SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                    FORM 10-Q

(Mark one)

|X|   Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
      of 1934

For the quarterly period ended March 31, 2001

|_|   Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from __________ to __________

                         Commission file number 0-24352
                                                -------

                                 INTERIORS, INC.
                                 ---------------
             (Exact Name of Registrant as Specified in Its Charter)

          Delaware                                               13-3590047
          --------                                               ----------
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

               320 Washington Street, Mount Vernon, New York 10553
               ---------------------------------------------------
                    (Address of Principal Executive Offices)

                                 (914) 665-5400
                                 --------------
                (Issuer's Telephone Number, Including Area Code)

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 |_|

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 17, 2001, the
registrant had 58,453,474 and 2,455,000 outstanding shares of Class A Common
Stock and Class B Common Stock, respectively.

Transitional Small Business Disclosure Format (check one) Yes |_| No |X|

<PAGE>

                                 INTERIORS, INC.

                                Table Of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements                                              Pages
                                                                         -------

        Consolidated Balance Sheets as of March 31, 2001 and June 30,
          2000 .........................................................     1

        Consolidated Statements of Operations for the Three Months
          Ended March 31, 2001 and 2000 ................................     2

        Consolidated Statements of Operations for the Nine Months
          Ended March 31, 2001 and 2000 ................................     3

        Consolidated Statement of Stockholders' Equity for the Nine
          Months Ended March 31, 2001 ..................................     4

        Consolidated Statements of Cash Flows for the Nine Months
          Ended March 31, 2001 and 2000 ................................     5

        Notes to Consolidated Financial Statements .....................  6-14

Item 2. Management's Discussion and Analysis of Financial Condition
          and Results of Operations .................................... 15-20

PART II OTHER INFORMATION

Item 1. Legal Proceedings ..............................................    21

Item 2. Changes in Securities ..........................................    21

Item 3. Defaults Upon Senior Securities ................................    22

Item 5. Other Information ..............................................    22

Item 6. Exhibits and Reports on Form 8-K ...............................    23

Signatures .............................................................    24

<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

Item 1. Financial Statements

                                 Interiors, Inc.
                           Consolidated Balance Sheets
                    (amounts in thousands, except share data)


<TABLE>
<CAPTION>
                                                                  (Unaudited)
                                                                    March 31,   June 30,
                                                                      2001        2000
                                                                  -----------   --------
<S>                                                                 <C>         <C>
                                            Assets
Current Assets:
  Cash and cash equivalents .....................................   $    948    $    152
  Accounts receivable, net of reserves of $807 and $35 at March
    31 and June 30, respectively ................................      1,203       1,385
  Inventories ...................................................      1,757       2,923
  Other current assets ..........................................        605         598
  Assets held for disposition, net ..............................     23,366      30,426
                                                                    --------    --------
      Total current assets ......................................     27,879      35,484
                                                                    --------    --------

Property and Equipment, net .....................................        681         842

Other Assets, net ...............................................        422         748
                                                                    --------    --------
      Total assets ..............................................   $ 28,982    $ 37,074
                                                                    ========    ========

                             Liabilities and Stockholders' Equity

Current Liabilities:
  Notes payable and current maturities of long-term debt ........   $  6,668    $  6,085
  Accounts payable ..............................................      2,097       1,376
  Accrued liabilities ...........................................      4,142       4,247
                                                                    --------    --------
      Total current liabilities .................................     12,907      11,708
                                                                    --------    --------

Long-Term Debt ..................................................         --       1,635

Stockholders' Equity:
  Preferred stock, $.01 par value, 5,300,000 shares authorized:
    Series A Redeemable Convertible Preferred Stock, $.01 par
      value, 2,870,000 shares authorized, 804,937 and 850,802
      shares issued and outstanding at March 31 and at June 30,
      respectively ..............................................          8           9
    Series B Redeemable Convertible Preferred Stock, $.01 par
      value, 200,000 shares authorized, 200,000 shares issued and
      outstanding at June 30 ....................................         --           2
    Series E Redeemable Convertible Preferred Stock, $1,000
      liquidation value, 2,000 shares authorized, 1,000 shares
      issued and outstanding at March 31 ........................      1,000          --
    Class A common stock, $.001 par value, 60,000,000 shares
      authorized, 48,549,678 and 37,271,457 shares issued and
      outstanding at March 31 and June 30, respectively .........         48          37
    Class B common stock, $.001 par value, 2,500,000 shares
      authorized, 2,455,000 shares issued and outstanding at
      March 31 and at June 30, respectively .....................          2           2
  Treasury stock, at cost, 45,400 shares at March 31 and June 30,
    respectively ................................................        (41)        (41)
  Accreted Dividends on Series B Redeemable Convertible Preferred
    Stock .......................................................         --       2,000
  Additional paid-in-capital ....................................     65,004      63,343
  Accumulated deficit ...........................................    (46,484)    (38,659)
  Notes receivable ..............................................     (3,462)     (2,962)
                                                                    --------    --------
      Total stockholders' equity ................................     16,075      23,731
                                                                    --------    --------
      Total liabilities and
        stockholders' equity ....................................   $ 28,982    $ 37,074
                                                                    ========    ========
</TABLE>

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


                                       1
<PAGE>

                                 Interiors, Inc.
                      Consolidated Statements of Operations
                  (amounts in thousands except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                                                   March 31,
                                                                             --------------------
                                                                                2001        2000
                                                                             ---------   ---------

<S>                                                                          <C>         <C>
 Net Sales ...............................................................   $  2,080    $  2,299

 Cost of Goods Sold ......................................................      1,479       1,163
                                                                             --------    --------

 Gross Profit ............................................................        601       1,136

 Selling, General, and Administrative Expenses ...........................      2,405       2,046
                                                                             --------    --------

 (Loss) From Continuing Operations .......................................     (1,804)       (910)

 Interest Expense ........................................................        562         552
                                                                             --------    --------

(Loss) From Continuing Operations Before Provision For Income Taxes ......     (2,366)     (1,462)

 Provision for Income Taxes ..............................................         --          --
                                                                             --------    --------

 (Loss) From Continuing Operations .......................................     (2,366)     (1,462)

 (Loss) Discontinued Operations:
     (Loss) from discontinued operations, net of provision for income
     taxes of $62 ........................................................         --        (237)
                                                                             --------    --------

 Net (Loss) ..............................................................   $ (2,366)   $ (1,699)
                                                                             ========    ========

 (Loss) Per Common Share:
     Basic and Diluted:
         Continuing ......................................................   $   (.05)   $   (.05)
         Discontinued ....................................................         --        (.01)
                                                                             --------    --------
                                                                             $   (.05)   $   (.06)
                                                                             ========    ========
Weighted Average Number Of Shares Used In Computation Of (Loss) Per Share:
     Basic and Diluted ...................................................     50,956      35,186
</TABLE>

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


                                       2
<PAGE>

                                 Interiors, Inc.
                      Consolidated Statements of Operations
                  (amounts in thousands except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               Nine Months Ended
                                                                                   March 31,
                                                                             ---------------------
                                                                                2001       2000
                                                                             ---------  ----------
<S>                                                                          <C>         <C>
 Net Sales ...............................................................   $  7,158    $  6,001

 Cost of Goods Sold ......................................................      5,611       3,311
                                                                             --------    --------

 Gross Profit ............................................................      1,547       2,690

 Selling, General, and Administrative Expenses ...........................      8,645       6,097
                                                                             --------    --------

 (Loss) From Continuing Operations .......................................     (7,098)     (3,407)

 Interest Expense ........................................................      1,866       1,212
                                                                             --------    --------

(Loss) From Continuing Operations Before Provision For Income Taxes ......     (8,964)     (4,619)

 Provision for Income Taxes ..............................................          7          --
                                                                             --------    --------

 (Loss) From Continuing Operations .......................................     (8,971)     (4,619)

 Discontinued Operations:
     (Loss) income from discontinued operations, net of provision for
     income taxes of $169 and $143, respectively .........................      1,422       1,275
                                                                             --------    --------

 Net (Loss) ..............................................................   $ (7,549)   $ (3,344)
                                                                             ========    ========

 Earning (Loss) Per Common Share:
     Basic and Diluted:
         Continuing ......................................................   $   (.20)   $   (.18)
         Discontinued ....................................................        .03         .04
                                                                             --------    --------
                                                                             $   (.17)   $   (.14)
                                                                             ========    ========
Weighted Average Number of Shares Used In Computation Of Income (Loss) Per
  Share:
     Basic and Diluted ...................................................     46,514      34,261
</TABLE>

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


                                       3
<PAGE>

                                 Interiors, Inc.
                 Consolidated Statement of Stockholders' Equity
                    For the Nine Months Ended March 31, 2001
                             (amounts in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                            Series A                 Series B                  Series E
                                        Preferred Stock          Preferred Stock           Preferred Stock
                                   ------------------------  -----------------------   -----------------------
                                      Shares       Amount       Shares      Amount       Shares       Amount
                                   -----------  -----------  -----------  ----------   ----------   ----------
<S>                                       <C>   <C>                <C>    <C>                  <C>  <C>
Balance June 30, 2000                     851   $        9          200   $        2           --   $       --

   Conversion of preferred stock
   to common stock                        (46)          (1)

  Additional shares issued
  regarding Model Home
  acquisition and earnout for
  calendar 2000

  Additional shares issued
  regarding Concepts 4
  acquisition

  Return of shares issued for
  Concepts 4 purchase price
  obligation paid in Dec. 2000

  Seaside Partners exercise
  of warrants, conversion of
  Series B Preferred Shares
  and Conversion of debt                                           (200)          (2)

  Partial conversions of
  Limeridge debt

  Shares issued in partial
  settlement of liability for
  shares issued for Troy
  acquisition

  Sale of Series E Redeemable
  Convertible Preferred stock                                                                   1        1,000

  Dividends declared on
  Series A and Series E
  Preferred Stock

  Net loss through 03/31/01

                                   ---------------------------------------------------------------------------
Balance March 31, 2001                    819   $        8           --                         1   $    1,000
                                   ===========================================================================

<CAPTION>
                                           Series A                    Series B
                                         Common Stock                Common Stock        Additional*
                                   -------------------------   -----------------------     Paid In     Accumulated   Treasury
                                     Shares         Amount       Shares       Amount       Capital      (Deficit)      Stock
                                   -----------   -----------   ----------   ----------   -----------   -----------   -----------
<S>                                    <C>       <C>                <C>     <C>          <C>           <C>           <C>
Balance June 30, 2000                  37,271    $       37         2,455   $        2   $   65,343    $  (38,659)   $      (41)

  Conversion of preferred stock
  to common stock                         138             1

  Additional shares issued
  regarding Model Home
  acquisition and earnout for
  calendar 2000                         5,431             5                                     320

  Additional shares issued
  regarding Concepts 4
  acquisition                           3,165             3                                      (3)

  Return of shares issued for
  Concepts 4 purchase price
  obligation paid in Dec. 2000         (7,545)           (8)                                 (2,721)

  Seaside Partners exercise
  of warrants, conversion of
  Series B Preferred Shares
  and Conversion of debt                6,343             6                                   1,219

  Partial conversions of
  Limeridge debt                        1,747             2                                     548

  Shares issued in partial
  settlement of liability for
  shares issued for Troy
  acquisition                           2,000             2                                     298

  Sale of Series E Redeemable
  Convertible Preferred stock

  Dividends declared on
  Series A and Series E
  Preferred Stock                                                                                            (276)

  Net loss through 03/31/01                                                                                (7,549)

                                   --------------------------------------------------------------------------------------------
Balance March 31, 2001                 48,550    $       48         2,455   $        2   $   65,004    $  (46,484)   $      (41)
                                   ============================================================================================

<CAPTION>
                                      Notes
                                   Receivable      Total
                                   -----------  -----------
<S>                                <C>          <C>
Balance June 30, 2000              $   (2,962)  $   23,731

  Conversion of preferred stock
  to common stock

  Additional shares issued
  regarding Model Home
  acquisition and earnout for
  calendar 2000                                        325

  Additional shares issued
  regarding Concepts 4
  acquisition

  Return of shares issued for
  Concepts 4 purchase price
  obligation paid in Dec. 2000                      (2,729)

  Seaside Partners exercise
  of warrants, conversion of
  Series B Preferred Shares
  and Conversion of debt                             1,223

  Partial conversions of
  Limeridge debt                                       550

  Shares issued in partial
  settlement of liability for
  shares issued for Troy
  acquisition                                          300

  Sale of Series E Redeemable
  Convertible Preferred stock            (500)         500

  Dividends declared on
  Series A and Series E
  Preferred Stock                                     (276)

  Net loss through 03/31/01                         (7,549)

                                   -----------------------
Balance March 31, 2001             $   (3,462)  $   16,075
                                   =======================
</TABLE>

*     Amounts reported in Additional Paid in Capital column include the amounts
      reported in accreted dividends on Series B Redeemable Convertible
      Preferred Stock and Additional Paid in Capital on the accompanying
      Consolidated Balance Sheets. See Note 3

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


                                       4
<PAGE>

                                 Interiors, Inc.
                      Consolidated Statements of Cash Flows
                             (amounts in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Nine Months Ended
                                                                                          March 31,
                                                                                     -------------------
                                                                                       2001       2000
                                                                                     --------   --------
<S>                                                                                  <C>        <C>
Cash Flow From Operating Activities:
   (Loss) from continuing operations .............................................   $(8,971)   $(4,619)
Adjustments to reconcile (loss) income from continuing operations to net cash used
   in continuing operating activities:
   Depreciation and amortization .................................................       303        507
   Provisions for accounts receivable and inventory ..............................     1,467         --
   Non-cash financing charge .....................................................       243        150
   Provision for issuance of stock ...............................................        --         75
   Changes in assets and liabilities:
      Decrease (increase) in accounts receivable .................................      (590)        24
      Decrease (increase) in inventories .........................................        46       (535)
      Decrease in prepaid expenses and other assets ..............................       463      1,019
      (Decrease) increase in accounts payable and accrued expenses ...............       955     (3,658)
                                                                                     -------    -------
   Net cash (used in) continuing operating activities ............................    (6,084)    (7,037)
   Net cash provided by discontinued activities ..................................     7,593      8,798
                                                                                     -------    -------
   Net cash provided by operations ...............................................     1,509      1,761
                                                                                     -------    -------
Cash Flow From Investing Activities:
   Capital expenditures ..........................................................      (242)      (748)
                                                                                     -------    -------
   Net cash (used in) investing activities .......................................      (242)      (748)
                                                                                     -------    -------
Cash Flow From Financing Activities:
        Borrowing from Foothill under revolving loans ............................     1,413         --
        Loan from Petals from proceeds from Senior Subordinated Secured Note .....       450         --
        Return of common shares ..................................................    (2,721)       (42)
        Repayment of note receivable .............................................        --        250
        Proceeds from sale of Series E Redeemable Convertible Preferred Stock ....       500         --
        Repayments of debt and capitalized lease obligations .....................      (113)    (1,612)
                                                                                     -------    -------
        Net cash (used in) provided by financing activities ......................      (471)    (1,404)
                                                                                     -------    -------
        Net increase (decrease) in cash ..........................................       796       (391)
        Cash, beginning of period ................................................       152        685
                                                                                     -------    -------
        Cash, end of period ......................................................   $   948    $   294
                                                                                     =======    =======
</TABLE>

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


                                       5
<PAGE>

                                 Interiors, Inc.
                   Notes to Consolidated Financial Statements
                                 March 31, 2001

1. Basis of Presentation.

General

      The financial statements included herein are unaudited and have been
prepared by Interiors, Inc., a Delaware corporation ("Interiors"), in accordance
with accounting principles generally accepted in the United States and pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, these statements include all adjustments necessary to
present fairly the financial condition of Interiors and its subsidiaries (the
"Company"), as of March 31, 2001 and the results of operations of the Company
for the three and nine months ended March 31, 2001 and 2000.

      The Company's results of operations during the three and nine months ended
March 31, 2001 are not necessarily indicative of any future results. The
financial statements included in this report should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2000. In addition, see
Note 2 regarding discontinued operations.

Going Concern Matters

      The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the realization of assets and the
satisfaction of liabilities as discussed below and in Note 2 - "Discontinued
Operations". As reported in the Company's Annual Report on Form 10-K for the
year ended June 30, 2000, the Company had net losses of $18,581,000 and
$8,024,000 for the fiscal years ended June 30, 2000 and 1999, respectively. The
Company also had negative operating cash flows of $4,294,000, $367,000 and
$338,000 for the years ended June 30, 2000, 1999 and 1998, respectively. In
addition, as discussed below, the Company classified a significant portion of
its long term debt as current liabilities because of its failure to meet certain
requirements contained in the agreements governing its debt instruments. These
factors, as well as those discussed elsewhere herein, raise substantial doubt
about the Company's ability to continue as a going concern.

      At March 31, 2001, including the borrowings of discontinued operations,
the Company had $28,915,000 of long term debt classified as current liabilities
because the Company was not in compliance with certain requirements governing
its debt instruments. Included in these amounts are the 29% Secured Convertible
Note due September 29, 2004 in favor of Limeridge LLC with a current principal
amount of $12,990,626 (the "Limeridge Note") and the 29% Secured Convertible
Note due September 29, 2004 in favor of The Endeavour Capital Investment Fund
S.A. with a principal amount of $1,744,518 (the "Endeavour Note"). Also included
is the Company's senior revolving credit facility in the amount of $12,923,000
and bank term loans of $1,257,000 with Foothill Capital Corporation
("Foothill"). The nature of the defaults under the Foothill agreements relate to
financial covenants, repayment of over-advances and cross defaults under the
Limeridge Note and the Endeavour Note. The nature of the defaults under the
Limeridge Note and the Endeavour Note relate to registration rights, the
de-listing of the Company's securities from the Nasdaq SmallCap Market and the
failure to pay approximately $5,064,000 in accrued interest as of March 31,
2001.

      As of March 19, 2001, the Company entered into Amendment No. 3 to Loan
Documents and Forbearance Agreement with Foothill (the "Foothill Forbearance
Agreement") pursuant to which Foothill agreed to forbear from taking any action
to collect the amounts owed to them until June 30, 2001 or a default under the
Foothill Forbearance Agreement. The fee charged by Foothill for such forbearance
was $150,000. The Company's interest rate was also increased to 2.5% per annum
over the prime rate and its maximum borrowing under its credit facility was
reduced from $25,000,000 to $17,000,000.

      On February 5, 2001, Limeridge LLC ("Limeridge"), formally notified the
Company of its default and requested acceleration with respect to the Limeridge
Note, plus accrued interest and penalties. In April 2001, the Company negotiated
a forbearance agreement with Limeridge and Endeavour. See Note 9 - "Subsequent
Events."


                                       6
<PAGE>

2. Discontinued Operations

      In an effort to generate cash needed to reduce the Company's high interest
rate debt and maximize shareholder value, during the second quarter of fiscal
2001, the Company's Board of Directors adopted a formal plan to sell various
businesses including, without limitation, Petals, Inc. ("Petals"), Stylecraft
Lamps, Inc. ("Stylecraft"), Habitat Solutions, Inc. ("Habitat Solutions") and
the West Coast operations. Following the contemplated transactions, the
Company's business will primarily consist of its APF Master Framemakers division
located in Mt. Vernon, New York. The Company retained DN Partners, an
investment-banking firm, to assist in the sale of the various businesses. The
West Coast is comprised of the operations of Troy and CSL, which were sold in
February 2001, Windsor Art, Inc. ("Windsor"), Vanguard Studios, Inc.
("Vanguard"), which was merged into Windsor in June 2000, and Artisan House,
Inc. ("Artisan House"), a wholly owned subsidiary of Decor Group, Inc.
("Decor"). Habitat Solutions is comprised of Concepts 4, Inc. ("Concepts 4") and
Model Home Interiors, Inc. ("Model Home"). The Company's lighting products are
sold by Stylecraft, its silk floral and tree products are sold by Petals, its
architectural and design services are provided by Habitat Solutions and its wall
decor products are sold by Windsor and Artisan.

      On February 2, 2001, the Company completed the sales of certain net assets
of Troy and CSL. The aggregate purchase prices consisted of $1,200,000 in cash
and the assumption of approximately $1,700,000 of liabilities. The entire
proceeds from these transactions were used to reduce outstanding debt owed to
Foothill.

      The components of the Troy and CSL assets, less liabilities assumed and
the write off of other net assets, primarily goodwill, was comprised of the
following:

                                                       (amounts in thousands)
                                                       ----------------------
Accounts receivable, net ...........................           $ 1,792
Inventory ..........................................             2,626
Fixed assets, net ..................................               442
Goodwill, net ......................................             3,049
Other assets .......................................             1,370
Accounts payable and accrued expenses ..............            (3,979)
                                                               -------
  Net assets disposed ..............................             5,300
Cash received ......................................            (1,200)
                                                               -------
Loss on sale of net assets .........................           $ 4,100
                                                               =======

      Cash received of $1,200,000 was used to repay outstanding borrowings under
the Foothill revolving loans.

      As discussed further below, in accordance with EITF 85-36 - "Discontinued
Operations With Expected Gain and Interim Losses", the above loss on sale of net
assets has been deferred and is included in assets held for disposition, in the
accompanying consolidated balance sheet.

      On April 12, 2001, the Company sold all of the capital stock of Model Home
to the former shareholders of Model Home. See Note 9 - "Subsequent Events".

      The sales of Petals, Stylecraft, Concepts 4 and the West Coast operations
are expected to be completed by the end of fiscal 2001 or the early part of
fiscal 2002. The disposal of these businesses are currently anticipated to
result in an aggregate net gain and net proceeds will be used, in part, to repay
outstanding borrowings. The Company is currently evaluating the effects of its
net operating loss carryforwards and limitations, if any, on the utilization
thereof and, accordingly, no effect of such tax asset was considered in
calculating the expected net gain from the disposal of these businesses.
Therefore, in accordance with EITF 85-36 the anticipated losses incurred on the
sales of certain businesses and the results of operations since December 31,
2000, when the discussion was made to discontinue the businesses will be
deferred and recorded when the net gains on the sales of other businesses are
realized. The results of operations through December 31, 2000 for the businesses
to be disposed of have been shown as discontinued operations in the consolidated
statement of operations and are summarized as follows:


                                       7
<PAGE>

                                               (amount in thousands)
                                    --------------------------------------------
                                    3 Months Ended March   9 Months Ended March
                                    --------------------   ---------------------
                                     2001        2000        2001         2000
                                    ------    ----------   --------     --------
Net sales ......................       --     $ 46,273     $ 85,848     $121,892
Gross profit ...................       --       16,725       36,150       47,837
Interest expense ...............       --        1,938        5,065        4,048
Depreciation/amortization ......       --        1,182        2,071        2,826
Amortization of goodwill .......       --          205          416          613

      Interest expense and default penalties due under the Limeridge Note and
the Endeavor Note, as well as the depreciation expense on a computer system that
was being implemented by the discontinued operations are reported in
discontinued operations.

      Depreciation and amortization assigned to the businesses reported as
discontinued operation represents the amounts applicable to fixed assets and
other intangible assets, excluding goodwill, which is presented separately.

      Net assets of discontinued operations in the accompanying consolidated
balance sheets as of March 31, 2001 and June 30, 2000 are comprised of the
following:

                                                          (amounts in thousands)
                                                          ----------------------
                                                           3/31/01      6/30/00
                                                          ---------    ---------
Current assets .........................................  $ 38,948     $ 45,923
Property, plant and equipment, net .....................    11,504       12,667
Goodwill, net ..........................................    35,835       37,748
Other assets ...........................................     7,643        2,241
Notes payable and current maturities of long-term debt .   (38,872)     (32,433)
Other current liabilities ..............................   (28,373)     (28,420)
Long-term debt .........................................      (783)      (3,326)
Other non current liabilities ..........................    (2,536)      (3,974)
                                                          --------     --------
Net assets of discontinued operations held for sale ....  $ 23,366     $ 30,426
                                                          ========     ========

      Included in other assets as of March 31, 2001 is the loss on the sale of
CSL and Troy as well as the net loss from discontinued operations since December
31, 2000 when the decision was made to dispose of the various businesses.

      Included in notes payable and current maturities of long term debt is
borrowings as of March 31, 2001 and June 30, 2000 applicable to discontinued
operations, under the Foothill Agreement totaling $13,727,000 and $16,395,000,
respectively; the Limeridge Note and the Endeavor Note aggregating $14,735,000
and $15,285,000, respectively; and $2,258,000, as of March 31, 2001 of 8.97%
Bank of America mortgage loan, which matures in September 30, 2001; and the
current portion of capital leases and other loans. As included in notes payable
and current maturities is the $5,000,000 Investors Note entered into during
March 2001. See Note 3 - "Debt".

      The borrowings under the Foothill Agreement of $13,727,000 and $16,395,000
as of March 31, 2001 and June 30, 2000, respectively, are comprised of
borrowings under a revolving credit facility of $11,098,000 and $12,736,000,
respectively, and bank term loans of $2,629,000 and $3,659,000, respectively.
These borrowings and the Limeridge Note and the Endeavor Note are classified as
current because the Company is not in compliance with certain requirements
governing these agreements. See Note 1 "Basis of Presentation - Going Concern
Matters".

      The Limeridge Note and the Endeavor Note represent funds that the Company
had originally received from the issuance of Series C Preferred Shares (as
defined below). The funds were used in the acquisitions of Stylecraft and CSL.
The Series C Preferred Shares were subsequently exchanged for the Limeridge Note
and the Endeavor Note. At the time of exchange, an additional $7,200,000
principal amount was also issued. These additional funds were used for the
financing of the West Coast operations and in the Concepts 4 acquisition.

      Included in long term debt of $783,000 and $3,326,000 as of March 31, 2001
and June 30, 2000, respectively, is the 8.97% Bank of America mortgage loan of
$2,300,000 as of June 30, 2000 and capital lease and other obligations. As of
March 31, 2001, the Bank of America mortgage loan maturity date has been
accelerated to September 30, 2001 and is classified as a current liability.


                                       8
<PAGE>

3. Debt.

      In July 2000, the Company issued to Donald M. Landis a $2,000,000
promissory note due July 27, 2001 (the "Landis Note"). The note requires the
payment of monthly interest at 14%, accrues interest at 4% and is secured by the
assets of the Company. The note replaces two separate $1,000,000 promissory
notes with 24% and 16% interest rates previously issued to Mr. Landis and the
Landis Brothers Corporation, respectively. The note is personally guaranteed by
Mr. Munn, Chairman, President and Chief Executive Officer of the Company, and
his spouse.

      In June 2000, the Company and Foothill Capital Corporation ("Foothill")
entered into a Loan and Security Agreement (the "Foothill Agreement") pursuant
to which Foothill agreed to make revolving credit loans and advances based on
agreed upon percentages of eligible accounts receivable and inventory of Artisan
House, Inc., CSL, Model Home, Petals, Stylecraft, Troy, Vanguard and Windsor
(collectively with Interiors, the "Borrowers"). The credit facility is a
combination of revolving loans and two thirty-two (32) month term loans. With
the sale of Troy and CSL, Foothill debt of $1,200,000 was repaid. As of March
31, 2001 and June 30, 2000, total borrowings were $15,552,000 and $16,859,000,
respectively, of which $12,923,000 and $13,200,000, respectively, represented
borrowings under the revolving loans and $2,629,000 and $3,659,000,
respectively, represented the borrowing under the term loans. The interest rates
on the revolving loans were prime plus 1.25% and prime plus 1.50% on the term
loans. As of March 1, 2001, the interest rates were increased to prime plus
2.50% on both the revolving and term loans. At March 31, 2001 and June 30, 2000,
the prime rate was 8.0% and 9.50%, respectively, announced by Wells Fargo Bank.
Borrowings under the credit facility are secured by substantially all the assets
of the Company, including accounts receivable and inventory. The credit facility
contains financial and other covenants, including minimum net worth, and
earnings before interest, income taxes and depreciation and amortization. The
Foothill Agreement is in default and related borrowings are included in current
liabilities in the accompanying financial statements because Foothill has the
right to accelerate these obligations. In March 2001, Foothill agreed to
forebear from taking any action to accelerate the collection of the amounts owed
under the Foothill Agreement. See Note 1 "Basis of Presentation - Going Concern
Matters".

      On March 19, 2001, Petals and Stylecraft, wholly owned subsidiaries of the
Company, executed a Senior Subordinated Secured Note due March 14, 2002 (the
"Investors Note") in favor of Interiors Investors, LLC, a Delaware limited
liability company ("Interiors Investors") in the original principal amount of
$5,000,000. The Investors Note is subordinated to the Company's obligations owed
to Foothill, secured by substantially all of the Company's assets and guaranteed
by Interiors and the Company's Chairman, President and Chief Executive Officer
and his spouse. The Investors Note accrues interest at 16% per annum until
September 30, 2001 and 18% thereafter and is payable monthly commencing May 31,
2001. From time to time, the Company is required to prepay the Investors Note
out of the proceeds of the sale of the assets or capital stock of the Company's
subsidiaries. Interiors Investors is owned by Robert Berman, who controls Berman
Industries, Inc., Stylecraft's largest vendor ("Berman Industries"), and Jimmy
Webster, Stylecraft's Chief Executive Officer. The Company received net proceeds
of $4,941,000, of which $2,000,000 was loaned to Stylecraft to pay accounts
payable owed to Berman Industries, $2,941,000 was loaned to Petals for working
capital requirements, of which $450,000 was paid to Foothill on behalf of
Interiors to pay down the revolving loan.

      On March 19, 2001, Petals, Stylecraft and Interiors Investors entered into
a letter agreement (the "Investors Letter Agreement") pursuant to which upon the
sale of the assets or capital stock of Petals and/or Stylecraft, the Company is
obligated to pay Interiors Investors $2,200,000 plus $125,000 for each calendar
month after October 1, 2001 until such event occurs. The Investors Letter
Agreement expires on March 19, 2004. The amount was considered in the estimated
net gain on the disposal of the discontinued operations.

4. Stockholders' Equity.

      On January 11, 2001, the Board of Directors authorized the creation of
2,000 shares of a new class of preferred stock designated Series E Convertible
Preferred Stock ("Series E Preferred Shares"). Each Series E Preferred Share has
a liquidation value of $1,000, is entitled to receive a 9% quarterly dividend
and convertible into 3,333 Class B Shares if such shares are available for
issuance. Until such time as the Company pays all accrued dividends on the
Series E Preferred Shares, each Series E Preferred Share is entitled to five
votes for each Class B Share into which it could have been converted if such
shares were available for issuance. Currently, the Company has 45,000 Class B
Shares authorized and available for issuance.

      On January 16, 2001, the Company issued 1,000 Series E Preferred Shares to
Laurie Munn, wife of Max Munn, the Company's Chief Executive Officer, in
exchange for $500,000 cash and a promissory note in the amount of $500,000 (the
"Series E Note"). The Series E Note is secured by the 1,000 Series E Preferred
Shares, accrues interest at 11% per annum, which is payable at maturity, and
matures on January 16, 2004. In addition, Mr. and Mrs. Munn agreed to guarantee
up to $3.0 million of accounts payable owed by Stylecraft. The Company also
agreed to subordinate its security interest in the


                                       9
<PAGE>

1,000 Series E Preferred Shares behind a security interest securing a $250,000
promissory note of Mrs. Munn executed in favor of Jimmy Webster, the Chief
Executive Officer of Stylecraft. The Company also subordinated to Jimmy Webster
its security interest in 2,445,000 Class B Shares owned by Mrs. Munn, which
shares secure the Consolidated Promissory Note due November 1, 2005 in favor of
the Company in the principal amount of $2,504,000 and accruing interest at 6.5%,
which is payable at maturity (the "Munn Consolidated Note"). The 9% Series E
Preferred Shares dividends are reduced by the 11% interest on the $500,000 note
receivable received as partial payment for the stock.

      In January 2001, the Company released from escrow 2,515,368 Class A Shares
to the former owners of Model Home, valued at $322,000, representing the earnout
for calendar year 2000 in accordance with the original acquisition agreement.
The amount was recorded as additional goodwill related to the acquisition. In
April 2001, these shares were returned to the Company when Model Home was sold
by the Company to the former owners of Model Home. See "Subsequent Events".

      On October 11, 2000, the Company issued to Limeridge LLC 1,747,565 Class A
Shares upon conversion of $550,000 principal amount of the Limeridge Note.

      On October 12, 2000, Seaside Partners, L.P. exercised the Series B Warrant
resulting in the issuance of 2,000,000 Class A Shares at $0.75 per share. The
exercise price of $1,500,000 was paid by the return to the Company of 150,000
Series B Preferred Shares held by Seaside. Seaside also converted its remaining
50,000 Series B Preferred Shares having a liquidation value of $500,000 and
$213,485 in accrued dividends through October 11, 2000 into 303,610 Class A
Shares at $2.35 per share. In addition, the Seaside note in the amount of
$1,000,000 principal amount and $9,863 in accrued interest through June 30, 2000
were converted into 4,039,452 Class A Shares at $0.25 per share. Seaside has
agreed to vote such shares in support of the election of the nominees of Board
of Directors as long as Seaside Partners holds these Class A Shares.

      On October 12, 2000, the Company and the former shareholders of Concepts 4
amended the terms of the purchase agreement pursuant to which the Company
acquired all of the common stock of Concepts 4. Pursuant to the amended terms,
the Company paid the former shareholders $3,388,000 during the second quarter of
2000. The Company also has purchase price obligations consisting of (a) a
payment of $770,000 on December 15, 2000, which was satisfied by delivery of a
note discussed below, (b) a payment of $1,218,000 on December 15, 2001, (c) a
payment of $1,218,000 on December 15, 2002 and (d) a payment of $1,007,289 on
March 10, 2003. Pursuant to the transaction, the Company also agreed to pay the
former shareholders up to $4,500,000 upon the attainment of certain earnings
goals by the Company. The amount, if any, will be determined by the earnings of
Concepts 4 for the calendar years 2000, 2001 and 2002. For calendar year 2000,
the earnout was $1,289,000 which was recorded as additional goodwill. All
purchase price obligations of the Company can be satisfied by the delivery of
twelve month promissory notes bearing interest at 8% per annum and all earnout
obligations can be satisfied by the delivery of eighteen month promissory notes
bearing interest at 8% per annum. The December 15, 2000 payment of $770,000 and
the earnout of $1,289,000 were satisfied by the issuance of promissory notes.
During the third quarter of fiscal 2001, $256,000 was paid on the $770,000
promissory note.

      Due to a decrease in the price of the Class A Shares, during the first
quarter and second quarter of fiscal 2001, the Company deposited an additional
3,164,321 and 2,454,123 Class A Shares, respectively, into an escrow account
established to secure future purchase price and earnout obligations in
connection with the Company's acquisition of Concepts 4. During the second
quarter of fiscal 2001, 7,545,886 shares were returned to the escrow by the
former owners of Concepts 4 as part of the original purchase price for
$3,388,000. As of March 31, 2001, there were 9,999,999 Class A Shares held in
this escrow account as collateral for future obligations that would be payable
under the original acquisition agreement.

      Due to a decrease in the price of the Class A Shares, during the first
quarter and second quarter of fiscal 2001, the Company deposited an additional
2,915,951 and 2,419,100 Class A Shares, respectively, into an escrow account
established to secure purchase price and future earnout obligations in
connection with the Company's acquisition of Model Homes Interiors, Inc. ("Model
Home"). In January 2001, the Company released from escrow 2,515,368 Class A
Shares valued at $322,000 or $0.128 per share representing the payment for the
calendar year 2000 earnout. Such amount was recorded as additional goodwill
related to the acquisition of Model Home. In April 2001, these shares were
returned to the Company when Model Home was sold by the Company to the former
owners of Model Home. See "Subsequent Events".

      In July 1999, the former shareholders of Troy agreed to sell 650,000 Class
A Shares (the "Troy Merger Shares") obtained from the Company to Dominion
Capital Fund, Ltd., Dominion Investment Fund, LLC and Sovereign Partners, L.P.
(collectively, the "Troy Purchasers") for $1,000,000. Since the Troy Merger
Shares were worth less $1,150,000 based on the sixty-day average of the Class A
Shares following January 25, 2000, the Company must either pay cash or issue
additional Class A Shares to the Troy Purchasers in the amount of the shortfall.
The determination to pay shares or issue stock is based upon, among other
things, the price of the Class A Shares and the liquidity needs of the Company
at the time of payment. On


                                       10
<PAGE>

December 7, 2000, the Company issued 2,000,000 shares to the Troy Purchasers in
satisfaction $300,000 of such shortfall. The parties have agreed that the
remaining balance is $200,739.

5. Earnings (Loss) Per Share.

      Set forth below is reconciliation between the numerators and denominators
of the basic and diluted earning per share computations for the Company's net
earnings for the three and nine-month periods ended March 31, 2001 and 2000,
respectively.

<TABLE>
<CAPTION>
                                                         (amounts in thousands except per share data)
                                                        ---------------------------------------------
                                                         Three Months Ended       Nine Months Ended
                                                              March 31,               March 31,
                                                        ---------------------   ---------------------
                                                           2001        2000       2001        2000
                                                        ---------   ---------   ---------   ---------
<S>                                                     <C>         <C>         <C>         <C>
Numerator for basic and diluted earnings per share:
(Loss) from continuing operations ...................   $ (2,366)   $ (1,462)   $ (8,971)   $ (4,619)
Less:
Dividends on non-convertible preferred stock ........       (101)       (107)       (276)       (399)
Accreted preferred dividends ........................         --        (168)         --      (1,168)
                                                        --------    --------    --------    --------
(Loss) from continued operations applicable to common
  stock .............................................     (2,467)     (1,737)     (9,247)     (6,186)
(Loss) income from discontinued operations ..........         --        (237)      1,422       1,275
                                                        --------    --------    --------    --------
                                                        $ (2,467)   $ (1,974)   $ (7,825)   $ (4,911)
                                                        ========    ========    ========    ========
Denominator for basic and diluted earnings per share:
Weighted average shares common shares outstanding
used in the computation of per share earnings .......     50,956      35,186      46,514      34,261
                                                        --------    --------    --------    --------
Weighted Average shares outstanding .................     50,956      35,186      46,514      34,261
                                                        ========    ========    ========    ========
Earnings (loss) income per share:
Basic and diluted:
  Continuing ........................................   $   (.05)   $   (.05)   $   (.20)   $   (.18)
  Discontinued ......................................         --        (.01)        .03         .04
                                                        --------    --------    --------    --------
    Net .............................................   $   (.05)   $   (.06)   $   (.17)   $   (.14)
                                                        ========    ========    ========    ========
</TABLE>

      The conversion of 804,937 Series A Preferred Shares and 1,000 Series E
Preferred Shares were not included for computation purposes because the effect
of such conversions would be antidilutive. In addition, the conversion and
exercise of 200,000 Series B Preferred Shares, which were converted in Class A
Shares during the second quarter of fiscal 2001, and options on approximately
4,500,000 Class A Shares, were not included for computation purposes because the
effect of such conversion and exercise would be antidilutive

      The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." In accordance with SFAS No. 128, net
earnings per share amounts ("basic EPS") were computed by dividing net earnings
by the weighted average number of common shares outstanding, excluding any
potential dilution. For purposes of this calculation, common shares include both
Class A Common Stock, par value $.001 per share ("Class A Shares"), and Class B
Common Stock, par value $.001 per share, of the Company. Net earnings per
diluted share amounts ("diluted EPS") were computed assuming there was no
potential dilution from the exercise of outstanding stock options, warrants and
other securities since the exercise price was higher than the market price. All
periods presented include a deduction for the dividend requirement of the
Company's 10% Series A Cumulative Convertible Preferred Stock, par value $.01
per share ("Series A Preferred Shares"), 8% Series B Preferred Stock, par value
$.01 per share ("Series B Preferred Shares"), 7% Series C Preferred Stock, par
value $.01 per share ("Series C Preferred Shares"), and 9% Series E Cumulative
Convertible Preferred Stock, liquidation value of $1,000. The dividends on the
9% Series E Cumulative Convertible Preferred Stock have been reduced by the 11%
interest on the $500,000 notes receivable received as partial payment for the
stock. All of the Series C Preferred Shares were redeemed by June 30, 2000. All
of the Series B Preferred Shares were converted into Class A Shares during the
second quarter of fiscal 2001.


                                       11
<PAGE>

6. Supplemental Cash Flow Information.

      Supplemental cash flow information relating to continuing operations, is
as follows:

<TABLE>
<CAPTION>
                                                                             (amounts in thousands)
                                                                                -----------------
                                                                                Nine Months Ended
                                                                                    March 31,
                                                                                -----------------
                                                                                  2001      2000
                                                                                -------   -------
<S>                                                                              <C>      <C>
Cash paid during the period for:
    Interest .................................................................   $  746   $  724
    Taxes ....................................................................        7       --
Non-Cash Financial Activities:
    Conversion of Series A Preferred Stock to Class A Common Stock ...........        1        1
    Dividend accrual and accretion of dividends on preferred shares ..........      276    1,567
    Promissory note conversion ...............................................       --      250
    Stock issuance per employment agreement ..................................       --       75
    Common Stock issued for preferred dividends ..............................       --      192
Supplemental disclosure of non cash items from investing and financing
    activities:
    Issuance of additional Class A common stock in connection with the
        Concepts 4 and MHI acquisitions and earnout for calendar year 2000 ...      325       --
    Return of common stock in connection with Concepts 4 amended agreement ...    2,729       --
    Seaside partners exercise of warrants, conversion of Series B Preferred
       shares and conversion of debt .........................................    1,223       --
    Issuance of warrant in connection with convertible debentures ............       --      278
    Partial conversion of Limeridge debt into Class A Shares .................      550       --
    Class A common shares issued in partial settlement of liability for shares
       issued in Troy acquisition ............................................      300       --
    Note receivable for partial proceeds for sale of Series E Redeemable
       Convertible Preferred Stock ...........................................      500       --
</TABLE>

      Cash flow information related to discontinued operations, is as follows:

<TABLE>
<CAPTION>
                                                                             (amounts in thousands)
                                                                                -----------------
                                                                                Nine Months Ended
                                                                                    March 31,
                                                                                -----------------
                                                                                  2001      2000
                                                                                -------   -------
<S>                                                                              <C>      <C>
Net cash used in discontinued operations:
   Net income from discontinued operations ...................................   $1,422   $1,275
Adjustments to reconcile net income from discontinuing operations to net
   cash used in discontinuing operating activities:
   Depreciation and amortization .............................................    2,487    3,841
   Net book value of property disposed .......................................      686    1,113
   Reserve for restructuring .................................................       --     (481)
   Reserve for Inventory .....................................................       --      151
   Provision for losses on accounts receivable ...............................    1,730      118
Changes in Assets and Liabilities:
   Increase in accounts receivable ...........................................     (128)  (2,819)
   Increase in inventories ...................................................    2,742   (2,101)
   Decrease in prepaid expense and other assets ..............................    3,413    3,434
   Increase (decrease) in accounts payable and accrued expenses ..............      356    3,455
   Capital expenditures ......................................................   (2,571)  (3,543)
   Repayment of Foothill revolving loans .....................................   (1,703)      --
   Repayment of Foothill term loans ..........................................   (1,030)      --
   Repayment of debt and capital lease obligations ...........................     (564)  (1,461)
   Net proceeds from sale of assets ..........................................    1,200       --
   Borrowings under Senior Subordinated Secured Note .........................    4,941       --
   Loan to Interiors, Inc. from proceeds from Senior Subordinated Secured Note..   (450)      --
   Payment on 8% promissory note related to Concepts 4 .......................     (256)      --
   Acquisition of Concepts 4 .................................................       --   (4,820)
   Net proceeds from issuance of debt ........................................       --   10,636
                                                                                 ------   ------
Net cash provided by discontinued activities: ................................   $7,593   $8,798
                                                                                 ======   ======
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                                             (amounts in thousands)
                                                                                -----------------
                                                                                Nine Months Ended
                                                                                    March 31,
                                                                                -----------------
                                                                                  2001      2000
                                                                                -------   -------
<S>                                                                               <C>     <C>
Non-Cash Financial Activities:
    Conversion of Series C Preferred stock to Limeridge and Endeavor
      convertible notes ......................................................       --   $6,527
    Partial conversion of Limeridge Convertible Note to Class A Common Stock .      550       --
Supplemental Disclosure of Cash Flows Related to Acquisition:
    Issuance of 8% promissory notes to former Concepts 4 owners in payment of
      deferred purchase price ($770,000) and calendar year 2000
      earnout ($1,289,000) ...................................................    2,059       --
    Fair value of assets acquired, excluding cash ............................       --    2,839
    Issuance of Class A Common shares for Model Home calendar year earnout ...      322       --
    Issuance of additional Limeridge convertible notes payable ...............       --   (7,036)
    Payments in connection with acquisitions, net of cash acquired ...........       --    1,174
    Liabilities assumed ......................................................       --    6,668
Supplemental disclosure of non cash items from investing and
    financing activities:
    Issuance of debt in connection with acquisitions .........................       --    7,036
</TABLE>

7. Other Matters.

      During the quarter ended December 31, 2000, the Company recorded a charge
of $2,530,000 related to the estimated cost of liquidating two of the Company's
brands. The charge is comprised of the Company's write-down of accounts
receivable of $634,000, a write-down of inventory of $733,000, a write-down of
leasehold improvements of $100,000 and an estimated accrual for other costs in
winding down the operations of $1,063,000. The write down of inventory of
$733,000 was recorded in cost of goods sold and the other charges totaling
$1,797,000 was recorded in selling, general and administrative expenses.

8. Restatement.

      As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000, the operating results for the three and nine-month
periods ended March 31, 2000 were restated and reduced by approximately $712,000
and $1,693,000, respectively, from the amounts previously reported for these
periods. Of these amounts, $543,000 and $979,000, respectively, were related to
continuing operations and $169,000 and $714,000, respectively, were related to
discontinued operations. The restatements increased costs and expenses related
to higher expense accruals, accounts receivable reserves and acquisition related
adjustments.

9. Subsequent Events.

      On April 12, 2001, the Company sold all of the capital stock of Model Home
to the former shareholders of Model Home. The purchase price consisted of
approximately $2,350,000 in cash for the repayment of outstanding Foothill
borrowings and the forgiveness of approximately $2,400,000 of inter-company
receivables due from Interiors and other consolidated operations. In addition,
7,357,371 Class A Shares, including the 2,515,368 shares issued in payment for
the calendar year 2000 earnout, were returned to the Company at the current
market price of $0.08. Pursuant to the agreement, the Company has also retained
a call on the shares of Model Home for approximately $3,000,000 until October
24, 2001; provided that contemporaneously with exercising the call, the Company
assigns the right to acquire Model Home to an unaffiliated third party. The
anticipated loss on this transaction is currently estimated to be approximately
$700,000, which in accordance with EITF 85-36 will be deferred.

      The Company entered into a Forbearance and Acknowledgement Agreement dated
April 26, 2001 with Limeridge and Endeavour (the "Limeridge/Endeavour
Forbearance Agreement") pursuant to which Limeridge and Endeavour agreed not to
take any action to collect any amounts owed to them until the earlier of (i)
July 31, 2001, (ii) the date upon which the proceeds from the sale of the assets
or capital stock of the Company's subsidiaries are sufficient to satisfy the
Limeridge Note and the Endeavour Note or (iii) a default under the
Limeridge/Endeavour Forbearance Agreement. From time to time, the Company is
required to prepay the Limeridge Note and the Endeavour Note out of the proceeds
of the sale of the assets


                                       13
<PAGE>

or capital stock of the Company's subsidiaries. The Company is also required to
pay to Limeridge and Endeavour fifty percent (50%) of the Company's excess cash
flow, if any, for each quarter. Under certain circumstances, the term of the
Limeridge/Endeavour Forbearance Agreement may be extended until September 30,
2001.


                                       14
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.

Overview

      The Company is a designer, manufacturer and marketer of museum-quality
traditional and contemporary picture frames, framed wall mirrors, oil paintings
and prints under glass for the residential, commercial, institutional and
contract markets. Interiors primarily markets its products to retailers in the
home furnishings industry, including furniture stores, home furnishings centers,
catalog retailers and department stores.

Discontinued Operations

      In an effort to generate cash needed to reduce the Company's high interest
rate debt and maximize shareholder value, during the second quarter of fiscal
2001, the Company's Board of Directors adopted a formal plan to sell
substantially all its businesses including, Petals, Stylecraft, Habitat
Solutions and the West Coast operations, to reduce its high interest rate debt
and maximize shareholder value. Following the contemplated transactions, the
Company's business will primarily consist of its APF Master Framemakers division
and rug and accessories business, which is being wound down, located in Mt.
Vernon, New York. The Company retained DN Partners, an investment banking firm,
to assist in the sale of the various businesses. The West Coast is comprised of
the operations of Troy, CSL, Windsor Art, Inc. ("Windsor"), Vanguard Studios,
Inc. ("Vanguard"), which was merged into Windsor during the quarter ended
December 31, 2000, and Decor. Habitat Solutions is comprised of Concepts 4 and
Model Home. The Company's lighting products are sold by CSL, Troy and
Stylecraft, its silk floral and tree products are sold by Petals, its
architectural and design services are provided by Habitat Solutions and its wall
decor products are sold by Windsor and Decor.

      On February 2, 2001, the Company completed the sales of assets of Troy and
CSL. The aggregate purchase prices consisted of $1,200,000 in cash and the
assumption of approximately $1,700,000 of liabilities. The entire proceeds from
these transactions were used to reduce outstanding debt owed to Foothill. The
loss recorded on this transaction is approximately $4,100,000, and included in
discontinued operations.

      On April 12, 2001, the Company sold all of the capital stock of Model Home
to the former shareholders of Model Home. The purchase price consisted of
approximately $2,350,000 in cash for the repayment of outstanding Foothill
borrowings and the forgiveness of approximately $2,400,000 of inter-company
receivables due to Interiors and other consolidated operations. In addition,
7,357,371 Class A Shares including the 2,515,368 shares issued in payment for
the calendar year 2000 earnout were returned to the Company. Pursuant to the
agreement, the Company has also retained a call on the shares of Model Home for
approximately $3,000,000 until October 24, 2001; provided that the
contemporaneously with exercising the call, the Company assigns the right to
acquire Model Home to an unaffiliated third party. The anticipated loss in this
transaction is estimated to be approximately $700,000, which will be included in
discontinued operations.

      The sales of Petals, Stylecraft, Concepts 4 and the West Coast operations
are expected to be completed by the end of fiscal 2001 or the early part of
fiscal 2002. The disposal of these businesses are currently anticipated to
result in an aggregate net gain and net proceeds, which will be used, in part,
to repay outstanding borrowings. Therefore, in accordance with EITF 85-36
"Discontinued Operations with Expected Gain and Interim Losses," the anticipated
losses incurred on the sales of certain businesses will be deferred and recorded
when the net gains on the sales of other businesses are realized. The results of
operations, through December 31, 2000, for the businesses to be disposed of have
been shown as discontinued operations in the accompanying financial statements
and are summarized as follows:

<TABLE>
<CAPTION>
                                                                         (amounts in thousands)
                                        -----------------------------------------------------------------------------------
                                                                       West            Habitat
3 Months Ended 3/31/00                  Stylecraft       Petals        Coast          Solutions        Other         Total
                                        ----------       ------        -----          ---------        -----         -----
<S>                                       <C>           <C>           <C>               <C>         <C>           <C>
Net sales.......................          $11,273       $13,849       $12,678           $8,756      $   (283)     $  46,273
Gross profit....................            2,941         8,037         2,644            3,103            --         16,725
Interest expense................              136           (13)          270               18         1,527          1,938
Depreciation/amortization.......               80           308           376              318           100          1,182
Amortization of goodwill........               25            38            68               74            --            205

<CAPTION>
                                                                       West           Habitat
9 Months Ended 3/31/01                  Stylecraft       Petals        Coast          Solutions        Other         Total
                                        ----------       ------        -----          ---------        -----         -----
<S>                                     <C>             <C>           <C>             <C>           <C>           <C>
Net sales.......................        $  25,782       $27,657       $ 18,823        $ 14,003      $   (417)     $  85,848
Gross profit....................            6,608        16,757          6,405           6,380            --         36,150
Interest expense................              354            74            556              97         3,984          5,065
Depreciation/amortization.......               96           307            421             941           306          2,071
Amortization of goodwill........               60            73            183             100            --            416
</TABLE>


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                       West            Habitat
9 Months Ended 3/31/00                  Stylecraft       Petals        Coast          Solutions        Other         Total
                                        ----------       ------        -----          ---------        -----         -----
<S>                                      <C>            <C>           <C>             <C>           <C>            <C>
Net sales.......................         $ 31,494       $38,607       $36,794         $15,280       $   (283)      $121,892
Gross profit....................            8,282        23,231         9,861           6,463             --         47,837
Interest expense................              354            35           805             135          2,719          4,048
Depreciation/amortization.......              128           584           500           1,200            414          2,826
Amortization of goodwill........               91           104           328              90             --            613
</TABLE>

      Revenues for the businesses presented above are from external sales.
Inter-segment sales totaled $417,000 for the nine months ended March 31, 2001
and for the three and nine months ended March 31, 2000 were $283,000 for both
periods; and is reported under the other category. Inter-segment sales were not
significant for any business.

      Also reported under the other category is the interest expense and default
penalty under the Limeridge Note and the Endeavor Note as well as the
depreciation expense on a computer system that was being implemented.

      Depreciation and amortization assigned to the business units represents
amounts applicable to fixed assets and other intangible assets excluding
goodwill which is presented separately.

Results of Operations

      The Company's continuing operations consist of its APF Master Framemakers
division and the rug and accessories business located in Mt. Vernon, New York.
The rug and accessories businesses are being wound down. The results of
continuing operations presented below exclude the performance of Petals,
Stylecraft, Habitat Solutions and the West Coast operations because these
businesses are being presented as discontinued operations in the accompanying
financial statements.

Comparison of Three Months Ended March 31, 2001 and 2000

      Net sales for the three months ended March 31, 2001 were $2,080,000 as
compared to $2,299,000 for the same period in fiscal 2000, a decrease of
$219,000 primarily due to lower sales in the rug and accessory business. The
Company has made the decision to wind down the rug and accessory business.

      Cost of goods sold for the three months ended March 31, 2001 increased to
$1,479,000 from $1,163,000 for the same period in fiscal 2000, an increase of
$316,000. Cost of goods sold includes the costs directly related to the
recognition of the Company's net sales. The increase in cost of goods sold was
primarily due to the rugs and accessory business. As a percentage of net sales,
cost of goods sold for the three months ended March 31, 2001 increased to 71.1%
from 50.6% for the same period of the prior year. The decrease in profit margin
resulted primarily from the decision to wind down the lower margin rug and
accessory business.

      Selling, general and administrative expenses for the three months ended
March 31, 2001 was $2,405,000 which includes $616,000 for sample products
primarily the new vision mirrors and picture frame corner samples compared to
$2,046,000 for the comparable period of fiscal 2000. General and administrative
expenses represent overhead and administrative expenses excluding costs directly
related to operations and the recognition of the Company's net sales. Excluding
the $616,000 sample expense, the decline in expenses of $257,000 primarily
represents lower expenses in the rug and accessory business which is being shut
down.

      Interest expense applicable to continuing operations increased to $562,000
for the three months ended March 31, 2001 from $552,000 for the same period in
fiscal 2000 principally due to the higher average borrowings.

Comparison of Nine Months Ended March 31, 2001 and 2000

      Net sales for the nine months ended March 31, 2001 were $7,158,000 as
compared to $6,001,000 for the same period in fiscal 2000, an increase of
$1,157,000. This increase in net sales was primarily due to the fact that the
nine months ended March 31, 2001 included sales of rugs and accessories of
$2,017,000 compared with $558,000 in the comparable period of the prior year.
The rug and accessory business began during the third quarter of fiscal 2000.
This increase was partially offset by lower sales in the frame making business,
primarily due to lower sales to department stores as a result of delayed store
openings.

      Cost of goods sold for the nine months ended March 31, 2001 increased to
$5,611,000 from $3,311,000 for the same period in 2000, an increase of
$2,300,000, which includes $733,000 related to the write down of the rug and
accessory inventory. The increase in cost of goods sold was primarily due to the
rugs and accessory business. As a percentage of net


                                       16
<PAGE>

sales, excluding the $733,000 inventory write down charge, cost of goods sold
for the nine months ended March 31, 2001 increased to 68.1% from 55.2% for the
same period of the prior year. The higher costs were primarily due to the higher
costs of the rug and accessory business.

      Selling, general and administrative expenses for the nine months ended
March 31, 2001 was $8,645,000, which includes $1,797,000 representing the
estimated write off to liquidate the rug and accessory business and $616,000 for
sample products principally the new vision mirrors and picture frame corner
samples, compared to $6,097,000 for the comparable period of the prior year. For
the nine months ended March 31, 2000, a charge of $205,000 related to an asset
impairment was recorded. Excluding these non-recurring charges, selling, general
and administrative expense increased to $6,232,000 for the nine months ended
March 31, 2001 as compared to $5,892,000 for the same period in 2000, an
increase of $340,000. General and administrative expenses represent overhead and
administrative expenses excluding costs directly related to operations and the
recognition of the Company's net sales. The increase in general and
administrative expenses was primarily due to the higher expense incurred as a
result of the rug and accessory business.

      Interest expense increased to $1,866,000 for the nine months ended March
31, 2001 from $1,212,000 for the same period in 2000 principally due to
increased borrowings and higher interest rates. The increased borrowings were
primarily related to the funding of corporate expenses and the rug and accessory
businesses.

Liquidity and Capital Resources

      The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the realization of assets and the
satisfaction of liabilities as discussed below and in Note 2 - "Discontinued
Operations". As reported in the Company's Annual Report on Form 10-K for the
year ended June 30, 2000, the Company had net losses of $18,581,000 and
$8,024,000 for the fiscal years ended June 30, 2000 and 1999, respectively. The
Company also had negative operating cash flows of $4,294,000, $367,000 and
$338,000 for the years ended June 30, 2000, 1999 and 1998, respectively. In
addition, as discussed below, the Company classified a significant portion of
its long term debt as current liabilities because of its failure to meet certain
requirements contained in the agreements governing its debt instruments. These
factors, as well as those discussed elsewhere herein, raise substantial doubt
about the Company's ability to continue as a going concern.

      At March 31, 2001, including the borrowings of discontinued operations,
the Company had $28,915,000 of long term debt classified as current liabilities
because the Company was not in compliance with certain requirements governing
its debt instruments. Included in these amounts are the 29% Secured Convertible
Note due September 29, 2004 in favor of Limeridge LLC with a current principal
amount of $12,990,626 (the "Limeridge Note") and the 29% Secured Convertible
Note due September 29, 2004 in favor of The Endeavour Capital Investment Fund
S.A. with a principal amount of $1,744,518 (the "Endeavour Note"). Also included
is the Company's senior revolving credit facility in the amount of $12,923,000
and bank term loans of $1,257,000 with Foothill Capital Corporation
("Foothill"). The nature of the defaults under the Foothill agreements relate to
financial covenants, repayment of over-advances and cross defaults under the
Limeridge Note and the Endeavour Note. The nature of the defaults under the
Limeridge Note and the Endeavour Note relate to registration rights, the
de-listing of the Company's securities from the Nasdaq SmallCap Market and the
failure to pay approximately $5,064,000 in accrued interest as of March 31,
2001.

      As of March 19, 2001, the Company entered into Amendment No. 3 to Loan
Documents and Forbearance Agreement with Foothill (the "Foothill Forbearance
Agreement") pursuant to which Foothill agreed to forbear from taking any action
to collect the amounts owed to them until June 30, 2001 or (ii) a default under
the Foothill Forbearance Agreement. The fee charged by Foothill for such
forbearance was $150,000. The Company's interest rate was also increased to 2.5%
per annum over the prime rate and its maximum borrowing under its credit
facility was reduced from $25,000,000 to $17,000,000.

      In April 2001, the Company entered into a Forbearance and Acknowledgement
Agreement with Limeridge and Endeavour (the "Limeridge/Endeavour Forbearance
Agreement") pursuant to which Limeridge and Endeavour agreed not to take any
action to collect any amounts owed to them until the earlier of (i) July 31,
2001, (ii) the date upon which the proceeds from the sale of the assets or
capital stock of the Company's subsidiaries are sufficient to satisfy the
Limeridge Note and the Endeavour Note or (iii) a default under the
Limeridge/Endeavour Forbearance Agreement. From time to time, the Company is
required to prepay the Limeridge Note and the Endeavour Note out of the proceeds
of the sale of the assets or capital stock of the Company's subsidiaries. The
Company is also required to pay to Limeridge and Endeavour fifty percent (50%)
of the Company's excess cash flow, if any, for each quarter. Under certain
circumstances, the term of the Limeridge/Endeavour Forbearance Agreement may be
extended until September 30, 2001.


                                       17
<PAGE>

      In an effort to generate cash needed to cure the Company's defaults,
reduce its high interest rate debt and maximize shareholder value, the Company
hired DN Partners, an investment banking firm, to act as a financial advisor to
assist the Board of Directors in the implementation of a formal plan to divest
the Company of substantially all of its businesses, except for its APF Master
Framemakers division ("APF") and its rug and accessories business, which is
being wound down. See Note 2 "Discontinued Operations" to the accompanying
financial statements. The Company's ability to generate cash proceeds will be
materially effected by the order and timing of the sales of its businesses.

      On March 19, 2001, Petals and Stylecraft, wholly owned subsidiaries of the
Company, executed a Senior Subordinated Secured Note due March 14, 2002 (the
"Investors Note") in favor of Interiors Investors, LLC, a Delaware limited
liability company ("Interiors Investors") in the original principal amount of
$5,000,000. The Investors Note is subordinated to the Company's obligations owed
to Foothill, secured by substantially all of the Company's assets and guaranteed
by Interiors and the Company's Chairman, President and Chief Executive Officer
and his spouse. The Investors Note accrues interest at 16% per annum until
September 30, 2001 and 18% thereafter and is payable monthly commencing May 31,
2001. From time to time, the Company is required to prepay the Investors Note
out of the proceeds of the sale of the assets or capital stock of the Company's
subsidiaries. Interiors Investors is owned by Robert Berman, who controls Berman
Industries, Inc., Stylecraft's largest vendor ("Berman Industries"), and Jimmy
Webster, Stylecraft's Chief Executive Officer. The Company received net proceeds
of $4,941,000, of which $2,000,000 was loaned to Stylecraft to pay accounts
payable owed to Berman Industries, $2,941,000 was loaned to Petals for working
capital requirements, of which $450,000 was paid to Foothill on behalf of
Interiors to pay down the revolving loan.

      On March 19, 2001, Petals, Stylecraft and Interiors Investors entered into
a letter agreement (the "Investors Letter Agreement") pursuant to which upon the
sale of the assets or capital stock of Petals and/or Stylecraft, the Company is
obligated to pay Interiors Investors $2,200,000 plus $125,000 for each calendar
month after October 1, 2001 until such event occurs. The Investors Letter
Agreement expires on March 19, 2004. The amount will be included as part of the
calculation of a gain or loss on discontinued operations.

      Since the beginning of the fiscal year, the Company has primarily used its
cash to support operating activities and to a lesser extent for capital
expenditures. The Company's primary sources of cash during this period have been
borrowings under the Foothill revolving loan agreement, the Investors Note and
from operations. At March 31, 2001, the Company had working capital of
$14,972,000. Included in current assets as of March 31, 2001 of $27,879,000 is
net assets held for disposition of $23,366,000. Excluding the net assets held
for disposition, the Company had a working capital deficit of $8,394,000.

      Net cash used in continuing operating activities during the nine months
ended March 31, 2001 and 2000 was $6,084,000 and $7,037,000, respectively. The
lower net cash usage during the nine months ended March 31, 2001 compared to the
same period of 2000, is principally due to a decrease in accounts payable and an
increase in accounts receivable. Partially offsetting these cash usages was an
increase in the net loss. The nine months ended March 31, 2001 had a net loss of
$8,971,000 compared to net loss of $4,619,000 for the comparable period of 2000.
The net loss for the nine months ended March 31, 2001 included a non-cash charge
of $1,467,000 related to the write down of the rug and accessory businesses.

      Net cash used in continuing investing activities during the nine months
ended March 31, 2001 and 2000 was $242,000 and $748,000, respectively, for
capital expenditures.

      Net cash used in continuing financing activities during the nine months
ended March 31, 2001 was $471,000 primarily representing the return of shares to
the escrow by the former owners of Concepts 4 and debt repayment. During the
nine months ended March 31, 2001 funds provided under the Foothill agreement
were $1,413,000, net funds were provided to Interiors under the Investors Note
of $450,000 and funds provided from the sale of Series E Preferred Shares was
$500,000.

      On October 12, 2000, the Company and the former shareholders of Concepts 4
amended the terms of the purchase agreement pursuant to which the Company
acquired all of the common stock of Concepts 4. Pursuant to the amended terms,
the Company paid the former shareholders $3,388,000 during the second quarter of
2000. The Company also has purchase price obligations consisting of (a) a cash
payment of $770,000 payable on December 15, 2000, which was satisfied by the
delivery of a note as discussed below, (b) a cash payment of $1,218,000 payable
on December 15, 2001, (c) a cash payment of $1,218,000 payable on December 15,
2002, and (e) a cash payment of $1,007,289 payable on March 10, 2003. Pursuant
to the transaction, the Company also agreed to pay the former shareholders up to
$4,500,000 upon the attainment of certain earnings goals by the Company. The
amount, if any, will be determined by the earnings of Concepts 4 for the fiscal
years 2000, 2001 and 2002. For the calendar year 2000, the earnout was
$1,289,000 which was recorded as additional goodwill. All purchase price
obligations of the Company can be satisfied by the delivery of twelve month
promissory notes bearing interest at 8% per annum and all earnout obligations
can be satisfied by the delivery of eighteen month promissory notes bearing
interest at 8% per annum. The December 15, 2000 payment of $770,000 and the
earnout of $1,289,000 were


                                       18
<PAGE>

satisfied by the issuance of promissory notes to the former shareholders of
Concepts 4. During the third quarter of fiscal 2001, $256,000 has been paid on
the $770,000 promissory note.

      The Company has also agreed to maintain an escrow account containing Class
A Shares in an amount sufficient to satisfy all purchase price and earnout
obligations relating to Concepts 4 as they become due under the terms of the
transaction. The former shareholders have agreed to vote such shares in support
of the election of the nominees of Board of Directors as long as the Company is
not in default under the amended purchase agreements. As of March 31, 2001,
there was an aggregate of 9,999,999 Class A Shares held in the escrow account.
The former shareholders have the option of removing Class A Shares from the
escrow account in an amount necessary to satisfy any outstanding purchase price
obligations or promissory notes delivered in connection therewith.

      On October 11, 2000, the Company issued to Limeridge LLC 1,747,565 Class A
Shares upon conversion of $550,000 principal amount of the Limeridge Note.

      Due to a decrease in the price of the Class A Shares, during the first
quarter and second quarter of fiscal 2001, the Company deposited an additional
2,915,951 and 2,419,100 Class A Shares, respectively, into an escrow account
established to secure purchase price and future earnout obligations in
connection with the Company's acquisition of Model Homes Interiors, Inc. ("Model
Home"). In January 2001, the Company released from escrow 2,515,368 Class A
Shares to the former owners of Model Home, valued at $322,000, representing the
earnout for calendar year 2000 in accordance with the original acquisition
agreement. The amount was recorded as additional goodwill related to the
acquisition. In April 2001, these shares were returned to the Company when Model
Home was sold by the Company to the former owners of Model Home. See "Subsequent
Events".

      In July 1999, the former shareholders of Troy agreed to sell 650,000 Class
A Shares (the "Troy Merger Shares") obtained from the Company to Dominion
Capital Fund, Ltd., Dominion Investment Fund, LLC and Sovereign Partners, L.P.
(collectively, the "Troy Purchasers") for $1,000,000. Since the Troy Merger
Shares were worth less $1,150,000 based on the sixty-day average of the Class A
Shares following January 25, 2000, the Company must either pay cash or issue
additional Class A Shares to the Troy Purchasers in the amount of the shortfall.
The determination to pay shares or issue stock is based upon, among other
things, the price of the Class A Shares and the liquidity needs of the Company
at the time of payment. On December 7, 2000, the Company issued 2,000,000 shares
to the Troy Purchasers in satisfaction $300,000 of such shortfall. The parties
have agreed that the remaining balance is $200,739.

      The Company believes that it will complete its plan to discontinue certain
of its operations within one year and that the ability of the continuing
subsidiaries to operate as a going concern is dependant upon the successful
completion of that plan.

Impact of Inflation

      The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplied
and other operating costs could adversely effect the Company's operations,
however, the Company believes that it should be able to increase prices to
offset increases in cost of goods sold or other operating costs.

Sales Variations

      The Company's net sales are not generally subject to seasonal fluctuations
experienced by certain retailers, however, the Company does experience some
minor variations in the level of sales during the year. The first quarter of the
Company's fiscal year (July through September) is generally the Company's
slowest sales period due to the fact that the summer is typically when retailers
are in their slowest purchasing period. During this time, certain of the
Company's warehouses and factories close for three to five days to take annual
physical inventories and to consolidate vacation periods for certain of the
Company's employees. In addition, the second quarter of the Company's fiscal
year (October through December) is generally the highest sales period for the
Company's subsidiary, Petals. As a result, the Company's liquidity is
dramatically improved during this period.


                                       19
<PAGE>

Forward Looking Statements

      When used in this Quarterly Report on Form 10-Q, the words "may," "will,"
"should," "expect," "believe," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth herein and others set forth from time to time
in the Company's reports and registration statements filed with the Securities
and Exchange Commission. The Company disclaims any intent or obligation to
update such forward-looking statements.

      In particular, the Company has adopted a formal plan to sell substantially
all of its assets and anticipates that such transactions in the aggregate will
result in a net gain and net proceeds to the Company. The ability of the Company
to achieve these results are dependent on numerous factors beyond the control of
the Company, including without limitation, the marketability of the Company's
subsidiaries and divisions, other comparable assets being offered by other
sellers, interest rates, the Company's ability to find willing buyers, the
capital markets, the continued performance of the Company's subsidiaries and
divisions, and the Company's defaults under senior debt instruments and lack of
capital resources needed to accomplish such sales.


                                       20
<PAGE>

                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings.

      On January 11, 2001, the Company was served with a complaint filed in the
United States District Court for the Southern District of New York by the former
shareholders of Model Home Interiors, Inc. ("Model Home"), a wholly owned
subsidiary of the Company acquired in February 1999. The complaint alleged that
the Company breached the purchase agreement related to the acquisition of Model
Home by failing to deliver Class A Shares to the former shareholders in a timely
fashion. In connection with the sale of Model Home to the former shareholders,
the litigation was dismissed with prejudice in April 2001.

Item 2. Changes In Securities.

      On October 11, 2000, the Company issued to Limeridge LLC 1,747,565 Class A
Shares upon conversion of $550,000 principal amount of the Limeridge Note.

      On October 12, 2000, Seaside Partners, L.P. exercised the Series B Warrant
resulting in the issuance of 2,000,000 Class A Shares at $0.75 per share. The
exercise price of $1,500,000 was paid by the return to the Company of 150,000
Series B Preferred Shares held by Seaside. Seaside also converted its remaining
50,000 Series B Preferred Shares having a liquidation value of $500,000 and
$213,485 in accrued dividends through October 11, 2000 into 303,610 Class A
Shares at $2.35 per share. In addition, the Seaside note in the amount of
$1,000,000 principal amount and $9,863 in accrued interest through June 30, 2000
were converted into 4,039,452 Class A Shares at $0.25 per share. In addition,
Seaside has agreed to vote such shares in support of the election of the
nominees of Board of Directors as long as Seaside Partners holds these Class A
Shares.

      On November 2, 2000, due to a decrease in the price of the Class A Shares,
the Company deposited an additional 2,454,123 Class A Shares into an escrow
account established to secure future purchase price and earnout obligations in
connection with the Company's acquisition of Concepts 4. As of December 31,
2000, there were 9,999,999 Class A Shares held in this escrow account.

      Due to a decrease in the price of the Class A Shares, during the first
quarter and second quarter of fiscal 2001, the Company deposited an additional
2,915,951 and 2,419,100 Class A Shares, respectively, into an escrow account
established to secure purchase price and future earnout obligations in
connection with the Company's acquisition of Model Homes Interiors, Inc. ("Model
Home"). In January 2001, the Company released from escrow 2,515,368 Class A
Shares to the former owners of Model Home, valued at $322,000, representing the
earnout for calendar year 2000 in accordance with the original acquisition
agreement. The amount was recorded as additional goodwill related to the
acquisition. In April 2001, these shares were returned to the Company when Model
Home was sold by the Company to the former owners of Model Home.

      On December 7, 2000, the Company issued 2,000,000 Class A Shares valued at
$300,000 to Sovereign Partners, Dominion Capital Fund and Dominion Investment
Fund as partial payment of the amount owed to the purchasers of the Class A
Shares originally issued in connection with the Troy acquisition.

      On January 11, 2001, the Board of Directors authorized the creation of
2,000 shares of a new class of preferred stock designated Series E Convertible
Preferred Stock ("Series E Preferred Shares"). Each Series E Preferred Share has
a liquidation value of $1,000, is entitled to receive a 9% quarterly dividend
and convertible into 3,333 Class B Shares if such shares are available for
issuance. Until such time as the Company pays all accrued dividends on the
Series E Preferred Shares, each Series E Preferred Share is entitled to five
votes for each Class B Share into which it could have been converted if such
shares were available for issuance.

      On January 16, 2001, the Company issued 1,000 Series E Preferred Shares to
Laurie Munn, wife of Max Munn, the Company's Chief Executive Officer, in
exchange for $500,000 cash and a promissory note in the amount of $500,000 (the
"Series E Note"). The Series E Note is secured by the 1,000 Series E Preferred
Shares, accrues interest at 11% per annum, which is payable at maturity, and
matures on January 16, 2004. In addition, Mr. and Mrs. Munn agreed to guarantee
up to $3.0 million of accounts payable owed by one of the Company's
subsidiaries, Stylecraft Lamps, Inc. ("Stylecraft"). The Company also agreed to
subordinate its security interest in the 1,000 Series E Preferred Shares behind
a security interest securing a $250,000 promissory note of Mrs. Munn executed in
favor of Jimmy Webster, the Chief Executive Officer of Stylecraft. The Company
also subordinated to Jimmy Webster its security interest in 2,445,000 Class B
Shares owned by Mrs. Munn, which shares secure the Consolidated Promissory Note
due November 1, 2005 in favor of the Company in the


                                       21
<PAGE>

principal amount of $2,504,000 and accrued interest at 6.5% of $458,000, is
payable at maturity (the "Munn Consolidated Note"). The Company does not accrue
interest on this note.

Item 3. Defaults Upon Senior Securities.

      As of March 31, 2001, the Company had $0.75 of accrued and unpaid
dividends per share on its Series A Preferred Shares for $604,000 and $9,000 on
its Series E Preferred shares.

      Including the borrowings of discontinued operations, at March 31, 2001 and
June 30, 2000, the Company had $28,915,000 and $30,772,000, respectively, of
long term debt classified as current liabilities because the Company was not in
compliance with certain requirements governing its debt instruments. Included in
these amounts are the Limeridge Note and the Endeavour Note in the aggregate of
$14,735,000 and $15,285,000, respectively, the Company's senior revolving credit
facility with Foothill (as defined below) of $12,923,000 and $13,200,000,
respectively, and bank term loans with Foothill of $1,257,000 and $2,287,000,
respectively. The nature of the defaults under the Foothill agreements relate to
financial covenants, repayment of over-advances and cross defaults under the
Limeridge Note and the Endeavour Note. The nature of the defaults under the
Limeridge Note and the Endeavour Note relate to registration rights, the
de-listing of the Company's securities from the Nasdaq SmallCap Market and the
failure to pay approximately $5,064,000 in accrued interest as of March 31,
2001. The Company has recorded $1,768,000 as of March 31, 2001 representing the
default penalty of 2% per month on the Limeridge Note for $1,559,000 and the
Endeavor Note for $209,000, which has been recorded as interest expense in
discontinued operations. Limeridge and Endeavor have agreed the default penalty
will be waived if payment of principal and interest are paid in accordance with
the Forbearance Agreement.

      The Company entered into Amendment No. 3 to Loan Documents and Forbearance
Agreement dated as of March 19, 2001 with Foothill (the "Foothill Forbearance
Agreement") pursuant to which Foothill agreed not to take any action to collect
any amounts owed to them until June 30, 2001 or (ii) a default under the
Foothill Forbearance Agreement. The fee charged by Foothill for such forbearance
was $150,000. The Company's interest rate was also increased to 2.5% per annum
over the prime rate and its maximum borrowing under its credit facility was
reduced from $25,000,000 to $17,000,000.

      On February 5, 2001, Limeridge LLC ("Limeridge"), formally notified the
Company of its default and requested acceleration with respect to approximately
$12,990,626 principal amount of secured convertible notes, plus accrued interest
and penalties. The Company entered into a Forbearance and Acknowledgement
Agreement dated April 26, 2001 with Limeridge and Endeavour (the
"Limeridge/Endeavour Forbearance Agreement") pursuant to which Limeridge and
Endeavour agreed not to take any action to collect any amounts owed to them
until the earlier of (i) July 31, 2001, (ii) the date upon which the proceeds
from the sale of the assets or capital stock of the Company's subsidiaries are
sufficient to satisfy the Limeridge Note and the Endeavour Note or (iii) a
default under the Limeridge/Endeavour Forbearance Agreement. From time to time,
the Company is required to prepay the Limeridge Note and the Endeavour Note out
of the proceeds of the sale of the assets or capital stock of the Company's
subsidiaries. The Company is also required to pay to Limeridge and Endeavour
fifty percent (50%) of the Company's excess cash flow, if any, for each quarter.
Under certain circumstances, the term of the Limeridge/Endeavour Forbearance
Agreement may be extended until September 30, 2001.

Item 5. Other Information.

      As a result of the issuance of 6,343,062 Class A Shares to Seaside on
October 13, 2000, Seaside became the beneficial owner of more than 10% of the
Company's outstanding Class A Shares and, accordingly, an inadvertent Acquiring
Person as such term is defined in the Rights Agreement dated October 18, 1999.
On November 6, 2000, the Board of Directors determined that as long as Seaside
is required to vote in support of the election of the nominees of Board of
Directors or as otherwise determined by the Board, Seaside shall not be
considered an Acquiring Person.

      On December 4, 2000, the Board of Directors adopted a severance and
retention program in an effort to retain its senior executive officers. Pursuant
to this program, upon a change of control of the Company or the sale of certain
businesses, executive officers of the Company may cancel all of their existing
unexercised stock options in exchange for up to approximately three times their
base salary. Generally, the aggregate amount shall not exceed three times an
executives base salary. If an executive's employment is terminated without cause
or for good reason, the executive shall also be entitled to eighteen months
severance.


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<PAGE>

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

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

       2.1  Second Amendment to Stock Purchase Agreement among Interiors, Inc.
            and Concepts 4, Inc., et al.*
       3.1  Certificate of Designation for Series E Preferred Stock**
      10.1  Conversion Agreement between Seaside Partners L.P. and Interiors,
            Inc.*
      10.2  Consolidated Promissory Note dated November 1, 2000 in the principal
            amount of $2,504,000 executed by Laurie Munn in favor of Interiors,
            Inc.**
      10.3  Pledge Agreement dated November 1, 2000 executed by Laurie Munn in
            favor of Interiors, Inc.**
      10.4  Promissory Note dated January 16, 2001 in the principal amount of
            $500,000 executed by Laurie Munn in favor of Interiors, Inc.**
      10.5  Subordinated Pledge Agreement dated January 16, 2001 executed by
            Laurie Munn in favor of Interiors, Inc.**
      10.6  Promissory Note dated as of March 19, 2001 issued by Stylecraft
            Lamps, Inc. and Petals, Inc. in favor of Interiors Investors, LLC
      10.7  Security Agreement dated as of March 19, 2001 executed by Petals,
            Inc. in favor of Interiors Investors, LLC
      10.8  Security Agreement dated as of March 19, 2001 executed by Stylecraft
            Lamps, Inc. in favor of Interiors Investors, LLC
      10.9  Security Agreement dated as of March 19, 2001 executed by Interiors,
            Inc., et al in favor of Interiors Investors, LLC
      10.10 Guaranty dated as of March 19, 2001 executed by Interiors, Inc. in
            favor of Interiors Investors, LLC
      10.11 Guaranty dated as of March 19, 2001 executed by affiliates of
            Interiors, Inc. in favor of Interiors Investors, LLC
      10.12 Personal Guaranty dated March 19, 2001 executed by Max Munn and
            Laurie Munn in favor of Interiors Investors, LLC
      10.13 Letter Agreement dated March 19, 2001 by and among Interiors
            Investors, LLC, Stylecraft Lamps, Inc. and Petals, Inc.
      10.14 Forbearance and Acknowledgement Agreement dated as of April 26, 2001
            by and among Interiors, Inc., Petals, Inc., Stylecraft Lamps, Inc.,
            Habitat Solutions, Inc., Limeridge LLC, The Endeavour Capital Fund,
            S.A. and The Endeavour Capital Investment Fund, S.A.
      10.15 Guaranty of Obligations dated as of April 26, 2001 by and between
            Max Munn, Laurie Munn, Limeridge LLC, The Endeavour Capital Fund,
            S.A. and The Endeavour Capital Investment Fund, S.A.
      10.16 Amendment No. 3 to Loan Documents and Forbearance Agreement dated as
            of March 19, 2001 by and among Interiors, Inc., et al and Foothill
            Capital Corporation

*     Incorporated by reference to the Form 10Q for the quarter ended September
      30, 2000 of Interiors filed November 14, 2000.

**    Incorporated by reference to the Form 10Q for the quarter ended December
      31, 2000 of Interiors filed February 20, 2001.

(b)  Reports on Form 8-K

None


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<PAGE>

                                   SIGNATURES

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

Dated:                      INTERIORS, INC.


May 18, 2001                By: /s/  Max Munn
                            ----------------------------------------------
                                     Max Munn
                                     President and Chief Executive Officer


May 18, 2001                By: /s/  Robert J. Conologue
                            ----------------------------------------------
                                     Robert J Conologue
                                     Executive Vice President and
                                     Chief Financial Officer


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