiate with vendors for reductions in unpaid balances and more
      favorable credit terms.
o     To evaluate its physical plant requirements.
o     To explore cross-marketing opportunities with Interiors and synergistic
      savings through the consolidation of certain administrative and
      manufacturing functions with Interiors.

      If, however, the Company experiences losses from operations, it may be
required to raise additional working capital to support its operations. Further,
there can be no assurance that the Company will be able to generate sufficient
cash flows from operations, or raise additional funding to support the Company's
operations, the failure of which would have a material effect on the Company's
operations and financial position.

Sales

      Sales decreased by $774,000 from $13,160,000 for the year ended December
31, 1997, to $12,386,000 for the year ended December 31, 1998. The decrease in
sales for the year ended December 31, 1998 as compared to December 31, 1997 is
attributable to the Company's decrease in foreign sales primarily in Asia as
well as the Company's decision to discontinue its business with certain large
retailers.


                                       18
<PAGE>

Gross Profit

      Gross profit decreased by $1,242,000 from $5,172,000 for the year ended
December 31, 1997, to $3,930,000 for the year ended December 31, 1998. Gross
profit as a percentage of net sales decreased 7.6% from 39.3% for the year ended
December 31, 1997, to 31.7% for the year ended December 31, 1998. The decrease
in the Company's gross profit as a percentage of sales and value for the year
ended December 31, 1998 versus the year ended December 31, 1997 is due decreased
sales volume and the write down of approximately $830,000 related to the
Company's inventory. Specifically, the Company reserved for its energy efficient
lighting products for approximately $600,000. In addition, the Company
reevaluated the process by which it allocates overhead to inventory and as such
reduced its overhead pool by approximately $230,000.

Selling Expense

      Selling expenses decreased by $822,000, or 5% from $3,503,000 for the year
ended December 31, 1997, to $2,681,000 for the year ended December 31, 1998.
Selling expenses as a percentage of net sales for the years ended December 31,
1997 and 1998 were 26.7% and 21.6%, respectively.

      The decrease in selling expense for the year ended December 31, 1998
compared to the year ended December 31, 1997, is attributable to reduced
expenditures for the Company's foreign operations, primarily in China, and the
reduction of certain sales and advertising personnel and associated payroll and
benefit expense.

General and Administrative Expenses

      General and administrative expenses decreased by $133,000 or 4.0% from
$3,303,000 for the year ended December 31, 1997, to $3,170,060 for the year
ended December 31, 1998. The decrease in general and administrative expenses for
the year ended December 31, 1998 as compared to December 31, 1997 is
attributable to lower travel costs, reductions in staffing and associated costs.
These decreases were offset by increases in reserves for notes receivable -
related parties, foreign accounts receivable and penalties relating to common
stock registration requirements in connection with the company's outstanding
subordinated debt.

Other Income and (Expense)

      Other income and expense as a percentage of net sales for the year ended
December 31, 1997 and 1998 were 9.9% and 3.6%, respectively. For the year ended
December 31, 1997 and 1998 other income and expense were $1,300,000 and $439,000
respectively. The decrease in other income and expense for the year ended
December 31, 1998 as compared to the same prior period is primarily due to the
Company, in 1997, recognizing $899,000 of interest expense from the issuance of
6% subordinated notes convertible into common stock at a 25% discount. In
accordance with generally accepted accounting principles the Company was
required to account for the discount conversion feature of these subordinated
convertible notes as interest expense. The Company has not issued any
convertible subordinated notes in fiscal 1998. In addition, in 1998 the Company
has reduced its bank borrowings by approximately $636,000, which has in turn
lowered its interest expense.


                                       19
<PAGE>

Provision for Income Taxes

      The provision for income taxes for the year ended December 31, 1997 and
1998 reflects the minimum state tax due.

Liquidity and Capital Resources

      During 1998, the Company provided cash flow from operations of $619,000.
The net cash provided from operations is primarily attributable to the Company's
earnings before depreciation, amortization, non-cash interest, and other
non-cash expenses. In addition, the Company has aggressively pursued the
collections of its accounts receivable and managed its accounts payable and
accrued expenses.

      During 1998, net cash used in investing activities of $70,000, consists
primarily of costs relating to the purchase of equipment and costs relating to
secure trademarks and patents.

      During 1998, net cash used in financing activities of $636,000, consisted
primarily of mandatory payments on the Company's bank line of credit.

      On December 31, 1998 the Company had an outstanding balance of $1,902,000
on its bank line of credit and term loan. The line of credit and term loan bear
interest at 11.25 percent and 11.5 percent, respectively. On October 22, 1998
the Company renewed its line of credit and term loan with its bank through
October 2000. The terms of the Company's refinanced bank line call for a maximum
borrowing of $4,000,000 primarily based on a formula consisting of a percentage
of accounts receivable and inventory. The Company was also successful in
reducing its interest rate associated with this facility to prime plus 2.5
percent.

      The Company's common stock has been delisted from the Nasdaq SmallCap
Market for failure to meet the minimum bid price maintenance listing
requirement. The Company's common stock is currently traded on the OTC Bulletin
Board of the National Association of Securities Dealers, Inc. under the symbol
CSLX. As a consequence, it may be more difficult to sell or obtain quotations as
to prices of the Company's common stock, which may adversely impact the
liquidity thereof.

      With the implementation of its 1999 fiscal plan, the Company believes that
it will be able to generate sufficient cash flows to support its operations
through fiscal 1999. If, however, the Company experiences continued losses from
operations, it may be required to raise additional working capital to support
its operations. Further, there can be no assurance that the Company will be able
to generate sufficient cash flows from operations, or raise additional funding
to support the Company's operations, the failure of which would have a material
adverse effect on the Company's operations and financial position.

      The Company believes that inflation has not had a material impact on it
operations.

Year 2000 Compliance

      The Company is on schedule with a project that addresses the Year 2000
(Y2K) issue of computer systems and other equipment with embedded chips or
processors not being able to properly recognize and process date-sensitive
information after December 31, 1999. Many systems use only two digits rather
than four to define the year and these systems will not be able to distinguish
between the year 1900 and the year 2000. This may lead to disruptions in the
operations of business and 


                                       20
<PAGE>

governmental entities resulting from miscalculations or system failures. The
project is designed to ensure the compliance of all of the Company's
applications, operating systems and hardware platforms, and to address the
compliance of key business partners. Key business partners are those customers
and vendors that have a material impact on the Company's operations. All phases
of the project should by completed by mid 1999 thus minimizing the impact of the
Y2K problem on the Company's operations.

      The total estimated cost of the required modifications to become Y2K
compliant should not be material to the Company's financial position.

      Failure to make all internal business systems Y2K compliant could result
in an interruption in, or a failure of, some of the Company's business
activities or operations. Y2K disruptions in customer operations could result in
one or more customers missing scheduled payments which could impact the
Company's cash flow. Y2K disruptions in the operations of key vendors could
impact the Company's ability to obtain components necessary for the manufacture
of products and fulfillment of contractual obligations. If one or more of these
situations occur, the Company's results of operations, liquidity and financial
condition could be materially and adversely affected. The Company is unable to
determine the readiness of its key business partners at this time and is
therefore unable to determine whether the consequences of Y2K failures will have
a material impact on the Company's results of operations, liquidity or financial
condition. The Y2K project is expected to significantly reduce the Company's
level of uncertainty about the Y2K problem and reduce the possibility of
significant interruptions of normal business operations.

New Authoritative Pronouncements

      SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not expect
adoption of SFAS No. 133 to have a material effect, if any, on its financial
position or results of operations.

      SFAS 134 "Accounting or Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by Mortgage Banking Enterprises,"
is effective for financial statements with the fiscal quarter beginning after
December 15, 1998. The Company does not expect adoption of SFAS No. 134 to have
a material effect, if any, on its financial position or results of operations.

      SFAS No. 135, "Recission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years beginning
February 1999. This statement is not applicable to the Company.

ITEM 7. FINANCIAL STATEMENTS

      Reference is made to the Financial Statements, the report thereon and
notes thereto, commencing on page F-1 to this report.


                                       21
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

      On January 18, 1999, Arthur Andersen LLP was dismissed by the Company as
its independent accountants and Singer, Lewak, Greenbaum & Goldstein, LLP was
retained by the Company as its independent accountants. The report of Arthur
Andersen LLP included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 included a "going concern qualification".

      The decision to change accountants was approved by the Audit Committee of
the Board of Directors as well as the Board of Directors of the Company. During
the Company's two most recent fiscal years and the interim period preceding
dismissal, there were no disagreements between the Company and Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. Arthur Andersen LLP has advised the
Company by letter dated January 19, 1999 that it agrees with the foregoing
statement.


                                       22
<PAGE>

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

Name                      Age                       Position
----                      ---                       --------

Max Munn                  55             Chairman of the Board; Chief
                                         Operating Officer; Executive Vice
                                         President

Mark Allen                37             Director

Richard Belenski          44             Director

Sylvan Gerber             71             Director

David Schwartz            31             Director

Michael Smith             44             Director

      All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors and, subject to existing employment
agreements, serve at the discretion of the Board.

Background of Executive Officers and Directors

      Max Munn has been Chairman of the Board, Chief Operating Officer and
Executive Vice President of the Company since March 1999. Since March 1994, Mr.
Munn has been a director of Interiors, Inc., a designer, manufacturer and
marketer of home furnishing accessories ("Interiors"), and Chairman of the
Board, President and intermittently Chief Financial Officer of Interiors since
September 1995. Since June 1996, Mr. Munn has been Chairman of the Board of
Decor Group, Inc.

      Mark Allen was the Vice President/Finance of the Company from October 1994
until March 1995. In March 1995, Mr. Allen was appointed Chief Operating
Officer, Executive Vice President/Finance and was elected to the Board of
Directors. In December 1997, Mr. Allen was appointed Chief Executive Officer. In
March 1999, Mr. Allen resigned as an officer of the Company. From 1984 to 1994,
Mr. Allen was employed at various investment banking firms. Mr. Allen received a
B.S. in finance from Syracuse University.


                                       23
<PAGE>

      Richard Belenski has been a director of the Company since March 1999.
Since October 1998, Mr. Belenski has been the Chief Financial Officer and Vice
President of Finance and Administration of Interiors. Mr. Belenski served as
Vice President and Chief Financial Officer of Petals, Inc., which was acquired
by Interiors in March 1999, from December 1996 until October 1998. From October
1986 until April 1996, Mr. Belenski served as Vice President of Finance and
Chief Financial Officer for the operating divisions of the J. Crew Group, Inc.

      Sylvan Gerber has been a director of the Company since inception. Mr.
Gerber had been the Chief Executive Officer of the Company from February 1995 to
December 1997, President from inception to August 1, 1995. From 1974 to 1986,
Mr. Gerber was the President and Chief Executive Officer of Capri Lighting
Manufacturing Company ("Capri Lighting") which Mr. Gerber co-founded in 1974.
Capri Lighting was sold in 1984 to Thomas Industries, Inc., although Mr. Gerber
continued to manage the day-to-day operations of Capri Lighting until 1986.

      David Schwartz has been a director of the Company since March 1999. Since
February 1999, Mr. Schwartz has been the General Counsel, Secretary and
Executive Vice President of Interiors. Mr. Schwartz served as Corporate Counsel
and Assistant Secretary of Complete Management, Inc. from April 1997 until
January 1999. From May 1994 until March 1997, Mr. Schwartz was an associate at
the law firm Skadden, Aprs, Slate, Meagher & Flom, LLP.

      Michael S. Smith became a director of the Company in 1995 and is a member
of the Audit and Compensation Committee. Mr. Smith is the President and CEO of
Micropub Systems International, Inc., a brewery system manufacturer, and is a
principal of International Capital & Management, Inc., a merchant banking firm.
From October 1992 through January 1997, Mr. Smith was the Managing Director of
corporate Finance of H.J. Meyers & Co. an investment banking firm and was
general counsel of such firm from May 1991 through May 1995. Mr. Smith serves on
the Board of Directors of Infinite Group, Inc. Mr. Smith was associated with the
law firm of Harter, Secrest & Emery from 1987 until 1991. Mr. Smith received a
B.A. from Cornell University and a J.D. magna cum laude from Cornell University
School of Law.


                                       24
<PAGE>

ITEM 10 EXECUTIVE COMPENSATION

      The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer, and
the other two most highly paid executive officers of the Company who earned more
than $100,000 during the fiscal years ended December 31, 1998 (the "Named
Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                               Long Term Compensation
                                                                     ---------------------------------------
                             Annual Compensation                            Awards                Payout
                             -------------------                     ---------------------------------------
         (a)                       (b)      (c)     (d)     (e)         (f)         (g)        (h)       (i)
                                  Year                     Other                                         All
                                 Ending                    Annual    Restricted                         Other
                                December   Annual          Compen-      Stock     Options/     LTIP    Compen
Name and Principal Position        31,     Salary   Bonus  sation      Awards(1)    SARS     Payouts   sation
-------------------------------------------------------------------------------------------------------------
<S>                               <C>     <C>          <C>    <C>     <C>          <C>          <C>      <C>
Mark Allen (1)                    1998    $165,000                    $32,500      $16,000
  Chief Executive Officer,        1997     159,000     --     --       32,500           --      --       --
    Vice President--Finance       1996     180,125     --     --       32,500           --      --       --

Scott Searle (2)                  1998    $193,000                    $16,250
  President                       1997     247,515     --     --       16,250           --      --       --
                                  1996     299,030     --     --       16,250           --      --       --
</TABLE>

----------------------
(1)   Mr. Allen and the Company entered into a Settlement Agreement in April
      1999 pursuant to which he resigned as Chief Executive Officer of the
      Company, effective March 8, 1999.

(2)   Mr. Searle was terminated as President of the Company in March 1998.

Employment Agreements

      In October 1999, the Company entered into an employment agreement with
Mark Allen, for a term expiring in September 2003, providing for his services as
Chief Executive Officer. Mr. Allen's agreement provided for a base salary of
$175,000 and for the payment to him upon a "change of control" (as defined in
the agreement) of an amount equal to the greater of $200,000 or the compensation
remaining due to him for the balance of the employment term.

      The employment agreement contained strict confidentiality provisions and
non-competition covenants. Compensation was subject to annual increases and
bonuses at the discretion of the Board of Directors. The agreements also
entitled Mr. Allen to participate in any employee benefit plans, such as group
life, health, hospitalization and life insurance offered by the Company. Under
the agreement, Mr. Allen's employment would terminate upon his death or
disability and could be terminated by the Company for "cause," which is defined
as, among other things, an act of fraud or embezzlement, material gross
misconduct, conviction of a felony involving moral turpitude and breach of the
employee's non-competition or confidentiality covenants.

      In April 1999, following Mr. Allen's resignation as Chief Executive
Officer in March 1999, the Company and Mr. Allen entered into an agreement
terminating his employment agreement, and related matters, in consideration for
a payment of $205,000.


                                       25
<PAGE>

Option Grants in Fiscal Year 1998 and Fiscal Year-End Option Values

                        Option Grants in Last Fiscal Year

                              Individual Grants

                                         Percent of 
                          Number of         Total
                            Shares     Options/Granted
                          Underlying    to Employees
                           Options        in Fiscal       Exercise    Expiration
Name                       Granted          Year           Price         Date
----                    -------------   --------------    --------     ---------

Mark Allen                 110,000          100%           $0.15       12/31/01

                    Aggregate 1998 Year End Option Values

                            Number of Shares of
                               Common Stock
                                Underlying              Value of Unexercised
                           Unexercised Options         In-The Money Options at
                             At 12/31/98 (#)               12/31/98 (1) ($)
Name                   Exercisable/Unexercisable      Exercisable/Unexercisable
----                   -------------------------      ------------------------- 

Mark Allen                  55,000/110,000 (2)                    0/0

----------
(1)   Based on the December 31, 1998 Nasdaq closing price of $0.0781.

(2)   In connection with Mr. Allen's resignation in March 1999, options covering
      55,000 shares expired unvested.

Directors' Compensation

      The Company pays a fee of $500 per meeting to outside Directors as
compensation for their services rendered as directors. Each Director is
reimbursed by the Company for expenses incurred in attending Director's meetings
and meetings of its committees.


                                       26
<PAGE>

ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table, together with the accompanying footnotes, sets forth
information, as of March 31, 1999 regarding stock ownership of all persons known
by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock, all directors, each of the Named Executive Officers and directors
and executive officers of the Company as a group:

                                                   Number of
                                                     Shares
                                                  Beneficially      Percent of
Name of Beneficial Owner                              Owned          Ownership
------------------------                         ---------------   -------------
Directors and Officers

Max Munn                                                   --(1)          --

Mark Allen                                             78,346(2)         3.2%

Richard Belenski                                           --(1)          --

Sylvan Gerber                                         100,000            4.2%

David Schwartz                                             --(1)          --

Michael Smith                                          11,540(3)           *

Directors and Officers as
   a Group (7 persons)                                189,886(4)         7.8%

5% Stockholders

Interiors, Inc. (5)
   320 Washington Street
   Mt. Vernon, NY 10553                             1,191,752           51.0%

-----------
*     less than 1%

(1)   Excludes 1,191,752 shares held of record and beneficially by Interiors,
      Inc. ("Interiors") as to which beneficial ownership is disclaimed. Each of
      Messrs. Munn, Belenski and Schwartz is a director of Interiors. In
      addition, Mr. Munn's wife beneficially owns shares in Interiors
      representing 9.6% of its outstanding shares and 34.7% of its voting power
      as of March 2, 1999.

(2)   Includes 57,462 shares subject to currently exercisable options and
      warrants.

(3)   Includes (i) 5,770 shares subject to currently exercisable warrants
      including 1,923 held by Mr. Smith as custodian for his minor nieces, and
      (ii) 1,923 shares held by Mr. Smith as custodian for the same minors. Mr.
      Smith disclaims beneficial ownership of the securities held for the
      benefit of such minors.

(4)   Includes 63,232 shares subject to currently exercisable warrants.

(5)   The information with respect to this stockholder was derived from the
      stockholder's Schedule 13D as filed with the Securities and Exchange
      Commission.


                                       27
<PAGE>

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on review of the copies of such forms
furnished to the Company, or written representations that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with.

ITEM 12 CERTAIN TRANSACTIONS

      During 1998, the Company paid approximately $160,000 to Gilderman, Johnson
& Co., LLP, an accounting firm, as fees for accounting services performed. Scott
Gilderman, a former director of the Company, is a partner in such firm.

      On March 2, 1999, the Company, consummated the sale of 1,191,752
newly-issued shares of its common stock, par value $0.01 per share (the
"Shares"), to Interiors, Inc., a Delaware corporation ("Interiors"),
representing approximately 51.0% of the outstanding shares of the Company's
Common Stock as of such date (giving effect to such issuance), pursuant to the
terms of a Stock Purchase Agreement, dated as of March 1, 1999 (the "Purchase
Agreement"), by and between the Company and Interiors. Pursuant to the terms of
the Purchase Agreement, Interiors acquired the Shares from the Company in
exchange for (i) the cancellation of approximately $1.4 million of outstanding
Company convertible debt and related obligations and (ii) $600,000 in cash.

      As contemplated by the Purchase Agreement, the Company and Interiors
entered into a Standstill Agreement, dated as of March 1, 1999 (the "Standstill
Agreement"), at the time of the purchase of the Shares. Pursuant to the
Standstill Agreement, during a standstill period ending July 28, 1999 (which
period is subject to early termination in certain circumstances set forth in the
Standstill Agreement), Interiors and its "affiliates" (as such term is defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended), executive
officers and directors (collectively, its "Affiliates") are prohibited from
acquiring additional shares of the Company's Common Stock (except by way of
stock dividends or other distributions or offerings made available to holders of
the Company's Common Stock generally) if the effect of such acquisition would be
to increase the number of shares of the Company's Common Stock then owned by
Interiors and its Affiliates to greater than 51.0% of the shares of the
Company's Common Stock then outstanding. Notwithstanding the foregoing, in the
event Interiors shall own less than 51.0% of the outstanding shares of the
Company's Common Stock during the standstill period, Interiors may acquire
additional shares of the Company's Common Stock during the standstill period,
provided that the effect of such acquisition would not increase the number of
shares of the Company's Common Stock then owned by Interiors and its Affiliates
to greater than 51.0% of the shares of the Company's Common Stock then
outstanding.

      In addition, pursuant to the terms of the Purchase Agreement, the Board of
Directors of the Company voted to expand the Board of Directors of the Company
from four to seven members and appointed four persons to fill vacancies on the
Board of Directors of the Company resulting from such expansion and the
resignation of one director, three of which persons were designated by the
Company and one of which was mutually designated by the Company and Interiors.
The Purchase Agreement provides that for a period of not less than 150 days
after the closing date of the transaction, six of the seven members of the Board
of Directors of the Company shall consist of (a) three persons designated by the
pre-closing members of the Board of Directors of the Company, and (b) three
persons 


                                       28
<PAGE>

designated by Interiors. From the date on which the Board of Directors holds its
first meeting following the closing of the transactions contemplated by the
Purchase Agreement to the date which is 150 days following such closing date,
the seventh member of the Board of Directors shall be the person previously
mutually agreed upon by the Company's designees and Interior's designees.

      The terms of the Purchase Agreement and the Standstill Agreement, and the
transactions contemplated thereby, were determined as a result of arm's-length
negotiations between representatives of both the Company and Interior.

      In April 1999, the Company entered into a settlement and release agreement
(the "Agreement") with Mark Allen, the former Chief Executive Officer and
Director of the Company. Pursuant to the Agreement, the Company has agreed to
pay to Mr. Allen the sum of $205,000 in full satisfaction of the Company's
obligations pursuant to Mr. Allen's employment agreement. The Company and Mr.
Allen exchanged general releases in connection with the transaction. In
connection with the payment to Mr. Allen, Interiors has agreed to loan to the
Company $205,000 pursuant to a convertible note bearing interest at 6.75% per
annum due April 30, 2001. The note will be convertible, on or after July 28,
1999 at the election of the holder into shares of Company Common Stock of a
conversion price of $0.345 per share (the average closing bid price of the
Common Stock on the thirty trading days preceding March 22, 1999, the date the
transaction was approved).

ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

      3.1   Certificate of Incorporation of the Company.(1)

      3.2   Certificate of Amendment of Certificate of Incorporation of the
            Company.(3)

      3.3   By-Laws of the Company.(1)

      4.1   Form of Securities Purchase Agreement, Convertible Note and
            Registration Rights Agreement entered into in February 1997.(3)

      4.2   Form of Securities Purchase Agreement, Convertible Note and
            Registration Rights Agreement entered into in August 1997.(4)

      10.3  Employment Agreement by and between the Company and Mark Allen. *

      10.5  1994 Stock Option Plan.(1)

      10.6  1995 Stock Option Plan.(2)

      10.7  1994 Non-Employee Director Stock Option Plan.(1)

      10.8  Lease for Company's principal offices located at 27615 Avenue
            Hopkins, Valencia, California 91355.(1)

      10.9  Stock Escrow Agreement by and among the Company, H. J. Meyers & Co.,
            Inc. (formerly Thomas James Associates, Inc.) and certain principal
            stockholders of the 


                                       29
<PAGE>

            Company.(1)

      10.10 Loan and Security Agreement between Coast Business Credit and the
            Company dated October 9, 1996.(3)

      10.11 Indemnification Agreement between the Company and its officers and
            directors.(1)

      10.12 Form of Restricted Stock Grant Agreements between the Company and
            Sylvan Gerber, Scott Searle and Mark Allen.(2)

      10.13 Form of Promissory Note and Warrant Agreement issues to Sylvan
            Gerber(2).

      10.14 Stock Purchase Agreement, dated as of March 1, 1999, by and between
            Interiors, Inc. and CSL Lighting Manufacturing, Inc.(6)

      10.15 Standstill Agreement, dated as of March 1, 1999, by and between
            Interiors, Inc. and CSL Lighting Manufacturing, Inc.(6)

      10.16 Asset Purchase Agreement dated October 1, 1998 between the Company
            and Ortek Corporation *

      10.17 Employment Agreement dated October 1, 1998 between the Company and
            Miron Skegin*

      10.18 Form of Note to be issued to Interiors, Inc.*

      10.19 Form of Settlement Agreement and Release between the Company and
            Mark Allan*

      23.1  Consent of Arthur Andersen LLP*

      27.1  Financial Data Schedule. *

----------
      *     Filed herewith

      (1)   Filed as an Exhibit to the Company's Registration Statement on Form
            SB-2 (Registration No 33-72678) and incorporated herein by
            reference.

      (2)   Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
            for the fiscal year ended December 31, 1995

      (3)   Filed as an Exhibit to the Company's Annual Report on form 10-KSB
            for the fiscal year ended December 31, 1996.

      (4)   Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
            for the fiscal year ended December 31, 1996.

      (5)   Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
            for the fiscal year ended December 31, 1997.

      (6)   Filed as an Exhibit to the Company's Current Report on (6) Form 8-K
            dated March 2, 1999.


                                       30
<PAGE>

      (b) Reports on Form 8-K

            (i)   January 18, 1999 -- Change in Independent Public Accountants

            (ii)  March 4, 1999 -- Sale of Common Stock to Interiors, Inc.

Financial Statements

      The financial statements listed in the accompanying index to financial
statements on page F-1 are filed as part of this Report.


                                       31
<PAGE>

                                  SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned hereunto duly authorized on the 13th day of April
1999.

CSL LIGHTING MANUFACTURING, INC.


By: /s/ Max Munn
    -------------------------------------
    Max Munn
    Chairman and Chief Operating Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on the 14th day of April 1999.

Signatures


/s/ Max Munn
------------------------------------            Chairman of the Board,
Max Munn                                        Director and Acting Principal 
                                                Financial and Accounting Officer

/s/ Mark Allen
------------------------------------            Director
Mark Allen

/s/ Richard Belenski
------------------------------------            Director
Richard Belenski

/s/ Sylvan Gerber
------------------------------------            Director
Sylvan Gerber

/s/ David Schwartz
------------------------------------            Director
David Schwartz

/s/ Michael Smith
------------------------------------            Director
Michael Smith


                                       32
<PAGE>

                        CSL LIGHTING MANUFACTURING, INC.
                                 AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                           DECEMBER 31, 1998 AND 1997

<PAGE>

                                              CSL LIGHTING MANUFACTURING, INC.
                                                                AND SUBSIDIARY
                                                                      CONTENTS
                                                             December 31, 1998

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


                                                                         Page

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         1

FINANCIAL STATEMENTS

   Consolidated Balance Sheets                                           2 - 3

   Consolidated Statements of Operations                                   4

   Consolidated Statements of Stockholders' Equity                         5

   Consolidated Statements of Cash Flows                                 6 - 7

   Notes to Consolidated Financial Statements                            8 - 24

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
CSL Lighting Manufacturing, Inc. and subsidiary

We have audited the accompanying consolidated balance sheet of CSL Lighting
Manufacturing, Inc. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year 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 audit. 

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 CSL Lighting
Manufacturing, Inc. and subsidiary as of December 31, 1998, and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the two years ended
December 31, 1998 and 1997, the Company incurred a net loss of $2,361,000 and
$2,935,000, respectively. In addition, the Company's accumulated deficit was
$14,220,000 as of December 31, 1998. Recovery of the Company's assets is
dependent upon future events, the outcome of which is indeterminable. In
addition, successful completion of the Company's transition, ultimately, to the
attainment of profitable operations is dependent upon obtaining adequate
financing to fulfill its development activities and achieving a level of sales
adequate to support the Company's cost structure. These factors, among others,
as discussed in Note 2 to the financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.


SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
March 5, 1999
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                                     CONSOLIDATED BALANCE SHEETS
                                                                    December 31,

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

                                    ASSETS

                                                            1998         1997
                                                         ----------   ----------
Current assets
   Cash                                                  $   65,000   $  152,000
   Accounts receivable, less allowance for doubtful
     accounts of $298,000 and $194,000                    1,310,000    2,228,000
   Notes receivable - related parties                            --      107,000
   Inventories                                            3,492,000    4,346,000
   Prepaid and other current assets                         218,000      471,000
                                                         ----------   ----------

         Total current assets                             5,085,000    7,304,000

Property and equipment, net of accumulated deprecation    1,004,000    1,365,000
Cost in excess of net book value of assets purchased,
  net of accumulated amortization                           215,000           --
Other assets                                                117,000      116,000
                                                         ----------   ----------
            Total assets                                 $6,421,000   $8,785,000
                                                         ==========   ==========

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


                                       2
<PAGE>

                                               CSL LIGHTING MANUFACTURING, INC.
                                                                 AND SUBSIDIARY
                                         CONSOLIDATED BALANCE SHEETS (Continued)
                                                                    December 31,

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                         1998           1997
                                                    ------------   ------------
Current liabilities
   Accounts payable                                 $  1,260,000   $  1,038,000
   Current portion of long-term debt                   1,929,000      2,483,000
   Notes payable - related parties                       268,000         78,000
   Accrued expenses and other current liabilities        833,000        712,000
                                                    ------------   ------------

      Total current liabilities                        4,290,000      4,311,000

Long-term debt, net of current portion                    92,000        119,000
Subordinated convertible debt                          1,452,000      1,525,000
Deferred rent                                            179,000        206,000

         Total liabilities                             6,013,000      6,161,000
                                                    ------------   ------------

Commitments and contingencies

Stockholders' equity
   Preferred stock, $0.01 par value
      1,000,000 shares authorized
      none issued and outstanding                             --             --
   Common stock, $0.01 par value
      30,000,000 shares authorized
      1,140,000 and 1,042,000 shares issued and
      outstanding                                         12,000         10,000
   Treasury stock at cost
      515,000 shares held                             (1,218,000)    (1,218,000)
   Additional paid-in capital                         16,279,000     16,201,000
   Deferred compensation                                (445,000)      (510,000)
   Accumulated deficit                               (14,220,000)   (11,859,000)
                                                    ------------   ------------

         Total stockholders' equity                      408,000      2,624,000
                                                    ------------   ------------

         Total liabilities and stockholders' 
           equity                                   $  6,421,000   $  8,785,000
                                                    ============   ============

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


                                       3
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                                For the Years Ended December 31,

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

                                                        1998            1997
                                                   ------------    ------------

Net sales                                          $ 12,386,000    $ 13,160,000

Cost of sales                                         8,456,000       7,988,000
                                                   ------------    ------------

Gross profit                                          3,930,000       5,172,000
                                                   ------------    ------------

Operating expenses
   Selling expenses                                   2,681,000       3,503,000
   General and administrative expenses                3,170,000       3,303,000
                                                   ------------    ------------

      Total operating expenses                        5,851,000       6,806,000
                                                   ------------    ------------

Loss from operations                                 (1,921,000)     (1,634,000)
                                                   ------------    ------------

Other income (expense)
   Interest income                                        1,000           3,000
   Interest expense                                    (304,000)       (302,000)
   Interest expense on subordinated debt               (136,000)       (947,000)
   Loss on disposition of property and equipment             --         (62,000)
   Other income, net                                         --           8,000
                                                   ------------    ------------

      Total other income (expense)                     (439,000)     (1,300,000)
                                                   ------------    ------------

Loss before provision for income taxes               (2,360,000)     (2,934,000)

Provision for income taxes                                1,000           1,000
                                                   ------------    ------------

Net loss                                           $ (2,361,000)   $ (2,935,000)
                                                   ============    ============

Basic loss per share                               $      (2.18)   $      (3.45)
                                                   ============    ============

Diluted loss per share                             $      (2.18)   $      (3.45)
                                                   ============    ============

Weighted-average shares outstanding                   1,082,000         851,000
                                                   ============    ============

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


                                       4
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                For the Years Ended December 31,

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

<TABLE>
<CAPTION>
                                               Common Stock                   Additional
                                            ------------------    Treasury      Paid-in     Deferred       Accumulated
                                             Shares     Amount      Stock       Capital    Compensation      Deficit        Total
                                                                                                        
<S>                                         <C>       <C>       <C>           <C>           <C>          <C>            <C>        
Balance, December 31, 1996                  482,000   $ 4,000   $(1,218,000)  $11,781,000   $(575,000)   $ (8,924,000)  $ 1,068,000
                                                                                                        
Issuance of common stock for conversion                                                                 
   of debentures                            560,000     6,000                   3,620,000                                 3,626,000
                                                                                                        
Deferred compensation amortization                                                             65,000                        65,000
                                                                                                        
Fixed conversion discount interest                                                                      
   expense                                                                        800,000                                   800,000
                                                                                                        
Net loss                                         --        --            --                                (2,935,000)   (2,935,000)
                                                                                                         ------------   -----------
Balance, December 31, 1997                1,042,000    10,000    (1,218,000)   16,201,000    (510,000)    (11,859,000)    2,624,000
                                                                                                        
Issuance of common stock for conversion                                                                 
   of debentures and accrued interest        98,000     2,000                      78,000                                    80,000
                                                                                                        
Deferred compensation amortization                                                             65,000                        65,000
                                                                                                        
Net loss                                         --        --            --                                (2,361,000)   (2,361,000)
                                                                                                         ------------   -----------
      Balance, December 31, 1998          1,140,000   $12,000   $(1,218,000)  $16,279,000   $(445,000)   $(14,220,000)  $   408,000
                                          =========   =======   ===========   ===========   =========    ============   ===========
</TABLE>

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


                                       5
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                For the Years Ended December 31,

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

                                                          1998          1997
                                                      -----------   -----------
Cash flows from operating activities
  Net loss                                            $(2,361,000)  $(2,935,000)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities
     Provision for loss on notes receivable -
       related parties                                    108,000            --
     Depreciation and amortization                        434,000       600,000
     Loss on disposition of property and equipment             --        62,000
     Deferred compensation                                 65,000        65,000
     Interest expense associated with fixed
       conversion discounts and additional
       stock bonus                                             --       800,000
  (Increase) decrease in
   Accounts receivable                                    918,000      (617,000)
   Inventories                                            854,000      (174,000)
   Other                                                  285,000       283,000
  Increase (decrease) in
   Accounts payable                                       222,000      (309,000)
   Accrued expenses                                       121,000       (65,000)
   Deferred rent                                          (27,000)      (14,000)
                                                      -----------   -----------

        Net cash provided by (used in)
          operating activities                            619,000    (2,304,000)
                                                      -----------   -----------

Cash flows from investing activities
  Purchases of property and equipment                     (70,000)     (152,000)
                                                      -----------   -----------

        Net cash used in investing activities             (70,000)     (152,000)
                                                      -----------   -----------

Cash flows from financing activities
  Notes payable to related parties                        (60,000)     (100,000)
  Additions to debt                                            --       688,000
  Repayment of debt                                      (576,000)      (85,000)
  Net proceeds from issuance of subordinated
    convertible debt                                           --     2,125,000
  Costs relating to the registration of shares
    underlying the subordinated convertible notes              --       (27,000)
                                                      -----------   -----------

        Net cash provided by (used in) financing
          activities                                     (636,000)    2,601,000
                                                      -----------   -----------

         Net increase (decrease) in cash during year      (87,000)      145,000

Cash, beginning of year                                   152,000         7,000
                                                      -----------   -----------

Cash, end of year                                     $    65,000   $   152,000
                                                      ===========   ===========

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


                                       6
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                                For the Years Ended December 31,

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

                                                          1998          1997
                                                      -----------   ----------
Supplemental disclosures of cash flow information

  Interest paid                                       $   327,000   $  342,000
                                                      ===========   ==========

  Income taxes paid                                   $     1,000   $    1,000
                                                      ===========   ==========

Supplemental schedule of non-cash investing and financing activities

During the year ended December 31, 1998, the Company entered into the following
non-cash transactions:

o     $73,000 of convertible notes payable and accrued interest of $5,000 were
      converted into 98,000 shares of common stock.

o     The Company purchased the net assets of ORTEK, Inc. in exchange for a
      promissory note of $250,000.

During the year ended December 31, 1997, the Company entered into the following
non-cash transactions:

o     The Company converted $3,853,000 of debt to equity.
o     The Company acquired $44,000 worth of property and equipment through the
      issuance of debt.
o     $164,000 of other long-term assets were reclassified to property and
      equipment.
o     $198,000 of accrued interest was written off in connection with the
      conversion of subordinated convertible notes to common stock.
o     $398,000 of issuance costs were written off in connection with the
      conversion of subordinated convertible notes to common stock.

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


                                       7
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 1 - NATURE OF BUSINESS

      CSL Lighting Manufacturing, Inc., a Delaware corporation, and subsidiary
      (collectively, the "Company"), designs, manufacturers, and markets a line
      of lighting fixtures utilizing both "low voltage" and standard "line
      voltage" halogen light sources for sale directly and indirectly to
      commercial and residential end users.

NOTE 2 - GOING CONCERN MATTERS

      The accompanying consolidated financial statements have been prepared on a
      going concern basis which contemplates the realization of assets and the
      satisfaction of liabilities in the normal course of business. As shown in
      the financial statements, during the two years ended December 31, 1998 and
      1997, the Company incurred losses of $2,361,000 and $2,935,000,
      respectively. In addition, the Company's cash flow requirements have been
      met by the generation of capital through convertible debentures issued
      with below market conversion features. No assurance can be given that this
      source of financing will continue to be available to the Company and
      demand for the Company's equity instruments will be sufficient to meet its
      capital needs. If the Company is unable to generate profits and unable to
      continue to obtain financing for its working capital requirements, it may
      have to curtail its business sharply or cease business altogether.

      The financial statements do not include any adjustments relating to the
      recoverability and classification of liabilities that might be necessary
      should the Company be unable to continue as a going concern. The Company's
      continuation as a going concern is dependent upon its ability to generate
      sufficient cash flow to meet its obligations on a timely basis, to retain
      its current financing, to obtain additional financing, and ultimately to
      attain profitability.

      Management has evaluated its current operations, and it has focused the
      Company's efforts and developed plans to generate operating income to
      continue the Company's operations through the year ended December 31,
      1999. Management's plans include the following:

      o     The sale of a 51% interest in the Company to Interiors, Inc., as a
            strategic investor.
      o     To reduce general and administrative expense, including management
            expense.
      o     To evaluate its current product offerings and distribution
            arrangements.
      o     To negotiate with vendors for reductions in unpaid balances and more
            favorable credit terms.
      o     To evaluate its physical plant requirements.
      o     To explore cross-marketing opportunities with Interiors, Inc. and
            synergistic savings through the consolidation of certain
            administrative and manufacturing functions with Interiors, Inc.


                                       8
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 2 - GOING CONCERN MATTERS (Continued)

      If, however, the Company experiences losses from operations, it may be
      required to raise additional working capital to support its operations.
      Further, there can be no assurance that the Company will be able to
      generate sufficient cash flows from operations or raise additional funding
      to support the Company's operations, the failure of which would have a
      material effect on the Company's operations and financial position.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Basis of Presentation

      As described in Note 2, the accompanying financial statements have been
      prepared in conformity with generally accepted accounting principles which
      contemplate the continuation of the Company as a going concern. The
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts, or amounts
      and classification of liabilities that might be necessary should the
      Company be unable to continue in existence.

      Principles of Consolidation

      The consolidated financial statements include the accounts of CSL Lighting
      Manufacturing, Inc. and its wholly-owned subsidiary. All significant
      intercompany transactions and balances have been eliminated in
      consolidation.

      Estimates

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

      Concentrations

      The Company sells its products to electrical distributors, lighting
      showrooms, and retailers primarily throughout the United States and
      Canada. The Company does not obtain collateral to secure its accounts
      receivable, but evaluates its accounts receivable on a regular basis for
      collectability and provides for an allowance for potential credit losses
      as deemed necessary.

      Inventories

      Inventories include raw materials and finished goods and are stated at the
      lower of cost (weighted-average) or market.


                                       9
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Property and Equipment

      Property and equipment are recorded at cost. Depreciation and amortization
      are provided using the straight-line method over the estimated useful
      lives of the assets as follows:

            Computer equipment                               5 years 
            Displays and showrooms                           3 years 
            Factory machinery and equipment            2 to 15 years 
            Furniture and fixtures                     3 to 12 years 
            Office machinery and equipment              3 to 5 years 
            Vehicles                                         4 years
            Leasehold improvements                     3 to 13 years

      The Company capitalizes expenditures that materially increase asset lives
      and charges ordinary repairs and maintenance to operations as incurred.
      When assets are sold or otherwise disposed of, the cost and related
      depreciation is removed from the accounts, and any resulting gain or loss
      is included in other income (expense) in the accompanying statements of
      operations.

      Trademarks and Patents

      Costs associated with the establishment of trademarks and patents have
      been capitalized and are being amortized over ten years using the
      straight-line method.

      Deferred Rent

      The lease for the Company's facility includes certain rent relief in its
      early months and scheduled increasing monthly payments thereafter. In
      accordance with generally accepted accounting principles, the Company has
      accounted for the lease to provide for even charges to operations over the
      life of the lease.

      Stock Split

      During the year ended December 31, 1998, the Company effected a 1-for-13
      reverse stock split. All share and per share data have been retroactively
      restated to reflect the reverse split.

      Treasury Stock

      The Company accounts for its treasury stock under the cost method, whereby
      purchases of treasury stock are recorded at cost.

      Revenue Recognition

      Revenue on product sales and a provision for warranty is recognized at the
      time of shipment.


                                       10
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Fair Value of Financial Instruments

      The Company measures financial assets and liabilities in accordance with
      generally accepted accounting principles. For the Company's financial
      instruments, including cash, accounts receivable, accounts payable, and
      accrued expenses, the carrying amounts approximate fair value due to their
      short maturities. The amounts shown for notes payable also approximate
      fair value because current interest rates offered to the Company for notes
      payable of similar maturities are substantially the same.

      Stock-Based Compensation

      The Company's policy is to account for stock-based compensation in
      accordance with Statement of Financial Accounting Standards ("SFAS") No.
      123, "Accounting for Stock-Based Compensation." As allowed by SFAS No.
      123, the Company has elected to continue to measure compensation cost
      under Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
      for Stock Issued to Employees," and comply with the pro forma disclosure
      requirements of the standard.

      Net Loss per Share

      The Company accounts for loss per share in accordance with SFAS No. 128,
      "Earnings per Share." All prior periods were restated to be consistent
      with the presentation requirements of SFAS No. 128. Loss per common share
      for the years ended December 31, 1998 and 1997 are based on the
      weighted-average number of common shares outstanding. Due to the net
      losses for the years ended December 31, 1998 and 1997, stock options and
      warrants were not included as common stock equivalents as their effect
      would be anti-dilutive.

      Income Taxes

      The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
      requires the recognition of deferred tax assets and liabilities for the
      expected future tax consequences of events that have been included in the
      financial statements or tax returns. Under this method, deferred income
      taxes are recognized for the tax consequences in future years of
      differences between the tax bases of assets and liabilities and their
      financial reporting amounts at each period end based on enacted tax laws
      and statutory tax rates applicable to the periods in which the differences
      are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized. The provision for income taxes represents the tax
      payable for the period and the change during the period in deferred tax
      assets and liabilities.

      Reclassifications

      Certain amounts have been reclassified in 1997 to conform with the 1998
      presentation.


                                       11
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Comprehensive Income

      For the year ended December 31, 1998, the Company adopted SFAS No. 130,
      "Reporting Comprehensive Income." This statement establishes standards for
      reporting comprehensive income and its components in a financial
      statement. Comprehensive income as defined includes all changes in equity
      (net assets) during a period from non-owner sources. Examples of items to
      be included in comprehensive income, which are excluded from net income,
      include foreign currency translation adjustments and unrealized gains and
      losses on available-for-sale securities. Comprehensive income is not
      presented in the Company's financial statements since the Company did not
      have any of the items of comprehensive income in any period presented.

      Recently Issued Accounting Pronouncements

      SFAS No. 133, "Accounting for Derivative Instruments and Hedging
      Activities," is effective for financial statements with fiscal years
      beginning after June 15, 1999. SFAS No. 133 establishes accounting and
      reporting standards for derivative instruments, including certain
      derivative instruments embedded in other contracts, and for hedging
      activities. The Company does not expect adoption of SFAS No. 133 to have a
      material effect, if any, on its financial position or results of
      operations.

      SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
      the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
      Enterprise," is effective for financial statements with the first fiscal
      quarter beginning after December 15, 1998. The Company does not expect
      adoption of SFAS No. 134 to have a material effect, if any, on its
      financial position or results of operations.

      SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
      Corrections," is effective for financial statements with fiscal years
      beginning February 1999. This statement is not applicable to the Company.

NOTE 4 - NOTES RECEIVABLE - RELATED PARTIES

      At December 31, 1998 and 1997, the Company had notes receivable of
      $108,000 and $107,000, respectively, from two officers. The notes are
      non-interest bearing and are currently due and payable. During the year
      ended December 31, 1998, an allowance was established for the entire
      balance as the two notes are considered uncollectible.

NOTE 5 - INVENTORIES

      Inventories at December 31 consisted of the following:

                                                     1998                1997
                                                  ----------          ----------

            Raw materials                         $1,067,000          $1,042,000
            Finished goods                         2,425,000           3,304,000
                                                  ----------          ----------

               Total                              $3,492,000          $4,346,000
                                                  ==========          ==========


                                       12
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 6 - PROPERTY AND EQUIPMENT

      Property and equipment at December 31 consisted of the following:

                                                         1998            1997
                                                      ----------      ----------

            Computer equipment                        $  481,000      $  462,000
            Displays and showrooms                       709,000         695,000
            Factory machinery and equipment            1,400,000       1,371,000
            Furniture and fixtures                       181,000         181,000
            Office machinery and equipment                35,000          35,000
            Vehicles                                      16,000          16,000
            Leasehold improvements                       310,000         301,000
                                                      ----------      ----------

                                                       3,132,000       3,061,000
            Less accumulated depreciation and
               amortization                            2,128,000       1,696,000
                                                      ----------      ----------

               Total                                  $1,004,000      $1,365,000
                                                      ==========      ==========

      Depreciation and amortization expense was $434,000 and $600,000 for the
      years ended December 31, 1998 and 1997, respectively.

NOTE 7 - BUSINESS COMBINATION

      On October 31, 1998, the Company acquired substantially all of the assets
      of ORTEK, Inc., a company engaged in the business of light fixture design
      and manufacturing, in exchange for a note payable. The total acquisition
      cost was $250,000. The excess of the total acquisition cost over fair
      value of the net assets acquired of $217,000 is being amortized over 15
      years using the straight-line method. Accumulated amortization at December
      31, 1998 was $2,000. In connection with the acquisition, the Company
      entered into a four-year employment agreement with the president and sole
      shareholder of ORTEK, Inc. providing for annual compensation at the rate
      of $80,000.

      The acquisition has been accounted for as a purchase, and the results of
      operations of ORTEK, Inc. since the date of acquisition are included in
      the consolidated financial statements.


                                       13
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 7 - BUSINESS COMBINATION (Continued)

      The following are the unaudited pro forma consolidated results of
      operations for the years ended December 31, 1998 and 1997 as though ORTEK,
      Inc. had been acquired as of January 1, 1997:

                                                  1998                 1997
                                            --------------       --------------

            Net sales                       $   12,398,000       $   13,290,000
            Net loss                        $   (2,367,000)          (2,956,000)
            Loss per share                  $        (2.18)               (3.47)
            Diluted loss per share          $        (2.18)               (3.47)

      The above amounts reflect adjustments for amortization of goodwill.

NOTE 8 - CREDIT FACILITY

      In October 1998, the Company entered into a two-year extension of its
      credit facility with a finance company. The credit facility consists of a
      line of credit and an equipment term loan. The facility provides for a
      maximum borrowing of $4,000,000, based on 80% of the Company's eligible
      accounts receivable and 40% of the Company's eligible inventory (capped at
      $1,200,000). The term loan is capped at $100,000 or 80% of the liquidation
      value of the Company's eligible equipment. The interest rates of the line
      of credit and term loan are prime (7.75% at December 31, 1998 and 1997)
      plus 2.50% and prime plus 3%, respectively. As of December 31, 1998,
      $1,901,000 and $2,454,000 were outstanding under the line of credit and
      the term loan, respectively. The Company's line of credit and term loan
      are due October 31, 2000. (See Note 10)

NOTE 9 - NOTES PAYABLE - RELATED PARTIES

      Notes payable - related parties at December 31 consisted of the following:

                                                             1998         1997
                                                           --------      -------
            Unsecured note payable to the former
               Chairman of the Board, subordinate
               to the bank credit facility,
               bearing interest at 9% per annum            $ 78,000      $78,000

            Non-interest-bearing note payable to
               the former owner of the acquired
               company, dated October 1, 1998,
               with an original principal
               balance of $250,000                          190,000           --
                                                           --------      -------


                                       14
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 9 - NOTES PAYABLE - RELATED PARTIES (Continued)        1998          1997
                                                            ----          ----
                                                          $268,000      $ 78,000
Less current portion                                       268,000        78,000
                                                          --------      --------

      Long-term portion                                   $     --      $     --
                                                          ========      ========

NOTE 10 - LONG-TERM DEBT

      Long-term debt at December 31 consisted of the following:

                                                            1998         1997
                                                         ----------   ----------
            Line of credit with a finance company,
               secured by eligible accounts
               receivable and inventory, bearing
               interest at a rate of 11.25%, due in
               October 2000                              $1,875,000   $2,394,000

            Equipment term loan with a finance
               company, secured by eligible
               equipment, bearing interest
               at a rate of 11.5%, due in
               October 2000                                  27,000       61,000

            Loan payable to facility landlord,
               secured by certain leasehold
               improvements, bearing interest
               at a rate of 9.97%, principal and
               interest payable in monthly
               installments of approximately $2,000
               through May 2003                              88,000      103,000

            Capital leases                                   31,000       44,000
                                                         ----------   ----------

                                                          2,021,000    2,602,000
            Less current portion                          1,929,000    2,483,000
                                                         ----------   ----------

                  Long-term portion                      $   92,000   $  119,000
                                                         ==========   ==========


                                       15
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 10 - LONG-TERM DEBT (Continued)

      Required principal debt payments are as follows:

            Year Ending
            December 31,
            ------------

               1999                                                 $1,929,000
               2000                                                     19,000
               2001                                                      2,000
               2002                                                          -
               2003                                                     71,000
                                                                    ----------
                                                                    $2,021,000
                                                                    ==========

NOTE 11 - SUBORDINATED CONVERTIBLE DEBT

      During the year ended December 31, 1996, the Company raised capital
      through the placement of three different series of subordinated
      convertible notes, bearing interest at rates of 7%, 8%, and 12%. Each
      series is convertible into common stock, commencing 90 days after issuance
      at discounted conversion prices, based on 80%, 75%, and 75% of the average
      bid price for the five trading days preceding the conversion, for the 7%,
      8%, and 12% notes, respectively. For the 7% and 8% notes, the conversion
      price per share is limited to a maximum of $2.875 and $2.00 per share,
      respectively. In addition to the 25% discount on conversion for the 12%
      notes, there is an additional 10% stock issuance, at no cost, for each
      conversion.

      During the year ended December 31, 1997, the Company raised capital
      through the placement of three different series of subordinated
      convertible notes, bearing interest at rates of 6%, 7%, and 8%. Each
      series is convertible into common stock, commencing 90 days after issuance
      at discounted conversion prices, based on 75% of the average bid price for
      the five trading days preceding the conversion. For the 7% notes, the
      conversion price per share is limited to a maximum of $2.875 per share.

      The 12% subordinated convertible notes valued at $325,000 at December 31,
      1997 became due and payable on November 27, 1997. The debt-holder has been
      informed by the Company that the debt is subordinated to the line of
      credit and term financing with its finance company.

      The Company has recorded reserves in the amount of $200,000 relating to
      penalties due to the Company's default on Convertible obligations.


                                       16
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 11 - SUBORDINATED CONVERTIBLE DEBT (Continued)

      The terms associated with each series and the related amounts raised and
      converted during the years ended December 31, 1998 and 1997 are as
      follows:

                                Outstanding                         Outstanding
                                   as of       Raised    Converted     as of
                                December 31,   During     During    December 31,
                                    1997        1997       1997        1998
                                ----------  ----------  ----------  ----------

            7% notes (a)        $  100,000  $       --  $       --  $  100,000
            12% notes (b)          325,000          --          --     325,000
            8% notes (c)         1,100,000          --      73,000   1,027,000
                                ----------  ----------  ----------  ----------

              Total             $1,525,000  $       --  $   73,000  $1,452,000
                                ==========  ==========  ==========  ==========

            (a) 7% notes, due March 31, 2001.
            (b) 12% notes, due November 27, 1997.
            (c) 8% notes, due August 31, 1999.

      In accordance with generally accepted accounting principles, the fixed
      discount on the conversion feature of the above notes is considered to be
      interest expense and is recognized in the statement of operations during
      the period from the issuance of the debt to the time at which the debt
      becomes convertible (90 days). In addition, the 10% stock bonus upon
      conversion of the 12% debt is also deemed to be interest. In connection
      with the issuance of the above notes, the Company recorded interest
      expense in the amount of $800,000 in the accompanying statements of
      operations for the year ended December 31, 1997.

      Subsequent to December 31, 1998, certain of the outstanding convertible
      debentures and related obligations were cancelled. (See Note 19)


                                       17
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 12 - COMMITMENTS AND CONTINGENCIES

      Leases

      The Company leases its office space, manufacturing facility, showroom, and
      certain property and equipment under long-term operating leases, expiring
      through 2003. Included in property and equipment is approximately $72,000
      of equipment which is leased under non-cancelable, capital leases,
      expiring in September 2001 (see Note 10). Future minimum lease payments
      for these leases are as follows:

            Year Ending                                 Operating       Capital
            December 31,                                   Leases        Leases
            ------------                                ---------      --------

               1999                                    $  324,000      $16,000
               2000                                       296,000       13,000
               2001                                       284,000        8,000
               2002                                       322,000            -
               2003                                       134,000            -
                                                       ----------      -------

                                                       $1,360,000       37,000
                                                       ==========
            Less amount representing interest                            6,000
                                                                       -------
                                                                        31,000
            Less current portion                                        12,000
                                                                       -------
                  Long-term portion                                    $19,000
                                                                       =======

      Total rent expense under the operating leases was approximately $329,000
      and $333,000 for the years ended December 31, 1998 and 1997, respectively.

      Employment Agreements

      The Company has employment agreements with certain executive officers
      that, in addition to customary benefit and severance provisions, guarantee
      lump sum payments after a change in control of the Company, if certain
      events occur.

      On October 1, 1998, the Company entered into a four-year employment
      agreement with its Chief Executive Officer. The agreement calls for
      $175,000 per year for the term of the agreement.

      Litigation

      The Company is a defendant in various lawsuits arising out of the normal
      course of business. In the opinion of management, the outcome of these
      lawsuits will not have a material effect on the Company's financial
      position or results of operations.


                                       18
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 13 - STOCK OPTION PLAN AND WARRANTS

      The Company has four stock option plans under which the Company is
      authorized to issue incentive and non-qualified stock options to its
      directors, officers, key employees, and consultants totaling up to 58,400
      shares of common stock. At December 31, 1998, 56,900 shares are available
      for future grant under these plans. Options are generally granted at
      exercise prices not less than the fair market value on the date of grant
      and expire 10 years after the date of grant. Options granted under these
      plans are fully vested immediately upon issuance.

      The Company has granted warrants to stockholders, directors, officers,
      consultants, underwriters, and a finance company in connection with
      various transactions, including issuance of debt, extension of debt,
      private placement of common shares, consulting services, and the initial
      public offering ("IPO") of common shares. All warrants are granted at
      exercise prices not less than the fair market value on the date of grant
      and expire from two to five years after the date of grant. Warrants are
      fully exercisable immediately upon grant.

      The Company has adopted only the disclosure provisions of SFAS No. 123. It
      applies APB Opinion No. 25 and related interpretations in accounting for
      its plans and does not recognize compensation expense for its stock-based
      compensation plans other than for restricted stock and options issued to
      outside third parties. If the Company had elected to recognize
      compensation expense based upon the fair value at the grant date for
      awards under these plans consistent with the methodology prescribed by
      SFAS 123, the Company's net loss for the years ended December 31, 1998 and
      1997 would be as follows:

                                                     1998              1997
                                                -------------     -------------
            Net loss
               As reported                      $  (2,361,000)    $  (2,935,000)
               Pro forma                        $  (2,361,000)    $  (2,935,000)
            Basic and diluted loss per 
              common share
               As reported                      $       (2.18)    $       (3.45)
               Pro forma                        $       (2.18)    $       (3.45)

      As permitted by SFAS No. 123, the fair value of these options was
      estimated at the date of grant using the minimum value method with the
      following weighted-average assumptions for the year ended December 31,
      1997: dividend yield of 0%; risk-free interest rate of 5%; exercise price
      of $0.15; and expected life of five years. The weighted-average fair value
      of options granted during the year ended December 31, 1998 was $0.06 per
      share.


                                       19
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 13 - STOCK OPTION PLAN AND WARRANTS (Continued)

      A summary of the Company's stock option plans and changes in outstanding
      options for the years ended December 31 are as follows:
                                                                       Weighted-
                                                             Shares     Average
                                                              Under    Exercise
                                                             Option     Price
                                                             ------    --------

            Outstanding at December 31, 1996                 2,000      $61.75
                                                             -----

               Outstanding at December 31, 1998 and 1997     2,000      $61.75
                                                             =====

               Exercisable at December 31, 1998              2,000      
                                                             =====   

      As of December 31, 1998, all outstanding options have a remaining life of
      approximately five years, and all are currently exercisable.

      A summary of the Company's outstanding warrants and activity for the years
      ended December 31 are as follows:

                                                                       Weighted-
                                                           Shares       Average
                                                           Under       Exercise
                                                           Warrant       Price
                                                        -----------    --------

            Outstanding at December 31, 1996               101,000      $22.58
                                                        ----------

            Outstanding at December 31, 1997               101,000      $22.58
               Granted                                     110,000      $ 0.15
               Canceled                                     (7,000)     $ 1.63
                                                        ----------

                  Outstanding at December 31, 1998         204,000      $10.50
                                                        ==========            

                  Exercisable at December 31, 1998         204,000      
                                                        ==========   


                                       20
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 13 - STOCK OPTION PLAN AND WARRANTS (Continued)

      The following table summarizes information about the stock option plan and
      warrants outstanding at December 31, 1998:

                                                           Weighted-
                                                            Average
                     Stock Options    Stock Options        Remaining
     Exercise Price    Outstanding      Exercisable    Contractual Life
     --------------    -----------      -----------    ----------------
            $ 0.15        110,000           55,000          3.8 years
            $19.50          4,700            4,700          2.1 years
            $22.75         30,400           30,400          2.0 years
            $26.00         55,000           55,000          2.3 years
            $39.00          3,900            3,900          2.7 years
                          -------          -------
                          204,000          204,000
                          =======          =======

NOTE 14 - STOCK ISSUED TO OFFICERS AS COMPENSATION

      On November 1, 1995, 30,770 shares of stock were granted to certain
      officers for services performed and to be performed over a ten-year
      period. These shares will vest ratably over the same ten-year period. The
      market price of the Company's common stock was $1.625 on the date of
      grant, giving rise to $650,000 of deferred compensation. For each of the
      years ended December 31, 1998 and 1997, the Company has recognized $65,000
      of compensation expense. The remaining unamortized balance is recorded as
      deferred compensation to be recognized as the stock vests over ten years.


                                       21
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 15 - INCOME TAXES

      Significant components of the Company's deferred tax assets and
      liabilities for federal and state income taxes as of December 31, 1998 and
      1997 consisted of the following:

                                                           1998          1997
                                                        ----------    ----------
            Deferred tax asset
               Allowance for doubtful accounts          $  118,000    $   77,000
               Inventory valuation                         636,000       394,000
               Uniform inventory capitalization            111,000        80,000
               Accrued warranty expense                     41,000        39,000
               Deferred rent                                71,000        82,000
               Federal net operating loss
                 carryforwards                           3,603,000     3,214,000
               Other, net                                  607,000       530,000
                                                        ----------    ----------

                                                         5,187,000     4,416,000
            Valuation allowance                          5,187,000     4,416,000
                                                        ----------    ----------

                  Net deferred tax asset                $       --    $       --
                                                        ==========    ==========

      As of December 31, 1998, the Company had a federal net operating loss
      carryforward of approximately $11,645,000, expiring through 2013.

NOTE 16 - EMPLOYEE BENEFIT PLAN

      The Company has a profit sharing plan established in accordance with
      Section 401(k) of the Employee Retirement Income Security Act of 1974 as
      amended. The plan covers substantially all eligible employees. Employee
      contributions to the plan are elective, and matching contributions by the
      employer are optional. The Company incurred $12,000 and $10,000 in
      contribution expense for the years ended December 31, 1998 and 1997,
      respectively.

NOTE 17 - RELATED PARTY TRANSACTIONS

      During the year ended December 31, 1998, the Company granted 110,000 stock
      options to an officer/stockholder of the Company.

      During the years ended December 31, 1998 and 1997, a director of the
      Company performed professional services valued at $78,000 and $101,000,
      respectively.


                                       22
<PAGE>

                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 18 - YEAR 2000 ISSUE

      The Company is conducting a comprehensive review of its computer systems
      to identify the systems that could be affected by the Year 2000 Issue and
      is developing an implementation plan to resolve the Issue.

      The Issue is whether computer systems will properly recognize
      date-sensitive information when the year changes to 2000. Systems that do
      not properly recognize such information could generate erroneous data or
      cause a system to fail. The Company is dependent on computer processing in
      the conduct of its business activities.

      Based on the review of the computer systems, management does not believe
      the cost of implementation will be material to the Company's financial
      position and results of operations. In addition, the Company has made
      various inquiries of its supply chain vendors and has been assured that
      they are Year 2000 Compliant.

NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED)

      Sale of Equity

      On March 2, 1999, the Company consummated the sale of 1,191,752
      newly-issued shares (the "Shares") of its common stock, par value $0.01
      per share (the "common stock"), to Interiors, Inc., a Delaware corporation
      ("Interiors"), representing approximately 51% of the outstanding shares of
      the Company's common stock, Pursuant to the terms of the Purchase
      Agreement, Interiors acquired the Shares from the Company in exchange for
      (i) the cancellation of approximately $1,400,000 of outstanding Company
      convertible debt and related obligations and (ii) $600,000 in cash.

      As contemplated by the Purchase Agreement, the Company and Interiors
      entered into a Standstill Agreement, dated as of March 1, 1999 (the
      "Standstill Agreement"). Pursuant to the Standstill Agreement, during a
      standstill period ending July 28, 1999 (which period is subject to early
      termination in certain circumstances set forth in the Standstill
      Agreement), Interiors and its "affiliates" (as such term is defined in
      Rule 12b-2 under the Securities Exchange Act of 1934, as amended),
      executive officers, and directors (collectively, its "Affiliates") are
      prohibited from acquiring additional shares of the Company's common stock
      (except generally by way of stock dividends or other distributions or
      offerings made available to holders of the Company's common stock) if the
      affect of such acquisition would be to increase the number of shares of
      the Company's common stock then owned by Interiors and its Affiliates to
      greater than 51% of the shares of the Company's common stock then
      outstanding.


                                       23
<PAGE>


                                                CSL LIGHTING MANUFACTURING, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 1998

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

NOTE 19 - SUBSEQUENT EVENTS (UNAUDITED) (Continued)

      Sale of Equity (Continued)

      Notwithstanding the foregoing, in the event Interiors shall own less than
      51% of the outstanding shares of the Company's common stock during the
      standstill period, Interiors may acquire additional shares of the
      Company's common stock during the standstill period, provided that the
      effect of such acquisition would not increase the number of shares of the
      Company's common stock then owned by Interiors and its Affiliates to
      greater than 51% of the shares of the Company's common stock then
      outstanding.

      In addition, pursuant to the terms of the Purchase Agreement, the Board of
      Directors of the Company voted to expand the Board from four to seven
      members and appointed four persons to fill vacancies on the Board
      resulting from such expansion and the resignation of one director, three
      of which persons were designated by the Company and one of which was
      mutually designated by the Company and Interiors. The Purchase Agreement
      provides that for a period of not less than 150 days after the closing
      date of the transaction, six of the seven members of the Board of
      Directors of the Company shall consist of (a) three persons designated by
      the pre-closing members of the Board and (b) three persons designated by
      Interiors. From the date on which the Board of Directors holds its first
      meeting following the closing of the transactions contemplated by the
      Purchase Agreement to the date which is 150 days following such closing
      date, the seventh member of the Board of Directors shall be the person
      previously mutually agreed upon by the Company's designees and Interior's
      designees.

      The terms of the Purchase Agreement and the Standstill Agreement, and the
      transactions contemplated thereby, were determined as a result of
      arm's-length negotiations between representatives of both the Company and
      Interiors.

      Termination of President

      On March 9, 1999, at a special meeting of the Board of Directors, the
      Board terminated the President of the Company. On March 12, 1999, the
      Company received a letter from the former President's counsel alleging
      certain claims against the Company in the amount of $377,600 in connection
      with his affiliation with the Company. The Company believes the claims are
      without merit and/or that it has defenses to such allegations and intends
      to defend itself vigorously.

      Settlement with Chief Executive Officer

      In April 1999, the Company entered into a settlement and release agreement
      (the "Agreement") with the former Chief Executive Officer ("CEO") and a
      Director of the Company following his resignation in March 1999 as CEO.
      Pursuant to the Agreement, the Company has agreed to pay to the former CEO
      the sum of $205,000 in full satisfaction of the Company's obligations
      pursuant to his employment agreement. The Company and the former CEO have
      agreed to exchange general releases in connection with the transaction. In
      connection with the payment to the former CEO, Interiors has agreed to
      loan to the Company $205,000 pursuant to a convertible note bearing
      interest at 6.75% per annum due April 30, 2001. The note will be
      convertible on or after July 28, 1999, at the election of the holder, into
      shares of the Company's Common Stock at a conversion price of $0.345 per
      share, the closing price of the common stock on the thirty trading days
      preceding March 22, 1999, the date the transaction was approved.


                                       24