UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
      For Six Month Period Ended December 31, 1997.

or
[  ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
      For the Transition Period From             to            .

                           Commission File No. 0-24352

                                 INTERIORS, INC.

        (Exact name of small business issuer 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, Mt. Vernon, New York 10553

               (Address of principal executive offices) (zip code)



                    Issuer's Telephone Number: (914) 665-5400

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

The number of shares  outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of February 11, 1998 was 6,240,822 and 469,750, 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..................................................1



Balance Sheet as of December 31, 1997..........................................2

Statements of Operations -
For the Three Months Ended December 31, 1997 and 1996.(Consolidated)...........3
For the Six Months Ended December 31, 1997 and 1996 (Consolidated).............4
Statement Changes in Stockholders Equity -
For the Six Months Ended December 31, 1997.....................................5
Statements of Cash Flows -
For the Six Months Ended December 31, 1997 and 1996.(Consolidated)............ 6

Notes to Consolidated Financial Statements.....................................7



Item 2.  Management's Discussion and Analysis.................................15

PART II - OTHER INFORMATION
Item 1.  Legal Proceedings....................................................20

Item 2.  Changes in Securities................................................22

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

Item 4.  Submission of Matters to a Vote of Security Holders..................22

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

Item 6.  Exhibits and Reports on Form 8-K.....................................22



                                       
<PAGE>






                                     PART 1

                              FINANCIAL INFORMATION



Item 1.   Financial Statements

The  condensed  financial  statements  included  herein  have been  prepared  by
Interiors,  Inc.  without  audit,  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 the Company as of December  31, 1997 and the results of  operations
for the six month period ended December 31, 1997 and 1996.

The  Company's  results of operations  during the six months ended  December 31,
1997 are not necessarily  indicative of any future results. It is suggested that
the financial statements included in this report be read in conjunction with the
financial  statements  and notes thereto in the Company's  Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997.



                                       1
<PAGE>

                                                                               
                            INTERIORS, INC.                                    
                             BALANCE SHEET                                      
                          
                             (unaudited)                                       

                           December 31, 1997                                   
        
<TABLE>
                                ASSETS                                         

CURRENT ASSETS:                                                                 
<S>                                                                     <C>     
  Cash                                                                  328,261 
  Accounts receivables -                                                        
    Trade, net allowance of $268,000                                  1,677,947 

  Inventories                                                         1,490,015 
  Prepaid expenses and other current assets                             962,814 
                                                                      ---------
          Total current assets                                        4,459,037 
                                                                      ---------
INVESTMENTS                                                                     
                                                                                
  Investments                                                         3,976,679 
                                                                      ---------
          Total investments                                           3,976,679
                                                                      --------- 
PROPERTY AND EQUIPMENT, at cost                                                                                              
  Machinery and equipment                                             1,607,386 
  Furniture and fixtures                                                144,297
  Leasehold improvements                                                213,010                          
                                                                      ---------
          Total property and equipment, at cost                       1,964,693                                     
                                                                                                 
                                                                               
 Less- Accumulated depreciation and                                                                                    
    amortization                                                      1,280,771

                                                                      ---------
          Net property and equipment                                    683,922 
                                                                                              
OTHER ASSETS                                                            250,549
                                                                     ----------
  Total assets                                                       $9,370,187                                                
                                                                     ==========
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                        

CURRENT LIABILITIES:                                                                                           
  Notes payable and current maturities of                                                                             
    long-term debt                                                    1,978,620                                              
  Accounts payable and accrued liabilities                            2,285,904 
                                                                      ---------                           
        Total current liabilities                                     4,264,524          
                                                                      ---------
NON-CURRENT LIABILITIES:                                                                 
  Notes Payable                                                         890,000
  Loan Payable                                                           16,415
                                                                     ----------
            Total non-current liabilities                               906,415
                                                                     ----------                       
COMMITMENTS AND CONTINGENCIES                                                           
                                                                
STOCKHOLDERS' EQUITY:                                                           
  Preferred stock, $.01 par value,                              
5,300,000 shares authorized,                         
1,147,060 shares issued and outstanding                                  11,471 
   Class A common stock, $.001 par value,                                                        
 30,000,000 shares authorized,                                                         
 5,091,241 shares issued and outstanding                                  5,091                                
   Class B common stock, $.001 par value,                                             
 2,500,000 shares authorized,                                                                         
 469,750 shares issued and outstanding                                      470                             
  Additional paid-in-capital                                         13,418,908                            
 Accumulated deficit                                                 (8,798,812)                           
  Treasury Stock                                                           (380)                           
  Notes  receivable                                                    (437,500)                             
                                                                     ----------
           Total stockholders' equity                                 4,199,248                             
                                                                     ----------
 Total liabilities and stockholders' equity                          $9,370,187                           
                                                                     ========== 
</TABLE>
                                                                             
        The accompanying notes are an integral part of this balance sheet     

                                       2
<PAGE>

                           INTERIORS,  INC.
                       STATEMENTS OF OPERATIONS
         FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
                             (unaudited)
<TABLE>

                                                      1997               1996
                                                      ----               ----
<S>                                                <C>                 <C>      
NET SALES                                          $2,318,083          $873,865 

COST OF GOODS SOLD                                  1,441,213           504,251 
                                                   ----------         ---------   
   Gross profit from continuing operations            876,870           369,614 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES          547,923           384,102 
                                                   ----------         ---------
   Operating expenses                                 547,923           384,102 

   Income (loss) from continuing operations
    before interest and provision for taxes           328,947           (14,488)

INTEREST EXPENSE (including financing charges)        113,312            83,010 
                                                   ----------         ---------
   Income (loss) from continuing operations
    before provision for taxes                        215,635           (97,498)

PROVISION FOR INCOME TAXES                             13,000             9,973 
                                                   ----------         ---------
   Income (loss) from continuing operations           202,635          (107,471)

DISCONTINUED OPERATIONS (Note 3)
   Loss from operations of discontinued operations          0                 0
    Loss from discontinued operations                       0                 0
                                                   ----------         ---------
NET INCOME (LOSS)                                    $202,635         ($107,471)
                                                   ==========         =========
BASIC EARNINGS PER SHARE

         CONTINUING OPERATIONS                          $0.04            ($0.03)
         DISCONTINUED OPERATIONS                        $0.00             $0.00
                                                   ----------         ---------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK             $0.04            ($0.03)
                                                   ==========         =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
    IN COMPUTATION                                  5,560,991         4,261,435 

DILUTED EARNINGS PER SHARE

         CONTINUING OPERATIONS                          $0.04            ($0.03)
         DISCONTINUED OPERATIONS                        $0.00             $0.00
                                                   ----------         ---------
NET INCOME ( LOSS) PER SHARE OF COMMON STOCK            $0.04            ($0.03)
                                                   ==========         =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                 5,560,991         4,261,435 

 The accompanying notes are an integral part of these financial statements
</TABLE>

                                       3
<PAGE>
 
<TABLE>
                                 INTERIORS,  INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                  (unaudited)

                                                          1997        1996
                                                          ----        ----
<S>                                                    <C>         <C>       
NET SALES                                              $3,835,865  $2,053,035

COST OF GOODS SOLD                                      2,397,416   1,125,704
                                                        ---------   ---------
          Gross profit from continuing operations       1,438,449     927,331

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES              889,092     872,173
                                                        ---------   ---------
           Operating expenses                             889,092     872,173

            Income (loss) from continuing operations
               before interest and provision for taxes    549,357      55,158

INTEREST EXPENSE (including financing charges)            225,814     160,250
                                                        ---------   ---------
            Income (loss) from continuing operations
                before provision for taxes                323,543    (105,092)

PROVISION FOR INCOME TAXES                                 13,000       9,973
                                                        ---------   ---------
            Income (loss) from continuing operations      310,543    (115,065)
                                                        
DISCONTINUED OPERATIONS (Note 3)
            Loss from operations of discontinued operat         0           0
                                                       ----------   ---------
                  Loss from discontinued operations             0           0
                                                       ----------   ---------
NET INCOME (LOSS)                                        $310,543   ($115,065)
                                                       ==========   =========
BASIC EARNINGS PER SHARE

           CONTINUING OPERATIONS                            $0.06      ($0.03)
           DISCONTINUED OPERATIONS                          $0.00       $0.00
                                                       ----------   ---------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK                 $0.06      ($0.03)
                                                       ==========   =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
    IN COMPUTATION                                      5,560,991   4,261,435

DILUTED EARNINGS PER SHARE

           CONTINUING OPERATIONS                            $0.06      ($0.03)
           DISCONTINUED OPERATIONS                          $0.00       $0.00
                                                       ----------   ---------
NET INCOME ( LOSS) PER SHARE OF COMMON STOCK                $0.06      ($0.03)
                                                       ==========   =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                     5,560,991   4,261,435
</TABLE>

  The accompanying notes are an integral part of these financial statements


                                       4
<PAGE>


<TABLE>
                                                              INTERIORS, INC.
                                                STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                 FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
                                                                (unaudited)

            


                              Series A        Class A             Class B
Additional  Retained
                          Preferred Stock   Common Stock       Common  Stock    Paid-In    Earnings  Treasury   Note
                         ----------------  ---------------    ---------------  
                          Shares   Amount  Shares   Amount    Shares   Amount   Capital    (Deficit)   Stock  Receivable   Total
                                                                               ---------   ---------  ------- ----------  -------
<S>                     <C>       <C>     <C>       <C>      <C>       <C>    <C>         <C>          <C>    <C>        <C>        
BALANCE, June 30, 1997  1,147,060 $11,471 5,261,241 $5,261   1,769,750 $1,770 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830 

 Paid in capital 
   adjustment                                                                      21,022                                    21,022 

 Infinity shares 
  sold by UCC                              (220,000)  (220)                       180,000                220                180,000 

 Conversion of Class 
  B Common shares into
  Class A                                    50,000     50     (50,000)   (50)

 Escrow shares                                              (1,250,000)(1,250)      1,250 

 Dividends declared                                                                          
  December, 1997                                                                             (430,147)                     (430,147)

 Net income through 
  December 31, 1997                                                                           310,543                       310,543
                        --------- ------- --------- ------ ----------- ------ ----------- -----------  -----  ---------  ----------
BALANCE, December 
  31, 1997              1,147,060 $11,471 5,091,241 $5,091     469,750 $  470 $13,418,908 ($8,798,812) ($380) ($437,500) $4,199,248 
                        ========= ======= ========= ====== =========== ====== =========== ===========  =====  =========  ==========


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



</TABLE>



















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




                                       5
<PAGE>

<TABLE>
                                       INTERIORS, INC.
                                   STATEMENT OF CASH FLOWS
                      FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                        (unaudited)

                                                                          SIX MONTHS ENDED
                                                                             DECEMBER 31
                                                                         ------------------
                                                                           1997        1996
CASH FLOWS FROM OPERATING ACTIVITIES:                                      ----        ----
 
<S>                                                                    <C>         <C>       
 Net Income (loss)                                                     $310,543    ($115,065)

  Adjustments to reconcile net  Income (loss) to net cash used in 
   operating activities:
    Depreciation and amortization                                       312,058      331,836
    Provision for issuance of stock                                                   15,000

 Changes in assets and liabilities:
     Decrease (increase) in accounts receivable, trade                 (731,119)     227,698
    Decrease (increase) in inventories                                   30,814     (616,475)
    Decrease (increase) in prepaid expenses and other current assets    (64,423)    (123,851)
    Decrease (increase) in other assets                                  12,691      165,220
    Increase (decrease) in accounts payable and accrued expenses       (245,516)    (837,126)
                                                                       --------     --------
          Net cash used in operating activities                        (374,952)    (952,763)
                                                                       --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                   (1,039)    (306,013)
  Investment in Decor Group, Inc.                                                   (826,000)
                                                                       --------     --------
          Net cash used in investing activities                          (1,039)  (1,132,013)
                                                                       --------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of debt                                    787,761                                       
  Repayments of debt and capitalized lease obligations                 (354,917)     (37,008)
  Net proceeds from sale of Series A preferred stock, common stocks, 
   and warrants                                               
  Net proceeds from exercise of common stock warrants                              1,292,642
  Net proceeds from exercise of common and preferred stock options                   825,000
                                                                       --------    ---------    
  Net cash provided by  financing activities                            432,844    2,080,634                   
                                                                       --------    ---------
   Net Increase (decrease) in cash                                       56,853       (4,142)      
                                                
CASH, beginning of period                                               271,408        4,142
                                                                       --------    ---------
CASH, end of period                                                    $328,261           $0                  
                                                                       ========    =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for-                                                                                      
    Interest                                                           $159,388     $119,095
    Taxes                                                                             $5,973
NON-CASH FINANCING ACTIVITIES:

The accompanying notes are an integral part of these financial statements

</TABLE>

                                       6
<PAGE>





1.   BASIS OF PRESENTATION

The  financial  statements  included  herein  have been  prepared by the Company
without audit, in accordance with generally accepted accounting principles,  and
pursuant to the rules and regulations of the Securities and Exchange Commission.
All  adjustments  (of normal  recurring  nature)  which are,  in the  opinion of
management,  necessary  for a fair  presentation  of the  results of the interim
period have been  included.  The results of operations  for the six months ended
December 31, 1997 are not necessarily indicative of those to be expected for the
entire year.  The Company,  for the six months ended December 31, 1997 and 1996,
used the gross profit method to value inventory.



2.   ACQUISITIONS AND STRATEGIC ALLIANCES

The Company's  long-term plan for growth includes in part either the acquisition
of or  entering  into  strategic  alliances  with  unrelated  companies  in  the
decorative accessories industry to maximize market potential.  For this purpose,
pursuant to a March 3, 1996 agreement  relating to the  capitalization  of Decor
Group, Inc.,  (Decor), Decor issued to the Company 250,000 shares of its Series
A Non-Voting  Convertible  Preferred Stock and an option to purchase  10,000,000
shares of its Series B  Non-Convertible  Voting  Preferred  Stock  (the  Option
Shares) in exchange for  issuance to Decor by the Company of 200,000  shares of
its Class A Common stock,  (registered in 1997) and 200,000 shares of its Series
A Convertible  Preferred  stock (also  registered in 1997) and a guarantee  with
respect to certain indebtedness should such indebtedness become necessary. Also,
the Company  exercised  its option to purchase  the Option  Shares in  September
1996, for total cash  consideration  of $2,000.  Concurrent with the exercise of
this option, the Company executed a Voting Agreement (the Voting Agreement ) to
vest the power to vote the Option Shares in a Voting Trust (the  Voting Trust.)
The Voting  Agreement  will  expire upon the earlier of February 7, 2007 or upon
the Company's repayment in full of its obligations to BH Funding,  LLC, (Note 3)
but in no event earlier than December 31, 1997. The Voting Trust comprises three
individuals:  the Company's  President and Chief Executive Officer (and also the
Chairman  of the Board of Decor),  and two  Directors  of Decor.  As part of the
Company's  investment in Decor,  during the months of August and September 1996,
the Company purchased 54,934 shares of Decor's Series C Non-Voting, Convertible,
Preferred Stock at a cost of $824,000.  In the formation of Decor, the Company's
intention was to create an affiliate with a corporate  identity clearly separate
and distinct  from that of the Company.  Decor was  organized for the purpose of
acquiring the business operations of unrelated companies.  On November 12, 1996,
(the  Effective  Date ) a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission.  Subsequent to
the  effective  date of Decor's  initial  public  offering,  the  Company  owned
approximately  79.6% of the total voting stock of Decor. In December 1996, Decor
declared  and issued a dividend on its common  stock  payable in the form of two
(2) shares of common stock for each one (1) share of common stock held as of the
record date of December  16, 1996.  Each share of Decor's  Series A and Series C
Preferred  stock are  convertible  into three (3) shares of Decor=s common stock
effective  December 16, 1996.  During February 1997, the Company sold its entire
holdings of Series A Convertible  Preferred  Stock to an  independent  investor.
After the conversion by the subsequent holder to common stock, the Company owned
approximately  77.5% of the total  voting  stock of Decor.  During  1997,  Decor
reverse  split its common  stock  issuing one new common  share in exchange  for
three prior owned common  shares.  As of December 31, 1997, the holding in Decor
is  recorded  on the  Company's  financial  statements  at the  market  value on
November 12, 1996, the Measurement  Date of the Company's  trading  securities
previously  transferred to Decor during March 1996, plus acquisition  costs less
the proportionate value of the securities sold during February 1997. On November
5, 1997 two of the Voting Trustees resigned from the Voting Trust (the Company's
CEO remains the sole Voting Trustee).

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS)  No. 128,  Earnings  Per Share.  This
statement  establishes standards for computing and presenting earnings per share
(EPS),  replacing the  presentation of currently  required  primary EPS with a
presentation  of basic EPS. For entities with complex  capital  structures,  the
statement  requires the dual  presentation  of both basic EPS and diluted EPS on
the face of the statement of income. Effective for the six months ended December
31, 1996 the Company  has  adopted  the  provisions  of SFAS 128 for all periods
presented.

On October  20,  1997,  the  Company  issued a letter of intent  whereby it will
acquire the remaining  shares of Decor Group,  Inc. it does not  currently  own.
Interiors,  Inc.  would be the  surviving  corporation  and all the  outstanding
shares of Decor would be canceled.  The merger  consideration to be delivered by
Interiors,  Inc. to the  stockholders  of Decor  Group,  Inc.  for the shares of
common stock outstanding at the date of closing of the proposed transaction will
be an aggregate $10 million of common stock of Interiors, Inc. subject to a fair
market  value  adjustment  which as of the date of this filing  would revise the
purchase price to approximately  $4,000,000 for the publicly traded Decor common
stock.  There  can  be no  assurance  that  the  proposed  transaction  will  be
completed.

In May 1996, the Company entered into a two year Management  Services  Agreement
with Decor  whereby the Company  will advise Decor on the  manufacturing,  sale,
marketing and  distribution of Decor's  products as well as providing Decor with
accounting and administrative services and advice on strategic planning of joint
ventures,  acquisitions,  and other  long  term  initiatives.  Pursuant  to this
agreement,  the  Company  will be paid on an  annual  basis the  greater  of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement.  The Company
and Decor amended this  agreement to increase this payment to $90,000 per annum.
Additional  transfers  of funds from Decor to the Company will be subject to the
attainment  by Decor of excess cash flow  totaling  $4,000,000  per year through
December 31, 1999. At December 31, 1997,  the Company has accrued  approximately
$96,000 of fees pursuant to this agreement. The Company received $50,000 in cash
pursuant to this for the quarter ending 12/31/97.

Decor entered into an asset purchase  agreement (the Agreement)  during March,
1996, with Artisan House, Inc.  (Artisan House) to purchase  substantially all
of the operating assets, and assume certain liabilities, of Artisan House for an
aggregate purchase price of $3,526,400,  subject to certain  adjustments.  Decor
completed the Artisan House  acquisition  on November 18, 1996.  Artisan  House,
located  in Los  Angeles,  California  and  founded  in 1964,  is engaged in the
design,  manufacturing,  and  marketing of wall,  table and  freestanding  metal
sculptures.  Management  believes that Artisan  House's  products bridge the gap
between high priced  gallery art and mass produced  decorative  pieces.  Artisan
House products retail from  approximately $100 to over $400. The primary goal of
Artisan  House is to supply a broad  spectrum  of design  driven  sculpture  and
decorative accessories at moderate prices.

The Company entered into an agreement effective June 1, 1997, with Photo-To-Art,
Ltd. (P-2-A), a company which converts photographs into large-scale canvas oil
paintings,  whereby the Company agreed to sell certain assets related to P-2-A's
process,  as well as other goods and services to P-2-A, in exchange for $600,000
in equity  securities of P-2-A and $50,000 in cash. The agreement was amended as
of June 30, 1997 using the cost method of  accounting  to reflect an increase in
value  to  $1,140,000.  Such  amounts  are  reflected  as an  investment  on the
Company's  balance sheet as of December 31, 1997. P-2-A subleases  approximately
21,000  square  feet of office and  manufacturing  space from the  Company at an
annual  rental rate of $63,000 per year plus rent  escalations.  The term of the
sublease is from June 1, 1997 to  December  31,  2001.  In  addition,  under the
current  supply  contract,  sales to P-2-A for the six months ended December 31,
1997 were approximately $186,000.

On  January  7, 1997 the  Company  entered  into a letter  of intent to  acquire
Henlor,  Inc. a privately held Los Angeles based  manufacturer of wall decor and
related  decorative  accessories  whose  revenues for the twelve  months  ending
November 1997 was approximately $13 million.  The payment terms for the purchase
calls  for $1  million  in cash at  closing,  $500,000  in a 3-year 8% note with
quarterly  amortization  commencing  one year after the closing and  $500,000 in
Company stock, restricted for two years from the closing.

Pursuant to a March 31, 1996 agreement  relating to the capitalization of Decor,
Laurie  Munn,  wife of the  Company's  President  and  Chief  Executive  Officer
purchased  and was issued  certain  shares of the Common  Stock of Decor.  As of
September 30, 1997, Ms. Munn was issued 100,000 shares of the outstanding common
shares of Decor,  adjusted to reflect  reverse splits and stock  dividends as of
this date.

3.   NOTES PAYABLE

At December 31, 1997, the Company has aggregate  notes payable of  approximately
$2,869,000. The components of these notes are discussed below.

The Company has  outstanding  secured formula based financing with United Credit
Corporation totaling approximately  $1,636,000 at December 31, 1997. Interest is
determined  at an annual rate of 16% plus related  fees.  The Company  signed an
agreement in February,  1997, whereby it agreed to issue 100,000 shares of Class
A common stock to this lender. These shares have, to date, not been issued.

The Company has outstanding secured financing with the Bank of New York totaling
approximately  $355,000 at December 31,  1997.  The  collateral  consists of the
Company's  machinery,  equipment  and  inventory.  Interest is  determined at an
annual rate of prime plus 1%, (9.50% as of the date of this filing.) The Company
has agreed to reduce the outstanding  principal by $10,000 per month  commencing
December 1, 1997. (Previously the amount per month was $5,000.)

During November 1997 the Company received $250,000 in a loan from Ekistics Corp.
This  loans  is due  December  31,  1998 and  bears  12%  interest.  The loan is
collaterlized by and convertible into 50,000 shares of Photo-To-Art  Ltd. common
stock.  Common  stock was acquired by the Company as part of its  investment  in
Photo-To-Art Ltd.

The Company  received  $600,000 of loans from BH Funding in February 1997.  This
loan is to be repaid with interest on April 28, 1999.  Interest is determined at
an annual rate of 15%.  This loan is secured by all of the  Company's  Preferred
Stock in Decor.  The  Company  paid  $100,000  on January  13,  1998  toward the
reduction of principal on this loan. (See  Recent Developments).

The Company had  outstanding  secured  financing with Infinity  Investors,  Ltd.
totaling  approximately  $188,000 at  September  30,  1997.  The  Company  payed
principal  and interest of $7,500 per month  calculated at an annual rate of 15%
against the unpaid principal balance. This loan was secured by 600,000 shares of
the Company's  Class A common stock (the "Infinity  Collateral").  United Credit
Corporation, the Company's senior secured lender, paid approximately $188,000 to
Infinity,  on December 17, 1997,  which  consisted of all of the Company's  then
outstanding debt to Infinity and received title to the Infinity Collateral.  The
Company  consented to United  Credit  Corporation's  peaceful  possession of the
Infinity  Collateral  in exchange for a reduction of the  Company's  debt in the
amount of $480,000.  This debt reduction shall occur  simultaneously with United
Credit's  disposal of the  Infinity  Collateral . This debt  reduction  totalled
$180,000 as of December 31, 1997.


The  Company  received a $100,000  demand  loan from  Laurie  Munn,  wife of the
Company's  President and Chief Executive Officer during March 1997, at an annual
interest rate of 6.5%. This debt was repaid in October 1997.


4.   COMMITMENTS AND CONTINGENCIES

The  litigation  relating to the  termination of the 1995  employment  agreement
between Ann Stevens and the  Company has been  settled by the  execution  during
July 1996, of an employment  severance agreement (the "Agreement").  Pursuant to
the  Agreement,  the  Company  paid Ms.  Stevens  $63,000 for accrued and unpaid
compensation  upon  execution of the  Agreement.  Subsequently,  for a period of
seven years,  the Company will make  bi-weekly  payments to Ms. Stevens to total
$72,000  for the first  year,  $70,000  for each of the next  three  years,  and
$50,000 for each of the final  three  years.  As  additional  compensation,  the
Company  paid  Ms.  Stevens  for  reimbursement  for  certain  expenses  in  the
approximate amount of $6,000 and $50,000 in various installments during the four
months ending December 1996.

The Company also entered into a non-compete agreement with Ms. Stevens for which
the Company will make  bi-weekly  payments to Ms.  Stevens to total  $25,000 per
year for seven years,  plus automobile and insurance costs for five years. As of
June 30, 1996,  the Company issued to Ms. Stevens 50,000 shares of the Company's
Class A Common Shares,  which were previously  committed to Ms. Stevens pursuant
to her 1995  employment  agreement.  As of June 30,  1996,  the  Company  issued
1,250,000  shares of its Class B Common Shares (the "Escrow  Shares") to Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the AEscrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either  the  failure  by the  Company  to adhere to the  payment
provisions  noted above or the financial  insolvency  of the Company.  If either
event occurs, Ms. Stevens will be in a position to elect replacement  Directors.
Once the payment  provisions  in the severance and  non-compete  agreements  are
satisfied,  the Escrow Agent shall return the Escrow  Shares to the Company.  In
February  1997,  the terms of the  agreement  with Ms.  Stevens were modified to
provide for additional  payments of approximately $550 per month over 18 months,
and to provide for  approximately  $6,000 as  reimbursement  for legal expenses.
During November 1997 the Company added  2,500,000  Common A shares to the Escrow
shares  under the same  terms  and  conditions  of the  original  Escrow  shares
agreement.

 On  January 9, 1998  Laurie  Munn,  wife of the  Company's  President  and CEO,
obtained  an option  to  purchase  the above  1,250,000  Escrowed  Shares  which
requires  payment  upon  exercise of the option of $500 plus a secured  $500,000
Note (to be  collateralized  by the  purchased  shares)  with  interest  at 6.5%
payable in five equal annual installments. This option was issued to Laurie Munn
in consideration,  amongst other things, for her continuing  personal guarantees
of Company  obligations to several  lenders,  including BH Funding.  In addition
Laurie Munn purchased  730,000 shares of Class B Common stock at $.70 per share,
the  approximate  market  value  of such  shares  at the  time of the  purchase.
Approximately  $51,000 of the purchase  price is due in May of 1998. The balance
is due in annual installments  through January 2005 at an interest rate of 6.6%.
The purchased stock is the collateral for this obligation.

Effective  January  1, 1998 the  Company  entered  into a  five-year  employment
agreement (the "Agreement") with its President and Chief Executive Officer.  The
Agreement provides for an annual base salary of $150,000 commencing July 1, 1997
with annual  increases of 10%. Such  increases will be subject to the attainment
of profitable results of operations by the Company.  In addition,  the Agreement
grants the Chief Executive  Officer an option to purchase at any time during the
Agreement  term  150,000  shares  of the  Company's  Series  A,  10%  Cumulative
Convertible  Preferred  Stock at a price of $2.50 per share and 250,00 shares of
Class A or Class B Common  Stock at $.50 per  share  during  the  first  year of
employment. This Agreement further allows additional purchases of 150,000 shares
of Common stock per year for each of the four  remaining  years of the Agreement
at an exercise cost which increases  approximately  10% each year from the above
$.50 per share. The Agreement also contains a non-compete  clause and provides
the Chief  Executive  Officer with life  insurance and the use of an automobile.
Presently, the Chief Executive Officer draws an annual salary of $150,000.

On April 1, 1995,  the Company  entered into a Consulting  Agreement with Morris
Munn,  father of Max Munn, the Company's  President and Chief Executive  Officer
under which he will  provide the Company  with:  design and  fabrication  of new
molds  for  sculpture;  recommend,  and  implement  improvements  in  antiquing,
woodworking,  gilding and carving  processes;  and attend  trade shows for frame
making and mold  making.  Fees under the  agreement  are  payable at $54,000 per
annum for one year renewable at the Company's  option.  On June 30, 1996, Morris
Munn's  Consulting  Agreement  was extended for five (5) years.  Pursuant to the
terms of this new  agreement,  the  Company  agreed to issue to  Morris  Munn an
option to purchase up to 350,000 shares of the Company's  Preferred  Shares at a
net exercise price of $2.25 per share.  The Preferred  Shares  issuable upon the
exercise  of the  Option  were  registered  for  sale  to  the  public  under  a
Registration  Statement  in Form S-8  filed  with the  Securities  and  Exchange
Commission  on July 3,  1996.  The  Option was fully  exercised  during  July to
September 1996  generating  net proceeds to the Company  totaling  $787,500.  In
addition,  the new  agreement  provides  for  bi-weekly  payments to Morris Munn
totaling $54,000 per year for five years. In exchange, Morris Munn has agreed to
assist the Company with marketing,  acquisitions,  divestitures,  joint ventures
and other strategic initiatives. In conjunction with the issuance of the Option,
the Company  recorded  charges  against  earnings  of $87,500 at June 30,  1996.
During  March  1997,  the Company  modified  its  agreement  with Morris Munn to
provide  additional  monthly  payments  of $975 over two years for the rental of
certain machinery used by the Company in its production processes.

On February 19, 1997,  the  employment by the Company of Michael J. Amore as its
Vice  President  and Chief  Financial  Officer  was  terminated.  Mr.  Amore had
provided  consulting  services to the Company  subsequent  to February 19, 1997.
Beginning May 6, 1997, the Company  provided Mr. Amore with  severance  payments
totaling  approximately  $10,000  over five weeks.  No other  liabilities  exist
pursuant to Mr. Amore's separation from the Company.

Except as otherwise  set forth herein,  the Company has no material  commitments
for  capital  expenditures.  In order to fund  growth  over the long  term,  the
Company  anticipates  possible  future  issuance of its securities  resulting in
further dilution to its securityholders

Disclosure of the Company's current legal matters are reflected at Part II, Item
1. - Legal Proceedings.

5.   SHAREHOLDERS' EQUITY

In August 1995,  the Company agreed to issue,  at a future date,  60,000 Class A
Common  shares in  settlement  of all  current  and future  liabilities  under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement") with
a  consulting  firm dated  January 4, 1994.  The  Company's  Board of  Directors
approved the issuance of such shares in November 1995. In  conjunction  with the
issuance of these shares,  approximately  $105,000 of charges  against  earnings
were recorded  during the year ended June 30, 1996.  On January 14, 1997,  these
shares  were  registered  by  the  Company  with  the  Securities  and  Exchange
Commission on Form S-8.

In September 1995, the Company issued 460,000 shares of Series A, 10% Cumulative
Convertible  Preferred Stock ("Preferred Stock") and 230,000 Redeemable Class WC
Warrants ("Warrants") to purchase Preferred Stock at the exercise price of $5.50
per share.  The net proceeds from this Offering were  approximately  $1,633,000,
including  over-allotments.  Each  share  of  Preferred  Stock  is  convertible,
commencing one year from the date of issue,  subject to  adjustment,  into three
shares of Class A Common  Stock of the  Company.  As of the date of this filing,
independent  holders of 92,940  shares of Preferred  Stock have  converted  such
shares into 278,820 shares of the Company's Class A Common Stock.

In September 1995, the Company lowered the exercise price of the Company's Class
WA  Warrant  to $1.50 per  share and  arranged  to place  180,000  shares of the
Company's Class A shares which were previously sold pursuant to a ARegulation S"
private  placement  into  escrow.  These  shares  were sold in  January  1996 to
unrelated  parties  pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed  below. On July 16, 1996, the Company
filed a Registration  Statement  with the Securities and Exchange  Commission to
register the Class WA Warrants and  underlying  Common A Shares.  The Commission
declared this  Registration  Statement  effective on July 19, 1996.  Through the
date of this filing,  704,412 of the Company's  Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these  proceeds,  $811,500 was used to purchase  54,100  shares  (adjusted for a
1-for-2 reverse split effected in October 1996) of Decor Group,  Inc.'s Series C
Non-Voting,  Convertible,  Preferred  Stock.  The  balance of the  proceeds  was
retained by the Company for working capital needs, for the repayment to Decor of
outstanding  loans of $50,000,  and for the  provision  of  additional  loans to
Decor. At September 30, 1997, the balance of loans to Decor totals $110,000.  On
May 7, 1997, the Company  announced that it would extend the exercise  period of
its Class WA Warrant to June 22, 1998.

In December 1995, pursuant to the terms of a promissory note, the holder of such
note converted the note into 80,000 shares of Preferred Stock.  Also in December
1995, and pursuant to the terms of another promissory note, 35,000 shares of the
Company's Class A Common Stock were issued to the lender.  Approximately $25,000
was  charged  against  earnings  during  the  quarter  ended  December  1995  in
conjunction with the issuance of these shares.

In January 1996, the Company's Board of Directors  elected to lower the exercise
price of the  Company's  Class WB  Warrant  to $2.00 per  Class A Common  share,
subject to the filing and  effectiveness  of a  Registration  Statement with the
Securities and Exchange Commission.  Such Registration  Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996. Through
the  date of this  filing,  118,012  of the  Company's  Class WB  Warrants  were
exercised at an exercise  price of $2.00 per option  generating  proceeds to the
Company of $236,024.  These proceeds were used by the Company to support working
capital needs and for the provision of loans to Decor Group, Inc.

In February  1996,  the Company's  Board of Directors  declared a stock dividend
equivalent  to $0.25  per  share  to its  Series  A 10%  Cumulative  Convertible
Preferred  Stockholders  of record as of the close of business  on February  23,
1996 (the record  date.)  Payment  was made on March 1, 1996 by the  issuance of
0.10231  of a share of the  Company's  Class A Common  Stock  for each  share of
Series A Preferred Stock held of record on the record date. Accordingly,  55,247
shares of the  Company's  Class A Common  Stock  was  issued  for this  purpose.
Retained  earnings was charged  $165,741 in March 1996 in  conjunction  with the
issuance of these shares. The Company has declared a record date of December 10,
1997 for a dividend on its Series A 10% Cumulative  Convertible  Preferred Stock
for the six month periods ending  September 1996, March 1997 and September 1997.
The dividend ($.75 per Preferred Share) was paid on January 10, 1998 in the form
of the Company's Common A Shares.  Accordingly,  shares of the Company's Class A
Common Stock was issued for this purpose. Retained earnings was charged $286,765
in December 1997 in conjunction with the issuance of these shares.

In February 1996, the Company's Board of Directors  approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock,  in  consideration
for  past  consulting  services  provided.  These  shares,  bearing  a two  year
restrictive  legend,  were issued on April 12,  1996.  In  conjunction  with the
issuance of these shares, approximately $54,000 of charges were recorded against
earnings during the year ended June 30, 1996.

In April 1996,  the Company's  investment  banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock.  These shares, all bearing a restrictive
legend,  were issued on April 24,  1996 to various  independent  investors  (the
"Investors")  generating  gross proceeds of $431,251.  The Company  realized net
proceeds of  $310,609  which was used to pay  certain  outstanding  liabilities.
Commencing  thirty  (30) days  following  the date of the  close of the  private
placement,  any of the Investors had the right to demand in writing (the "Demand
Notice") that the Company file a registration  statement with the Securities and
Exchange  Commission (the  "Commission")  which shall cover the shares and allow
the  Investor  to sell the  shares  to the  public.  Within  fifteen  (15)  days
following  receipt of the Demand  Notice,  the Company was required to file such
registration  statement  and use its  best  efforts  to have  such  registration
statement  declared  effective  by the  Commission  and  such  state  securities
regulators as reasonably requested by the Investor.

Laurie Munn,  wife of the Company's CEO obtained  certain  options on the Escrow
Shares and in addition  purchased  730,000  shares of Class A Common  stock (See
"Commitments and Contingencies").


On April 4, 1996,  the  Company's  Board of Directors  resolved to issue 250,000
shares  of the  Company's  Class B Common  Stock  to  Laurie  Munn,  wife of the
Company's   President  and  Chief  Executive   Officer.   This  issuance  is  in
consideration  for a down payment of $250,  Ms.  Munn's 6.6% note to the Company
providing  for  principal  of  $437,500  to be paid to the Company in five equal
annual  installments of  $105,561.90,  and Ms. Munn's guaranty and pledge of her
assets for certain  Company debt The Company  obtained an appraisal at that time
to determine the fair market values of this transaction.  The shares were issued
to Ms. Munn on April 8, 1996. A Promissory Note and Security Agreement,  whereby
the shares will  collateralize  the Promissory Note, was executed by the Company
and Ms. Munn pursuant to these terms. The Promissory Note remains outstanding.

Effective  June 30, 1996, the Company  entered into a consulting  agreement with
Morris Munn, father of the Company's  President and Chief Executive Officer,  in
exchange for certain services. (See "Commitments and Contingencies.") As part of
this agreement, the Company issued to Mr. Munn options to purchase up to 350,000
shares of the  Company's  Series A Preferred  stock.  These  options  were fully
exercised during July to September 1996,  generating net proceeds to the Company
totaling $787,500.  (See "Liquidity and Capital Resources.") In conjunction with
the issuance of the options to Mr. Munn, the Company  recorded  charges  against
earnings totaling $87,500 at June 30, 1996.

In January  1998 the  Company  entered  into an  Employment  Agreement  with its
President and CEO (See "Commitments and Contingencies").

Pursuant  to the  Company's  June 30,  1996  settlement  with Ann  Stevens  (the
"Settlement"),  a former  executive  of the Company,  the Company  issued to Ms.
Stevens  50,000 shares of the Company's  Class A Common Stock.  Also pursuant to
the  Settlement,  the  Company  issued to  Michael  Levine as escrow  agent (the
"Escrow Agent")  1,250,000  unregistered  shares of the Company's Class B Common
shares and  2,500,000  Class A Common  shares (the "Escrow  Shares".) The Escrow
Shares shall not be voted by the Escrow  Agent,  unless the Company  defaults on
its obligations under the agreement. Upon satisfaction of such obligations,  the
Escrow Shares shall be returned by the Escrow Agent to the Company.  (See "Legal
Proceedings".)  In conjunction  with the issuance of the Company's shares to Ms.
Stevens,  the Company recorded charges against earnings totaling $71,400 at June
30, 1996.

During  September 1996 and September  1997,  pursuant to the Company's  Director
Stock Option Plan, the Company  issued (per year):  10,000 shares of its Class A
Common shares to Roger Lourie,  an outside  director of the Company,  and 10,000
shares of its Class A Common  shares to  various  individuals  named by  Richard
Josephberg,  also an  outside  director  of the  Company.  These  shares  bear a
restrictive  legend.  Pursuant  to the  issuance  of these  shares,  $15,000 was
charged against earnings at December 31, 1996.

During February 1997, the Company entered into an agreement with BH Funding, LLC
("BH")  providing  for certain  advisory  services to be performed by BH for the
Company over five years.  The Company issued to BH 100,000 shares of its Class A
Common  shares  and  100,000  shares  of  its  Series  A  Preferred   shares  in
consideration for such services. (See "Notes Payable" or "Recent Developments").

Other than  services  provided by the  Company's  investment  banking  firm,  no
services  have been  provided at the  Company's  direction by any  consultant or
advisor with respect to the issuance or sale of the Company's equity securities.


6.   INCOME TAXES

For the six months ended December 31, 1997 the income tax provision is offset by
a  corresponding  reduction  in the  valuation  associated  with  the  Company's
deferred tax assets.  For the six months ended  December 31, 1996 the income tax
benefit generated has been offset by a corresponding valuation allowance.



Item 2.   Management's Discussion

The following  discussion  should be read in  conjunction  with the  information
contained  in  the  financial   statements   of  the  Company  (the   "Financial
Statements") and the Notes (the ANotes") thereto appearing  elsewhere herein and
in conjunction  with the  Management's  Discussion and Analysis set forth in the
Company's Form 10-KSB for the fiscal year ended June 30, 1997,  which discussion
is incorporated herein by reference.

Results of Operations

Period Ended December 31, 1997 as Compared to Period Ended December 31, 1996.

The Company's net sales from operations for the 6 months ended December 31, 1997
increased by $1,783,000 or 86.8% to $3,836,000  from  $2,053,000  for the period
ended  December 31, 1996. The growth in revenue was the result of an increase in
sales to a large  customer  and in it's custom  frame  division,  as well as the
implementation of an approximate 5% price increase initiated in June 1997.

The Company's cost of goods sold as a percentage of net sales increased to 62.5%
for the six months ended December 31, 1997,  from 54.8% for the six months ended
December 31, 1996.  Cost of goods sold for the current period was  approximately
$2,397,000 versus  $1,126,000 for the prior period.  This increase in percentage
was  due to an  increase  in  labor  costs  arising  from a  staff  build  up in
anticipation of substantial  growth in shipments for the subsequent  period. The
Company elected to  conservatively  estimate its current  work-in-progress.  The
Company used the gross profit  method to value  inventory  during the six months
ended December 31, 1997 and 1996.

The Company's selling,  general and  administrative  expenses as a percentage of
net sales totaled 23.2% for the six months ended December 31, 1997, versus 42.5%
for the six months ended  December 31,  1996.  To achieve this  reduction in the
ratio of selling,  general,  and administrative  expenses as a percentage of net
sales for the six months ended  December 31, 1997 versus the prior  period,  the
Company has taken certain measures to reduce expenses.  For example,  reductions
of administrative  personnel have led to reduced salaries,  benefits, and travel
expenses. Also discretionary spending for such items as stationery and supplies,
advertising,  and  consulting  fees has been  curtailed.  Interest  expense as a
percentage  of net sales  totaled  approximately  5.9% for the six months  ended
December 31, 1997, versus  approximately  7.8% for the six months ended December
31, 1996.  Interest expense increased  approximately  $65,000 for the six months
ended  December 31, 1997 in comparison to the six months ended December 31, 1996
because of new loans.

For the quarter  ended  December  31, 1997,  the Company  realized net income of
approximately  $203,000 or $0.04 per share,  versus net loss from  operations of
approximately ($107,000) or ($0.03 per share) for the quarter ended December 31,
1996.  For the six months  ended  December 31,  1997,  the Company  realized net
income  of  approximately  $311,000  ($.06  per  share),  versus a net loss from
continuing  operations of  approximately  $107,000  ($.03 per share) for the six
months ended December 31, 1996.

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS')  No. 128,  Earnings  Per Share.  This
statement  establishes standards for computing and presenting earnings per share
("EPS"),  replacing the  presentation of currently  required  primary EPS with a
presentation  of basic EPS. For entities with complex  capital  structures,  the
statement  requires the dual  presentation  of both basic EPS and diluted EPS on
the face of the statement of income. Effective for the six months ended December
31, 1996 the Company  has  adopted  the  provisions  of SFAS 128 for all periods
presented.


Liquidity and Capital Resources

Management  believes that future cash flow from operations will be sufficient to
support the  Company's  operations.  However,  Company  management  continues to
implement  what it  believes  to be the  changes  deemed  necessary  to  further
increase positive cash flow and  profitability.  Specific action taken as of the
date of this filing include  seeking either the  acquisition of or entering into
strategic  alliances  with  unrelated  companies in the  decorative  accessories
industry.  (See "Acquisitions and Strategic  Alliances.").  On October 20, 1997,
the  Company  entered  into a letter  of  intent  whereby  it will  acquire  the
remaining shares of Decor Group,  Inc. it does not currently own, and on January
7, 1998,  the Company  entered  into a letter of intent to acquire a Los Angeles
manufacturer of wall decor. (See . "Acquisitions and Strategic Alliances."). The
Company  has also begun to  implement  a  marketing  program  meant to  increase
revenues of its Master  Framemakers  Division.  No assurances  can be given that
these measures will generate the fiscal improvement sought by the Company.

On June 1, 1997 the Company  entered into an agreement (the  "Agreement"),  with
P-2-A which amended an earlier supply agreement.  The Agreement provides for the
sale of certain manufacturing equipment and related assets, consulting services,
as well as certain  contractual  reimbursements  of General  and  Administrative
expenses by P-2-A to the Company aggregating $1,140,000. The Company agreed that
the  $1,140,000 due to the Company would be used to fund the purchase from P-2-A
of 270,000  shares of P-2-A's  common stock and 120,000 of P-2-A's  common stock
purchase  warrants for an aggregate  purchase price of  $1,140,000.  The Company
effectively   owns   approximately   4.5%  of  P-2-A  after  this   transaction.
Additionally,  P-2-A will pay the Company $50,000 for the non-exclusive right to
utilize the Company's  existing  mail-order  customer list. P-2-A also agreed to
sublease approximately 21,000 square feet of office and manufacturing space from
the Company at an annual rental rate of $63,000 per year plus rent  escalations.
The term of the  sublease is from June 1, 1997 to December  31,  2001.  Prior to
this Agreement P-2-A was purchasing certain stretching and framing services from
the Company

As of December 31, 1997, the Company  reflected  cash balances of  approximately
$328,000  as compared to cash  balances  of  approximately  $271,000 at June 30,
1997, representing an increase of $57,000. Net cash used in operating activities
was approximately $375,000 at December 31, 1997, as compared to net cash used in
operating  activities of  approximately  $953,000 at December 31, 1996.  The net
cash used in operating  activities during the six months ended December 31, 1997
was  primarily a result of net income of  approximately  $311,000 as well as the
following approximate changes from continuing  operations:  decrease in accounts
payable and accrued  expenses of $246,000,  decrease in  inventories of $31,000,
and an increase in accounts  receivable of $731,000 and other assets of $13,000.
The decreases in inventory,  accounts payable, and accrued expenses were largely
due to increased sales at the Company's A.P.F. Master Framemakers  division (see
"Results of Operations").  The accounts receivable change was due to significant
growth of sales to a large customer.

Net cash generated in investing  activities during the six months ended December
31, 1997 totaled $1,000 versus approximately $1,132,000 for the six months ended
December 31, 1996.  During the six months ended  December 31, 1997,  the Company
invested  $1,000 to acquire  equipment,  versus  approximately  $306,000 used to
acquire  equipment  and other assets  during the six months  ended  December 31,
1996.

Net cash provided by financing activities totaled approximately  $433,000 during
the  six  months  ended  December  31,  1997  as  debt  was  paid  off,   versus
approximately  $2,081,000  during the six months ended December 31, 1996. During
the current  period,  funding  was the result of an  increase  in United  Credit
Corporation  asset based  borrowing in the  approximate  net amount $402,000 The
primary source of the prior year's financing was the conversion of the Company's
stock  warrants.  Bank of New York debt  decreased  from $380,000 as of June 30,
1997 to $355,000 as of December 31, 1997.  The debt continues to be amortized at
the rate of $10,000 per month  commencing  December 1, 1997.  The  liability  to
Infinity Investors,  Ltd. in the amount of $188,000 was entirely paid off during
the current quarter.

As of December 31, 1997, the Company's  financial  position  reflected a working
capital surplus of approximately  $194,000,  versus a working capital deficit of
approximately  $99,000 at June 30, 1997. As of December 31, 1997 versus June 30,
1997, there were increases in trade receivables of approximately $731,000, other
assets of $13,000 and a decrease in inventories of approximately  $31,000, and a
decrease in current  liabilities of approximately  $246,000.  These changes were
due to increases in sales and debt repayments.


On July 16, 1996, the Company filed a Registration Statement with the Securities
and Exchange  Commission  to  re-register  the Class WB Warrants and  underlying
Common A Shares  issuable if all  outstanding  Class WA Warrants were exercised.
The Commission declared this Registration  Statement effective on July 19, 1996.
Through the date of this filing, 704,412 of the Company's Class WA Warrants were
exercised  at $1.50  per  warrant,  generating  gross  proceeds  to the  Company
totaling  $1,056,618  net of  costs  related  to  professional  fees.  Of  these
proceeds,  $811,500 was used to purchase  54,100  shares of Decor Group,  Inc.'s
Series C Non-Voting,  Convertible,  Preferred Stock. The balance of the proceeds
was retained by the Company for working capital needs,  and for the provision of
loans to Decor Group, Inc.

On May 7, 1997 the Company announced that it had extended the exercise period of
its Class A Warrants to June 22, 1998.

In January 1996, the Company's Board of Directors  elected to lower the exercise
price of the  Company's  Class WB  Warrant  to $2.00 per  Class A Common  share,
subject to the filing and  effectiveness  of a  Registration  Statement with the
Securities and Exchange Commission.  Such Registration  Statement was filed with
the  Commission on July 16, 1996 and declared  effective on July 19, 1996.  This
registration  statement  registered all Class WB Warrants issuable upon exercise
of all outstanding  Class WA Warrants,  as well as Class A Common Stock issuable
upon exercise of all potentially  outstanding  warrants.  As of the date of this
filing, 118,012 of the Company's Class

 WB  Warrants  were  exercised  generating  gross  proceeds of  $236,024.  These
proceeds were retained by the Company to support working capital needs,  and for
the provision of loans to Decor Group, Inc.

In February  1996,  the Company's  Board of Directors  declared a stock dividend
equivalent  to $0.25  per  share  to its  Series  A 10%  Cumulative  Convertible
Preferred  Stockholders  of record as of the close of business  on February  23,
1996 (the record  date.)  Payment  was made on March 1, 1996 by the  issuance of
0.10231  of a share of the  Company's  Class A Common  Stock  for each  share of
Series A Preferred Stock held of record on the record date. Accordingly,  55,247
shares of the  Company's  Class A Common  Stock  was  issued  for this  purpose.
Retained  earnings was charged  $165,741 in March 1996 in  conjunction  with the
issuance of these shares. The Company has declared a record date of December 10,
1997 for a dividend on its Series A 10% Cumulative  Convertible  Preferred Stock
for the six-month  period ending  September 1996, March 1997 and September 1997.
The dividend ($.75 per Preferred share) was paid on January 10, 1998 in the form
of the Company's Common A Shares.  Accordingly,  shares of the Company's Class A
Common Stock was issued for this purpose. Retained earnings was charged $430,147
in December 1997 in conjunction with the issuance of these shares.

In February 1996, the Company's Board of Directors  approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock,  in  consideration
for past consulting  services provided.  The Company registered these securities
with the  Securities  and Exchange  Commission  during July 1997.  These shares,
which  bear a two-year  lock-up  restrictive  legend  pursuant  to an  agreement
between VCR Capital, Inc. and Sol Munn, were issued on April 12, 1996.

In April 1996,  the Company's  investment  banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the  Company's  Series A  Preferred  Stock.  These  shares,  all of which bore a
restrictive  legend,  were  issued  on April  24,  1996 to  various  independent
investors  generating  gross  proceeds of  $431,251.  The Company  realized  net
proceeds of  $310,609  which was used to pay  certain  outstanding  liabilities.
These shares were registered by the Company with the SEC on August 13, 1997.

During  September  1996,  the Company issued 10,000 shares of its Class A Common
shares to Roger Lourie, an outside director of the Company, and 10,000 shares of
its Class A Common shares to various  individuals  named by Richard  Josephberg,
also an outside director of the Company. These shares bear a restrictive legend.
Pursuant to the  issuance  of these  shares,  approximately  $15,000 was charged
against earnings at June 30, 1997.

The Company had  outstanding  secured  financing with Infinity  Investors,  Ltd.
totaling  approximately  $186,000 at September 30, 1997 due March 15, 1998. This
loan was paid in full during  December 1997 (see Notes  Payable).  In connection
with this loan,  the Company  also issued an option to purchase  25,000  Class A
Common shares at $2.50 per share.

In February 1997 the Company received a loan from BH Funding,  LLC ("BH") in the
aggregate  principal  amount  of  $600,000  to  be  utilized  to  repay  certain
indebtedness of the Company and for continued operating expenses. The Company in
order to collateralize  the loan to BH pledged and assigned to BH and granted to
BH a continuing security interest in the Company's 20,000,000 shares of Series B
Non-Convertible  Preferred  Stock of Decor,  and the Company's  54,934 shares of
Series C Convertible  Preferred Stock of Decor.  Simultaneously with the loan to
the Company,  BH purchased all of the Company's  Series A Convertible  Preferred
Stock holdings in Decor Group,  Inc., a total of 250,000 shares.  The loan is to
be repaid to BH Funding,  LLC with interest on April 28, 1999. In addition,  the
Company  entered into a Consulting  Agreement  with BH whereby BH would agree to
provide  consulting  and other  services to the Company in exchange  for 100,000
shares of each of the Company's Series A Convertible Preferred stock and Class A
Common stock (the  "Consulting  Shares").  The Company  prepaid  $100,000 of the
principal due BH Funding on December 13, 1997.

In connection with this agreement,  the fair market value of these shares on the
date of issuance (less the proceeds received) was allocated as follows: $350,000
as  acquisition  consulting  on the Decor  transaction;  $350,000 as  additional
financing costs on the loan (to be amortized over the life of the loan using the
effective  interest method);  and $25,000 as additional expense of the Company's
sale of its  250,000  Series A  Convertible  Preferred  Stock  holdings in Decor
Group, Inc.

As of December 31, 1997,  the Company had various unpaid New York State taxes of
approximately  $170,000.  In July,  1997,  the Company  entered  into a 24-month
payout agreement with New York State to fully satisfy this obligation.

Except as otherwise  set forth herein,  the Company has no material  commitments
for  capital  expenditures.  In order to fund  growth  over the long  term,  the
Company  anticipates  possible  future  issuance of its securities  resulting in
further dilution to its securityholders.

The Company operates pursuant to a policy that generally precludes acceptance of
goods on a non-cash basis (sometimes known as barter transactions).

Refer to the ALegal Proceeding" section for discussion of litigation and related
commitments.


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 supplies and other
operating costs could adversely affect the Company's  operations.  However,  the
Company  believes it could increase prices to offset  increases in cost of goods
sold or other operating costs.


Sales Variations

Although the  Company's  net sales are not subject to  seasonality  fluctuations
experienced by certain retailers,  the Company experiences some minor variations
in the level of sales  during the year.  The first  quarter  of the fiscal  year
(i.e.,  July 1 through  September 30) is generally  the Company's  slowest sales
period due to the fact that the summer  period is typically  the period when art
galleries  are at their  slowest  purchasing  period.  During this  period,  the
Company's warehouse and factory closes for three to five days to take the annual
physical  inventory  and to  consolidate  vacation  periods  for  the  Company's
employees.



<PAGE>


                                     PART II

                                OTHER INFORMATION

Item 1 .   Legal Proceedings
The Company and its Chief Executive Officer ("CEO") during fiscal year 1996 were
involved in lawsuits with various members of the CEO's immediate family, certain
of whom were Officers and Directors of the Company.  All of this  litigation has
been  settled  and all  resulting  charges  were  reflected  in the fiscal  1996
financial statements. In addition, as a component of the settlement, the Company
entered into various severance and non-compete agreements discussed in Note 12.

The  litigation  relating to the  termination of the 1995  employment  agreement
between Ann Stevens  and the  Company has been  settled  during July 1996 by the
execution of an employment  severance  agreement (the "Agreement").  Pursuant to
the  Agreement,  the  Company  paid Ms.  Stevens  $63,000 for accrued and unpaid
compensation  upon  execution of the  Agreement.  Subsequently,  for a period of
seven years,  the Company will make  bi-weekly  payments to Ms. Stevens to total
$72,000  for the first  year,  $70,000  for each of the next  three  years,  and
$50,000 for each of the final  three  years.  As  additional  compensation,  the
Company  paid  Ms.  Stevens  for  reimbursement  for  certain  expenses  in  the
approximate amount of $6,000 and $50,000 in various installments during the four
months  ending  December  1996.  The Company  also  entered  into a  non-compete
agreement with Ms. Stevens for which the Company will make bi-weekly payments to
Ms. Stevens to total $25,000 per year  commencing in July 1996, for seven years,
plus  automobile  and insurance  costs for five years.  As of June 30, 1996, the
Company  issued to Ms.  Stevens  50,000 shares of the  Company's  Class A Common
Shares,  which were  previously  committed to Ms.  Stevens  pursuant to her 1995
employment  agreement.  The  50,000  Class A  Common  Shares  are  subject  to a
Alock-up"  agreement  with VTR Capital  Corporation,  the  Company's  investment
bankers.  The Company placed into escrow  1,250,000 shares of its Class B Common
Shares and 2,500,000  Class A Common  shares (the "Escrow  Shares") with Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either  the  failure  by the  Company  to adhere to the  payment
provisions  noted above or the financial  insolvency  of the Company.  If either
event occurs, Ms. Stevens will be in a position to elect replacement  Directors.
Once the payment  provisions  in the severance and  non-compete  agreements  are
satisfied,  the Escrow Agent shall return the Escrow Shares to the Company.  The
Company paid $36,707 in the quarter ended  September 30, 1997 to Ms.  Stevens in
compliance with the various  settlement  related  Agreements.  The status of the
Escrow shares remain unchanged.

In February  1997,  the terms of the agreement with Ms. Stevens were modified to
provide for additional payments of $500 per month over 16 months, and to provide
for $6,000 as reimbursement for legal expenses.

During April and May of 1995, Hide Tashiro commenced two lawsuits,  now settled,
in the  Supreme  Court of New York,  Manhattan  County,  totaling  approximately
$300,000, plus interest and attorney's fees, against the Company and others. The
Company claimed that Mr. Tashiro and his affiliates owed a greater amount to the
Company for earned  royalties  and  commissions.  In April 1996 the  plaintiff's
motions  for summary  judgment  were denied and the court held that there was an
issue of fact to be tried. On June 30, 1997 the Company, Hide Tashiro,  Takehisa
Nishijima,  and Max Munn,  President of the  Company,  entered into a settlement
agreement (the  "Settlement  Agreement")  whereby the Company issued Mr. Tashiro
300,000 shares (the "Shares") of the Company's unregistered Class A Common Stock
in exchange and satisfaction of all claims.  The Settlement  Agreement  contains
certain  restrictions  on resale  of the  Shares  commencing  in 1999 as well as
providing for certain "piggy-back" registration rights.

In July 1996, Gear Holdings,  Inc. brought an action against the Company for the
alleged breach of a licensing agreement.  The Company denies that it was a party
to an  agreement  with  Gear,  or that any sum of money is owed.  The  complaint
demands sums Gear would have received under the alleged agreement in a sum to be
determined,  but not less than  $250,000.  The suit has remained  dormant  since
inception.  Management  believes this matter will be dismissed  with no material
impact to the Company's financial position or results of operations.

In August 1996, a lawsuit,  now settled,  was brought by The Munn Trust of 1975,
Sol Munn and  Evelyn A. Munn,  Co-Trustees  commenced  an action in the  Supreme
Court of New York,  County of Suffolk  against  the Company as well as Max Munn,
the Company's  President and Chief  Executive  Officer and Laurie Munn, his wife
for  non-payment  of  $150,000  plus  interest.  The  Company  claimed  that any
obligations  that may have been due were due  solely by Mr. and Mrs.  Munn.  The
Company  has not  guaranteed  such  liabilities.  This  matter has been  settled
between all parties and releases  exchange without any payment by the Company or
by the Munn Trust.

In August 1996,  SJP  Contractors of New York,  Inc.  commenced an action in the
Supreme Court of New York, County of Westchester  against the predecessor entity
of the Company, A.P.F. Holdings,  Inc., and others for $208,165 for work, labor,
and  services  allegedly  performed in January  1991 for the  renovation  of the
Company's premises. Management believes that all required payments had been made
in 1991 and no further amounts should be provided for.

In July 1997, an action now settled was brought  against the Company in the U.S.
District Court by a former employee of the Company (for an unspecified  amount),
who  claimed  among  other  things,  that  she was  discharged  because  she was
pregnant. The settlement did not have a material effect on the Company's results
of operations.


The Company is subject to other claims and litigation in the ordinary  course of
business. In management's opinion, such claims are not material to the Company's
financial position or its results of operations.


<PAGE>




Item 2.   Changes in Securities

None in addition to those disclosed herein.

Item 3.   Defaults Upon Senior Securities

None

Item 4.   Submission of Matter to a Vote of Security Holders

None

Item 5.   Other Information

None

Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits

None

(b)   Reports on Form 8-K

None


<PAGE>











Signatures




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




                                             INTERIORS, INC.


Date:  February 17, 1998                     By: /s/ Max Munn
                                                 ------------------------------
                                                 Max Munn, President and Chief 
                                                 Executive, Financial and 
                                                 Accounting Officer