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 Three Month Period Ended September 30, 1996.

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.
      (Doing Business in New York under the name A.P.F. Master Framemakers)
       (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  November  15,  1996  was  4,216,135   and   2,039,500,
respectively.

Transitional Small Business Disclosure Format (check one).  Yes     .  No   X  .
                                                               -----      ----
<PAGE>
                                INTERIORS, INC.

                                TABLE OF CONTENTS

                                                                        Page No.
                                                                        --------

PART I - FINANCIAL INFORMATION

Item 1.  Financial
Statements........1..........................................................1

      Consolidated Balance Sheet as of September 30, 1996....................2

      Consolidated Statements of Operations -
           For the Three Months Ended September 30, 1996 and 1995............3

       Consolidated Statement Changes in Stockholders' Equity -
           For the Three Months Ended September 30, 1996.................... 4

      Consolidated Statements of Cash Flows-
           For the Three Months Ended September 30, 1996 and 1995............5

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

Item 2.  Management's Discussion and Analysis...............................17

PART II - OTHER INFORMATION

Item 1.  Legal Proceeding...................................................27

Item 2.  Changes in Securities..............................................29

Item 3.  Defaults Upon Senior Securities....................................29

Item 4.  Submission of Matters to a Vote of Security Holders................29

Item 5.  Other Information..................................................29

Item 6.  Exhibits and Reports on Form 8-K...................................29


<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 September  30, 1996 and the results of operations
for the three months ended March 31, 1996 and 1995.

         The  Company's  results of  operations  during the three  months  ended
September 30, 1996 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, 1996.

                                       1

<PAGE>
                                 INTERIORS, INC.
                                ---------------
                                  CONSOLIDATED
                                  ------------
                                  BALANCE SHEET
                                  -------------
                                  (Unaudited)


                                                        September 30,
                              ASSETS                       1996
                                                        ----------

CURRENT ASSETS:
  Cash                                                  $        0
  Accounts receivables -
     Trade, net of allowance of $40,000                    811,044
  Inventories                                            1,949,565
  Prepaid expenses and other current assets                349,565
                                                      ------------
              Total current assets                       3,110,174


INVESTMENT IN AFFILIATE                                    824,000




PROPERTY AND EQUIPMENT, at cost
  Machinery and equipment                                1,927,015
  Furniture and fixtures                                   164,929
  Leasehold improvements                                   259,405
                                                        ----------
            Total property and equipment, at cost        2,351,349





  Less- Accumulated depreciation and
     amortization                                        1,152,100
                                                        ----------
          Net property and equipment                     1,199,249



OTHER ASSETS                                               599,616
                                                        ----------
          Total assets                                  $5,733,039
                                                        ==========
<PAGE>
                                 INTERIORS, INC.
                                ---------------
                                  CONSOLIDATED
                                  ------------
                                  BALANCE SHEET
                                 -------------
                                   (Unaudited)

                                                           September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY                           1996
-----------------------------------                        -------------

CURRENT LIABILITIES:
  Notes payable and current maturities of
     long-term debt                                       $  2,583,586
  Accounts payable and accrued liabilities                   2,090,364
  Capital lease obligations                                     22,112
                                                          ------------
            Total current liabilities                        4,696,062



NON-CURRENT LIABILITIES:
  Notes payable                                                      0
  Capital lease obligations                                     30,652
                                                          ------------
            Total noncurrent liabilities                        30,652

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value,
     5,300,000 shares authorized,
     1,140,000 issued and outstanding                           11,400
  Class A common stock, $.001 par value,
      30,000,000 shares authorized,
    4,026,247 shares issued and outstanding                      4,026
  Class B common stock, $.001 par value,
     2,500,000 shares authorized,
     2,039,500 shares issued and outstanding                     2,040
  Additional paid-in-capital                                10,219,685
  Retained deficit                                          (8,792,726)
  Treasury Stock                                                  (600)
  Note receivable                                             (437,500)
                                                          ------------
           Total stockholders' equity                        1,006,325
                                                          ------------
           Total liabilities and stockholders' equity     $  5,733,039
                                                          ============


       The accompanying notes are an integral part of this balance sheet
                                      
                                        2
<PAGE>

                                 INTERIORS, INC.

                                  CONSOLIDATED

                            STATEMENTS OF OPERATIONS

             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                     1996           1995
                                                              -----------    -----------
<S>                                                           <C>            <C>        
NET SALES                                                     $ 1,179,170    $ 1,293,258

COST OF GOODS SOLD                                                621,453        705,261
                                                              -----------    -----------

          Gross profit from continuing operations                 557,717        587,997

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                      488,071        649,665

                                                              -----------    -----------
           Operating expenses                                     488,071        649,665

            Income (loss) from continuing operations
               before interest and provision for taxes             69,646        (61,668)

INTEREST EXPENSE (including financing charges)                     77,240         95,348
                                                              -----------    -----------

            Income (loss) from continuing operations
                before provision for taxes                         (7,594)      (157,016)

PROVISION FOR INCOME TAXES
                                                              -----------    -----------

            Income (loss) from continuing operations               (7,594)      (157,016)

DISCONTINUED OPERATIONS (Note 3)
            Loss from operations of discontinued operations             0         42,293
                                                              ------------   -----------
                  Loss from discontinued operations                     0         42,293

NET INCOME (LOSS)                                             ($    7,594)   ($  199,309)
                                                              ===========    ===========

NET EARNINGS PER COMMON STOCK

                 CONTINUING OPERATIONS                        $      0.00    ($     0.08)
                 DISCONTINUED OPERATIONS                      $      0.00    ($     0.02)
NET INCOME (LOSS) PER SHARE OF COMMON STOCK                   $      0.00    ($     0.10)

WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                             3,927,116      1,977,158
                                                              ===========    ===========
</TABLE>

    the accompanying notes are an integral part of these financial statements

                                       3

<PAGE>
<TABLE>
<CAPTION>

                                INTERIORS, INC.

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

               FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND 1995
                                   (unaudited)

                                   Series A             Class A               Class B           
                                Preferred Stock       Common Stock          Common Stock        
                                Shares   Amount    Shares       Amount    Shares     Amount     
                                ------   ------    ------       ------    ------     ------     

<S>                            <C>      <C>       <C>          <C>       <C>        <C>      
BALANCE, June 30, 1996          790,000  $7,900    3,470,247    $3,470    2,039,500  $2,040     

  Proceeds from the exercise 
    of common stock warrants                         556,000      $556                          
  Proceeds from the exercise 
    of pfd. stock options       350,000  $3,500                                                 
  Net loss through September 
    30, 1996                                                                                    

BALANCE, September 30, 1996   1,140,000 $11,400    4,026,247    $4,026    2,039,500  $2,040    
</TABLE>
<TABLE>
<CAPTION>



                                 INTERIORS, INC.
                                                          
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                                          
                FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND 1995
                                   (unaudited)
                                   (CONTINUED)

                                   Additional      Retained                                
                                    Paid-In        Earnings      Treasury    Note              
                                    Capital        (Deficit)      Stock   Receivable      Total      
                                    -------        ---------      -----   ----------      -----      
                                                                                               
<S>                               <C>             <C>            <C>      <C>            <C>      
BALANCE, June 30, 1996            $8,564,741      ($8,785,132)   ($600)   ($437,500)      ($645,081)
                                                                                                         
  Proceeds from the exercise                                                                              
    of common stock warrants        $833,444                                               $834,000      
  Proceeds from the exercise                                                                              
    of pfd. stock options           $821,500                                               $825,000      
  Net loss through September                                                                              
    30, 1996                                          ($7,594)                              ($7,594)        
                                                                                                          
BALANCE, September 30, 1996      $10,219,685      ($8,792,726)   ($600)   ($437,500)     $1,006,325
                              
</TABLE>

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


                                       4
<PAGE>
                                 INTERIORS, INC.
                                  CONSOLIDATED
                             STATEMENT OF CASH FLOWS
               FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                   QUARTERS ENDED
                                                                                                     SEPTEMBER 30
                                                                                                 1996            1995
                                                                                            ---------------   -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                            <C>            <C>    
  Net Loss                                                                                        ($7,594)     ($199,309)


  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                                 158,875        112,081
    Provision for losses on accounts receivable                                                                  (20,000)
    Accretion of interest expense                                                                                 25,000
    Restructuring costs
    Non-cash provision for discontinued catalog operations                                                        89,250
    Non-cash  satisfaction  of debt  Provision  for issuance of stock Changes in
    assets and liabilities:
    Decrease (increase) in accounts receivable, trade                                             (26,444)        20,615
    Decrease (increase) in inventories                                                           (228,261)      (261,784)
    Decrease (increase) in prepaid catalog costs, prepaid expenses and other current assets       (36,300)       (16,489)
    Decrease (increase) in other assets                                                                          (27,705)
    Increase (decrease) in notes payable and current maturities of long term debt                  67,013
    Increase (decrease) in accounts payable and accrued expenses                                 (616,024)      (629,005)
    Increase (decrease) in net liabilities and accrued expenses of discontinued operations        (90,557)
    Increase (decrease) in prepaid sales & customer deposits                                                     (14,345)
                                                                                              -----------    -----------
          Net cash used in operating activities                                                  (779,292)      (921,691)
                                                                                              -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                                            (59,850)      (180,557)
   Investment in Decor Group, Inc.                                                               (824,000)
                                                                                              -----------    -----------
          Net cash used in investing activities                                                  (883,850)      (180,557)
                                                                                              -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of debt                                                                            507,000
  Repayments of debt and capitalized lease obligations                                                         (580,642)
  Net proceeds from sale of Series A preferred stock and warrants                                             1,693,096
  Net proceeds from exercise of common stock warrants                                             834,000
  Net proceeds from exercise of preferred stock options                                           825,000
                                                                                              -----------    -----------
      Net cash provided by  financing activities                                                1,659,000      1,619,454
                                                                                              -----------    -----------
      Net Increase (decrease) in cash                                                              (4,142)       517,206

CASH, beginning of period                                                                           4,142          2,114
                                                                                              -----------    -----------

CASH, end of period                                                                           $         0    $   519,320
                                                                                              ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for-
    Interest                                                                                  $    21,157    $    85,630
    Taxes                                                                                     $     5,566    $     5,150
NON-CASH FINANCING ACTIVITIES:
   Conversion of convertible debt into Class WC Warrants                                                     $   100,000

</TABLE>




   The accompanying notes are an integral part of these financial statements.
                                        5
<PAGE>
                       THIS PAGE LEFT INTENTIONALLY BLANK
<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.
Reference  should be made to the  Company's  financial  statements  for the year
ended June 30, 1996 for a description of the accounting policies which have been
applied  consistently.  Also,  reference  should  be  made to the  notes  to the
Company's  June 30, 1996  financial  statements  contained in the Company's Form
10-KSB for the fiscal year ended June 30, 1996,  for  additional  details of the
Company's financial condition, results of operations and cash flows. The details
in those notes have not changed except as a result of normal transactions in the
interim.  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 three months ended
September  30, 1996 are not  necessarily  indicative of those to be expected for
the entire year. The Company,  for the three months ended September 30, 1996 and
1995, used the gross profit method to value inventory.

2.     ACQUISITIONS AND STRATEGIC ALLIANCES

Part of the Company's  long-term plan for growth includes 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  and  200,000  shares  of its  Series  A  Convertible
Preferred stock 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
on December 31, 1997.  The Voting Trust shall comprise  three  individuals:  the
Company's  President and Chief  Executive  Officer (and also the Chairman of the
Board of Decor),  and two Directors of Decor who are otherwise  unrelated to the
Company.  Conversion  of the 250,000  shares of Series A  Convertible  Preferred
stock into common stock would give the Company approximately 88.6% of the voting
stock of Decor. 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 this effective date, the Company will own
approximately  86.0% of the total  voting  stock of Decor.  The holding in Decor
will be recorded on the Company's  financial  statements under the equity method
of accounting  until such time the Company obtains  unconditional  and effective
control of Decor,  which is expected to occur upon the  expiration of the Voting
Agreement.

During the quarter  ended  September  30,  1996,  the Company has also  provided
$824,000 cash as part of the capitalization of Decor. At September 30, 1996, the
Company has not made a valuation of either the securities  issued or received in
the  capitaliztion  of Decor.  This valuation will take place subsequent to this
date. Thus, at September 30, 1996, the Company's investment in Decor is based on
its cash investment  only. This basis may increase if the ultimate  valuation of
the securities exchanged warrants such increase.

The Decor  securities  acquired by the Company,  as  described in the  preceding
paragraph, reflects a 1-for-2 reverse split effected by Decor in October 1996.

                                       7
<PAGE>

     Decor has entered into an asset purchase  agreement (the  "Agreement") 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
expects to close on the Agreement  contemporaneously  with its public  offering.
Artisan  House,  located in Los  Angeles,  California  and  founded in 1964,  is
engaged in the design,  manufacturing,  and  marketing of metal wall,  table and
freestanding  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.

     As part of the Company's  investment in Decor,  during the months of August
and September 1996, the Company  purchased 54,934 shares (adjusted for a 1-for-2
reverse split effected by Decor in October 1996) of Decor's Series C Non-Voting,
Convertible, Preferred Stock at a cost of $824,000.

     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 the
date of this  filing,  Ms.  Munn was issued  100,000  shares of the  outstanding
1,312,500  common shares of Decor,  adjusted to reflect a 1-for-2  reverse split
effected by Decor in October 1996.  Also,  the Company has executed a management
agreement  with  Decor,   whereby  the  Company  will  provide   management  and
administrative  support to Decor in exchange for minimum annual fees of $75,000.
At September 30, 1996, approximately $19,000 of fees were accrued by the Company
for such services.

     As of the date of this filing, Laurie Munn, wife of the Company's President
and Chief Executive  Officer,  was issued 9 of the outstanding 100 Common shares
of Lance Acquisition Corp. ("LAC") which on March 3, 1996 acquired the assets of
The Lance Corporation ("Lance") a Massachusetts  manufacturer and distributor of
various products for the giftware and collectibles marketplace.  The Company and
LAC  entered  into an  agreement  whereby  each entity  will  guarantee  certain
liabilities of the other. During April 1996, the Company moved the operations of
Italia Collection to Lance.  Subsequent to this move, the ownership of Lance and
its business  operations  changed.  Because of this, Company management believes
that the  operations  of Italia  Collection  will be best served by  retaining a
lower cost,  independent  manufacturer.  The Company is  accordingly  conducting
discussions  with a Mexican  company to  finalize  terms under which this entity
will manufacture and support the entire product line of Italia Collection, which
largely  consists  of ceramic and  porcelain  collectibles,  mirrors,  and other
decorative  accessories for the home. Also, the Company plans to base its Italia
operations in California,  to leverage upon the infrastructure  acquired as part
of the Decor transaction. During this period of transition,  shipments of Italia
products have significantly slowed (See "Management's Discussion".) Although the
Company  expects  Italia  revenues  to grow  once the  reorganization  of Italia
operations  is  completed,  no  assurances  can be given that such  growth  will
actually occur. LAC is expected to be dissolved during the current period.

                                       8
<PAGE>

3.     DISCONTINUATION OF CERTAIN OPERATIONS

On March 31, 1996, the Company's  Board of Directors  decided to discontinue the
Company's catalog  operations  because of declining  revenues and high operating
costs. As a result, a charge against  earnings of  approximately  $2,100,000 was
recorded at June 30, 1996.  For the twelve  months  ended June 30, 1996,  losses
from continuing catalog operations totaled $789,332.  The Company plans to fully
carry out the  discontinuation  of the  catalog  operation  within one year from
March 31, 1996.  The Company plans to wind down  operations by filling  existing
orders and possibly mailing one final catalog as a "close-out sale" to liquidate
inventory.  As of March  1997,  no catalog  related  assets or  liabilities  are
expected to remain on the Company's  balance  sheet.  The  financial  statements
included with this filing have  reclassified  the results of operations  for the
quarter ended September 30, 1995 as if the Company's catalog operations had been
discontinued  during this  quarter.  For the quarter  ended  September 30, 1996,
results of the discontinued catalog operations were not material.

4.    NOTES PAYABLE

On November 23, 1994,  the Company  borrowed the sum of $225,000  from  Ekistics
Corp., a Bahamian corporation, pursuant to a promissory note due March 30, 1995,
together with  interest at the rate of 14% per annum and a 5% financing  charge.
In April  1995,  the  Company  paid  $25,000,  plus  interest  on account of the
principal  amount of said Note and entered  into a revised note for the $200,000
balance with such revised note providing for payment of principal on October 20,
1995, having an interest rate of 14% per annum and being convertible into 80,000
shares of Preferred  Stock and 40,000  Class WC Warrants.  On December 15, 1995,
this conversion took place.  The 80,000  Preferred Shares and 40,000 WC Warrants
were registered in a Registration  Statement  declared  effective  September 18,
1996.

In June and July 1995, the Company delivered to unaffiliated  parties promissory
notes in the  aggregate  amount of $300,000 with interest at the rate of 10% per
annum (the "10% Notes") and promissory notes in the principal amount of $100,000
with interest at the rate of 6% per annum (the "6% Notes".) The 10% Notes and 6%
Notes were each  payable in June and July 1996 or the closing of the sale by the
Company of an issue of Preferred Stock,  whichever is earlier. The 6% Notes were
convertible, in whole or in part, at the option of the holder, into a maximum of
2,000,000  WC  Warrants  entitling  the  holders  for a period of five  years to
purchase one share of  Preferred  Stock per Class WC Warrant at a price of $5.50
per share. These Warrants are redeemable by the Company.  The Notes were secured
by a lien on the Company's  assets. In September 1995 the Company repaid all 10%
Notes in full,  plus all accrued  interest  for both the 10% Notes and 6% Notes.
All holders of 6% Notes have converted in full,  into a total of 2,000,000 Class
WC  Warrants,  which  were  registered  in  a  Registration  Statement  declared
effective by the Securities and Exchange Commission on September 18, 1995.

On October 16, 1995,  the Company  entered into an  agreement to  restructure  a
promissory  note dated May 1995, with the principal  amount of $500,000  bearing
interest  at the rate of 18% per  annum  with the  principal  which  was due and
payable in full on  September  30, 1995 and a $150,000  note dated May 12, 1995,
bearing  interest at the rate of 18% payable  monthly with

                                       9
<PAGE>

135% of the  principal  which was also due and payable in full on September  30,
1995 with a Nevis,  BWI  Corporation.  As of October 16, 1995 the parties agreed
the Company owes the lender,  including  interest and monthly  extension fees of
approximately  $102,500  through  December  15,  1995,  an  aggregate  amount of
approximately $805,000. Pursuant to the new agreement, the Company paid $405,000
to the Nevis  Corporation  upon  acceptance of the  agreement.  The Company also
delivered a Promissory Note in the principal amount of  approximately  $400,000,
in  extension  and  replacement  of the  remaining  balance  due and  payable of
$180,000 on or before  December 15, 1995 and $220,000 on July 31, 1996.  The new
agreement also  stipulates  that the lender shall sell the 180,000 shares of the
Company's Class A Common Stock, held in escrow by the lender, for $180,000 to an
unaffiliated  third party. The proceeds of such sale will be applied against the
note and during  January 1996. In addition,  during  December  1995, the Company
issued to the lender 35,000  unregistered  shares of Class A Common Stock.  Such
shares  shall be afforded a piggyback  registration  right for all  registration
statements  filed by the  Company  before  July 31,  1996 and a one time  demand
registration  right  commencing after July 31, 1996.  Approximately  $25,000 was
charged  against  earnings  during  the  quarter  ended  December  31,  1995  in
conjunction  with the  issuance of these  shares.  The  promissory  note is also
guaranteed by Max Munn,  President and Chief  Executive  Officer of the Company.
The note is  collateralized  by 600,000  shares of the Company's  Class A Common
Stock owned by the Company's Italia Collections Inc. subsidiary. The Company has
reached a general  agreement  with this  lender  to  restructure  the  repayment
schedule  of  approximately  $245,000  of  outstanding  principal  and  interest
payable.

5. 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  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 will pay Ms.
Stevens for reimbursement of certain expenses,  $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  commited to Ms. Stevens  pursuant to her 1995 employment
agreement.  The Company plans to register  these shares with the  Securities and
Exchange  Commission  during the quarter ended December 31, 1996. 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  "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  

                                       10
<PAGE>

provisions in the severance and non-compete agreements are satisfied, the Escrow
Agent shall return the Escrow Shares to the Company.

  On February 15, 1996, the Company's Board of Directors  agreed in principle to
enter  into a  four-year  employment  agreement  between  the  Company  and  its
President and Chief Executive Officer. The agreement will provide an annual base
salary of $150,000, 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 will grant the President and Chief Executive Officer an
option to purchase at any time  150,000  shares of the  Company's  Series A, 10%
Cumulative  Convertible  Preferred  Stock  at a price of $2.50  per  share.  The
exercise of this option,  as well as any subsequent  conversion to the Company's
Class A Common Stock, will require the prior consent of the Company's investment
banking firm. The agreement will also contain a "non-compete" clause and provide
the President and Chief Executive  Officer with the use of an automobile.  As of
the date of this filing,  the document for this agreement has not been finalized
or  executed.  This is  expected  to  occur  during  the  current  fiscal  year.
Presently,  the President and Chief Executive  Officer draws an annual salary of
$150,000 and has the use of an automobile provided by the Company.

  In August 1995 the Company entered into a four year employment  agreement with
Ann Stevens,  then Executive Vice President,  with an annual salary of $150,000.
In addition,  on or about  September 30, 1995,  the  agreement  provides for Ms.
Stevens  to  receive a one time  payment of  either,  at the  Company's  option,
$50,000 or 50,000  shares of Class A Common Stock.  Pursuant to this  agreement,
Ms. Stevens was also entitled to receive stock options,  stock bonuses and other
equity instruments in an amount equal to that received by Max Munn or members of
his immediate family. In June 1996, the Company executed an employment severance
agreement  with Ms.  Stevens which  terminated the provisions of the August 1995
employment  agreement.  The employment  severance agreement  stipulated that the
Company will pay to Ms. Stevens an initial payment of $63,000,  and make various
periodic payments over seven years. In addition,  the Company agreed to issue to
Ms.  Stevens 50,000 shares of the Company's  Class A Common Shares.  Such shares
were issued on July 25, 1996. (See "Legal Proceedings.")

                                       11
<PAGE>

  On October 27, 1995 the Company entered into a one-year  employment  agreement
with Robert  Schildkraut,  then Vice  President,  Operations with an annual base
salary of  $120,000.  The  Agreement  may be  terminated  by the Company  with a
payment of 50% of the  employee's  salary  remaining  under the  agreement  or a
payment of six week's salary in the event the employee resigns from the Company.
The Agreement also provides for the employee to be granted certain stock options
to purchase an  aggregate of 100,000  Class A Shares,  50,000 of which are to be
granted and vested immediately at a price of $2.00 per share, exercisable in six
months from the date of grant,  and any attempt to exercise these options during
the exercise  period will  terminate the options  granted on September 16, 1994;
options to purchase 25,000 shares at a price of $4.00 per share to be granted on
the second  anniversary;  and  options to purchase  25,000  shares at a price of
$5.00 per share to be  granted  on the third  anniversary.  The  Agreement  also
provides for a bonus program based on the Company meeting certain minimum profit
goals.  In April 1996,  the  employment of the Vice  President,  Operations  was
terminated.  The Company  settled its  obligations  to the  employee  during the
subsequent quarter. This settlement took the form of severance payments totaling
approximately $27,000. No securities have been issued to the employee as part of
the settlement.

  On May 8, 1995, the Company  entered into an Employment  Agreement with Donald
Feldman,  Vice President of Sales and Marketing of the Company. The Agreement is
for a term of four  years  beginning  June  1995  and may be  terminated  by the
Company  after the first  year with  payment  of 80% of the  employee's  salary,
reduced by the  employee's  other income.  The Agreement  provides that the Vice
President of Sales and  Marketing  will be employed at a base salary of $117,500
plus a sales  commission  structure  based on  increases  in net  sales  for the
Company and for Italia. Mr. Feldman will be granted an option to purchase 10,000
shares of the  Company's  Class A Common  Stock for  every  full year  under the
employment  agreement  at a price  of  $2.50  per  share.  Concurrent  with  the
Effective Date of Decor Group,  Inc.'s  ("Decor")  initial public  offering (See
"Acquisitions  and Strategic  Alliances."),  the Company and Mr. Feldman plan to
terminate Mr.  Feldman's  Employment  Agreement.  Mr.  Feldman will enter into a
three (3) year  employment  agreement  with Decor at such  Effective  Date.  Mr.
Feldman,  who is President of Decor, will receive a salary of $117,500 per annum
and an annual bonus equal to two percent (2%) of the amount by which Decor's net
sales exceed the sales  recorded by Decor for the year ending June 30, 1997.  In
addition,  Mr.  Feldman  will be granted  options to purchase  10,000  shares of
Common Stock of Decor at an exercise price of $2.50 per share for each full year
of employment  under the  agreement.  Decor will also  reimburse Mr. Feldman for
bona fide  business  expenses  including  up to $400 per month for the use of an
automobile and $200 per month for insurance.

  As part of the Italia  acquisition during fiscal year ended June 30, 1995, the
Company entered into various  consulting and employment  agreements  aggregating
$176,000 per annum.  The  agreements  were subject to termination at any time by
Italia for reasons  specified in the  agreements.  In July 1995,  the employment
agreement for the  President of Italia,  as well as all other  agreements,  were
terminated by the Company.

  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 

                                       12
<PAGE>

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  totalling  $787,500.
(See "Liquidity and Capital Resources.") In addition, the new agreement provides
for bi-weekly payments to Morris Munn totalling $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.

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.

6.       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.

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.

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 "Regulation 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  

                                       13
<PAGE>

Registration  Statement  effective  on July 19,  1996.  Through the date of this
filing,  635,252 of the Company's  Class WA Warrants were exercised at $1.50 per
warrant,  generating  proceeds  to  the  Company  totaling  $952,878.  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.

In December 1995, an consideration for certain services rendered,  10,000 shares
of the  Company's  Class A Common  Stock were issued to various  individuals  as
determined  by  Richard   Josephberg,   an  outside  Director  of  the  Company.
Approximately  $7,000 was charged  against  earnings  during the  quarter  ended
December 31, 1995 in conjunction with the issuance of these shares.

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.  The Company plans to
register these securities with the Securities and Exchange Commission during the
quarter  ended  December 31,  1996.  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,  90,636  of the  Company's  Class  WB  Warrants  were
exercised at an exercise  price of $2.00 per option  generating  proceeds to the
Company of $181,272.  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.  As of the date of this  filing,  the Company has not
declared  or  established  a record  date for a  dividend  for its  Series A 10%
Cumulative Convertible Preferred Stock for September 1996.

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,  which bear a restrictive
legend, were issued on April 12, 1996. The Company is planning to register these
securities with the Securities and Exchange 

                                       14
<PAGE>

Commission  during the quarter ended December 31, 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.

On March 3, 1996,  the Company  acquired  250,000 shares of Series A Convertible
Preferred  Stock  and an option  to  purchase  10,000,000  shares  (the  "Option
Shares") of Series B  Non-Convertible  Voting  Preferred  Stock of Decor  Group,
Inc.,  ("Decor")  in  exchange  for  issuance to Decor by the Company of 200,000
shares  of its  Class  A  Common  stock  and  200,000  shares  of its  Series  A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. (The Decor securities are adjusted to
reflect a 1-for-two  reverse split effected by Decor in October 1996.) 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 on December  31,  1997.  The Voting  Trust shall
comprise three individuals:  the Company's President and Chief Executive Officer
(and also the  Chairman of the Board of Decor),  and two  Directors of Decor who
are  otherwise  unrelated to the Company.  Conversion  of the 250,000  shares of
Series A  Convertible  Preferred  stock into common stock would give the Company
approximately  88.6% of the voting stock of Decor as of the date of this filing.
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  this   effective   date,   the  Company  will  own
approximately  86.0% of the total  voting  stock of Decor.  The holding in Decor
will be recorded on the Company's  financial  statements under the equity method
of accounting  until such time the Company obtains  unconditional  and effective
control of Decor,  which is expected to occur upon the  expiration of the Voting
Agreement.

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 bear 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 is 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.  The Company is
planning  to  register  these   securities  with  the  Securities  and  Exchange
Commission during the quarter ended December 31, 1996.

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 

                                       13
<PAGE>

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
guarantee  and pledge of her assets for certain  Company  debt.  The shares were
issued to Ms. Munn on April 8, 1996. Ms. Munn has executed a Promissory Note and
Security Agreement in conjunction with the issuance of these shares. The Company
obtained an appraisal to determine the fair market values of this transaction.

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.  As part of this agreement,  over the subsequent
five-years,  the Company will pay Mr. Munn $54,000 per annum in equal  bi-weekly
installments,  and issue 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 totalling
$787,500.  Of these  proceeds,  approximately  $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens,  a former Company executive
(See  "Legal  Proceedings."),  and  $12,500  was  used to  purchase  834  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
proceeds  was  retained  by the Company to support  working  capital  needs.  In
conjunction  with the issuance of the options to Mr. Munn, the Company  recorded
charges against earnings totaling $87,500 at June 30, 1996.

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.  The Company plans
to register these securities with the Securities and Exchange  Commission during
the quarter  ended  December  31, 1996.  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  (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, pursuant to the Company's Director Stock Option Plan, 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.

  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.

                                       16
<PAGE>

7.       RECENT DEVELOPMENT

On October 24, 1996,  the Company  received  notification  from the Nasdaq Stock
Market,  Inc. ("Nasdaq") that the Company's capital and surplus at June 30, 1996
was less than $1,000,000, thereby failing to satisfy a requirement for continued
listing of its securities on The Nasdaq SmallCap Market.  The Company is subject
to delisting  effective  November  18, 1996 if the Company does not  demonstrate
that it currently meets all Nasdaq SmallCap Market listing criteria.  Because of
equity raised by the Company during the quarter  ending  September 30, 1996, the
Company's capital and surplus at September 30, 1996 now exceeds  $1,000,000 (See
"Financial  Statements".) The Company accordingly believes that it now meets all
Nasdaq SmallCap Market listing  criteria,  and has so advised Nasdaq,  providing
Nasdaq with a copy of this filing to support its position.

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 "Notes") 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, 1996,  which discussion
is incorporated herein by reference.

Results of Operations

Quarter  Ended  September  30, 1996 as Compared to Quarter  Ended  September 30,
1995.

         The  Company's  net  sales  from  continuing  operations  for the first
quarter ended  September 30, 1996 decreased by $114,000 or 9% to $1,179,000 from
$1,293,000  for the quarter ended  September  30, 1995,  restated to reflect the
discontinuation of the company's catalog  operation.  (See  "Discontinuation  of
Certain Operations.")

         Net sales for the A.P.F.  Master  Framemakers  division for the quarter
ended  September 30, 1996 increased  $405,000 or 61% to $1,065,000 from $660,000
for the quarter ended  September 30, 1995.  Net sales for the Italia  Collection
subsidiary for the quarter ended September 30, 1996 decreased $519,000 or 82% to
$114,000 from $633,000 for the quarter ended September 30, 1996. The Company has
significantly  curtailed the conduct of Italia's business while it finalizes the
reorganization  of  Italia's  operations  to improve  efficiency,  quality,  and
controls.  (See  "Acquisition  and Strategic  Alliances.")  The Company plans to
finalize  such  reorganization  during the  quarter  ended  December  31,  1996.
Thereafter, the Company expects to resume the full operation of Italia, which it
expects will lead to growing revenues and profits.  Assurances,  however, cannot
be given that the Company's expectations will be realized.

         The Company's cost of goods sold as a percentage of net sales decreased
to 53% for the three months  ended  September  30, 1996,  from 55% for the three
months ended September 30, 1995. The reduced cost percentage is primarily due to
an adjustment  made during  September  1996 to correct an  overaccrual  of costs
during the prior  period.  Otherwise,  the  Company  believes  

                                       17
<PAGE>

that the margins  generated during the three months ended September 30, 1996 are
largely  consistent with those of the three months ended September 30, 1995. The
Company used during the three months ended September 30, 1996 and 1995 the gross
profit method to value  inventory.  During the quarter ended  December 31, 1996,
the Company plans to begin the  implementation of a perpetual  inventory system.
The Company  believes  that such a system will  enable it to  determine  product
costing and margins more precisely.  Although the Company expects this system to
be fully operational  during the quarter ended March 31, 1997, no assurances can
be given that this will occur.

         The  Company's  selling,  general  and  administrative  expenses  as  a
percentage  of net sales  decreased to 41% for the three months ended  September
30, 1996,  from 50% for the three months ended  September 30, 1995.  The Company
has taken certain measures to reduce expenses, leading to this improved ratio of
expenses-to-sales.  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.  Finally,  due to the  overall  reduction  of  revenues,  sales
commission  expenses are reduced in the current  period versus the prior period.
Interest  expense as a percentage of sales remained at  approximately 7% for the
quarter ended  September 30, 1996, and the quarter ended  September 30, 1995. In
absolute  dollars  howevery.  interest  expense is $18,000  lower in the quarter
ended September 30, 1996 versus the prior quarter because of reduced balances in
interest-bearing  debt.  Interest  as a percent  of sales is  largely  unchanged
because of the reduced sales of the current quarter versus the prior quarter.

         For the quarter ended  September 30, 1996,  the Company  realized a net
loss of $8,000, which constitutes largely break-even  performance,  versus a net
loss from  continuing  operations of $157,000 ($.08 per share),  and a loss from
discontinued  operations  of  $42,000  ($.02 per share)  for the  quarter  ended
September 30, 1995.

Liquidity and Capital Resources

         At September  30, 1996,  no cash  balances were recorded as compared to
approximately  $519,000  at  September  30,  1995.  Net cash  used in  operating
activities  during the quarter ended  September 30, 1996 totalled  approximately
$779,000  compared  with net cash used in  operating  activity of  approximately
$922,000  during the quarter  ended  September  30,  1995.  The  current  period
reduction  in the use of cash from  operations  is  largely  due to the  current
period's net loss of  approximately  $8,000  versus a net loss of  approximately
$199,000 for the quarter  ended  September  30,  1995.  The decrease in accounts
payable and accrued  expenses  during the quarter  ended  September 30, 1996 was
largely due to equity raised during the period (see below.)

         Net  cash  used  in  investing  activities  during  the  quarter  ended
September 30, 1996 totalled approximately $884,000 versus approximately $181,000
for the quarter ended September 30, 1995. During the current period, the Company
invested  $824,000  of cash to  acquire  54,934  shares of  Series C  non-voting
convertible  preferred  stock  of  Decor  Group,  Inc.  (See  "Acquisitions  and
Strategic  Alliances.")  During the same current period, an additional amount of

                                       18

<PAGE>

approximately  $60,000  was  used to  acquire  equipment,  versus  approximately
$181,000 for the quarter ended September 30, 1995.

         Net cash provided by financing  activities  was  $1,659,000  during the
quarter ended  September  30, 1996 versus  approximately  $1,619,000  during the
quarter ended September 30, 1995. During the current period, the funding was the
result of the  exercise  by  investors  of 556,000  Class WA Warrants to acquire
556,000  shares of Class A Common  shares and 556,000  Class WB Warrants  for an
exercise price of $1.50, and the exercise of an option to acquire 350,000 shares
of Series A  Preferred  Shares at a net  exercise  price of  $2.25.  During  the
quarter ended  September 30, 1996, the funding was the result of the sale by the
Company of 460,000 shares of Series A Preferred Stock  registered by the Company
in September 1995.

         As of September 30, 1996, the Company's  financial position reflected a
working capital deficit of  approximately  $1,586,000,  versus a working capital
deficit of  approximately  $2,512,000 at June 30, 1996. Of this working  capital
deficit  at  September  30,  1996,  $824,000  is  directly  attributable  to the
Company's  direct  investment in Decor Group,  Inc. (See above.) As of September
30,  1996  versus  June 30,  1996,  trade  receivables  increased  approximately
$26,000,  inventories increased approximately $228,000, and accounts payable and
accrued expenses decreased  approximately  $616,000, due largely to the proceeds
received from the equity transactions described in the preceding paragraph.

In July 1994, The Company replaced its then existing financing  agreement with a
line of credit of up to $950,000  with a New York Bank  following  the Company's
Initial  Public  Offering  in June  1994.  Such  borrowings  are  based on trade
receivables and inventory.  The borrowings under such line of credit are secured
by a lien on all personal  property  and fixtures of the Company and  personally
guaranteed by the President and Chief Executive Officer of the Company. In March
1996,  the Company  agreed with the bank to reduce the line of credit by $10,000
per month. As of the date of this filing, the line of credit has been reduced to
$870,000.  This line of credit bears  interest at a rate of prime plus 1% (9.25%
as of the date of this filing.) The Company is also seeking  alternative sources
of financing to ultimately  replace the current line of credit, but there can be
no assurance it will be able to do so.

In connection with the Company's plan to restructure its wholesale business, the
Company,   through  its  wholly  owned  subsidiary,   Italia  Collection,   Inc.
("Italia"),   acquired  the  businesses  of  two  privately  held  Florida-based
companies,  Murano  Crystal  Corp.  ("Murano")  and Ceramic  Productions,  Corp.
("CPC"),  which manufacture and market upscale decorative ceramic accessories to
the home furnishings  industry through a showroom in High Point,  North Carolina
and a network of sales representatives. Closing on such acquisitions occurred on
October 21,  1994.  These  acquisitions  were  accounted  for under the purchase
method of  accounting.  In connection  therewith,  the Company agreed to pay the
seller on the basis of a formula  purchase  price computed as a factor of future
earnings from continuing operations,  subject to certain adjustments and offsets
in cash  and/or  Class A  Shares.  As of the date of this  filing,  based on the
results of operations of these acquisition,  the Company's  Management  believes
that no liabilities  are due to the seller,  nor have any  liabilities  for such
payment been recorded on the  Company's  financial  statements.  The parties are
currently  in  dispute   regarding  the  nature  and  amount,  if  any,  

                                       19
<PAGE>

of the consideration  necessary. The parties are discussing a resolution to this
matter  and in  the  opinion  of  management,  there  will  not be any  material
adjustment  to the  Company's  financial  position or results of operations as a
result of the outcome of such discussions. Upon resolution of these discussions,
appropriate  payments,  if any,  will  be made  and  recorded  on the  Company's
financial statements.

On February 15, 1995, Italia Collection entered into a Financing  Agreement with
a New York based secured lender whereby Italia Collection may borrow pursuant to
an asset-related formula. The agreement remains in effect as of the date of this
filing,  and may be  terminated  by either  party  upon  notice to the other and
payment of the commitment fee for the unexpired term of this agreement. Although
the Company is currently pursuing alternative  financing  agreements,  as of the
date of this filing, no such arrangements have been finalized.  According to the
current  agreement,  the lender,  upon  confirmation of shipments,  will advance
Italia Collection 70% of the receivable.  Upon collection of the receivable, the
lender  remits the  balance of 30%.  Interest  is  calculated  on the daily cash
balance  at the rate of prime  plus 9% per annum  (17.25% as of the date of this
filing)  or a  minimum  of 18% per  annum  against  a  minimum  monthly  defined
compensation  of $3,000.  As of the date of this  filing,  the amount due to the
lender was  approximately  $750,000.  In addition,  the secured lender  received
personal guarantees from Max Munn,  President and Chief Executive Officer of the
Company, and his spouse. During February 1996, the Company's President and Chief
Executive Officer arranged for $160,000 additional financing from this lender at
the rates in effect  for  existing  loans.  The  President  and Chief  Executive
Officer,  and his spouse,  have provided personal guarantees for this additional
funding,  in addition to a security  interest in certain real estate and Company
stock owned by his spouse. Of these proceeds, approximately $121,000 was used to
pay outstanding tax  liabilities.  The balance of the proceeds was loaned by the
Company to the  President and Chief  Executive  Officer.  A $38,000  demand loan
dated  February 8, 1996,  bearing an annual rate of interest of 18% was executed
by the President and Chief Executive  Officer,  and  countersigned  by the Chief
Financial Officer. On May 13, 1996, the Company's Board of Directors affirmed by
majority  vote the loan by the  Company  to its  President  and Chief  Executive
Officer.  The  principal  balance  of the  loan  will  be  partially  offset  by
rereimbursed  business  expenses  generated by the President and Chief Executive
Officer.  The  remaining  loan balance will be repaid by the President and Chief
Executive  Officer to the Company,  with interest as provided above,  during the
twelve months ended October 1997.

In March 1996,  the Company  executed an  agreement  with the  Internal  Revenue
Service (the  "Service") for the payment of outstanding  payroll tax liabilities
totalling  approximately $100,000. The agreement will require the Company to pay
approximately  $9,000 per month for approximately 14 months for this purpose. As
of the date of this filing,  all such tax liabilities are being paid on a timely
basis.

On November 23, 1994,  the Company  borrowed the sum of $225,000  from  Ekistics
Corp., a Bahamian corporation, pursuant to a promissory note due March 30, 1995,
together with  interest at the rate of 14% per annum and a 5% financing  charge.
In April  1995,  the  Company  paid  $25,000,  plus  interest  on account of the
principal  amount of said Note and entered  into a revised note for the $200,000
balance with such revised note providing for payment of principal on 

                                       20


<PAGE>

October 20, 1995, having an interest rate of 14% per annum and being convertible
into 80,000 shares of Preferred Stock and 40,000 Class WC Warrants.  On December
15, 1995, this conversion took place.  The 80,000 Preferred Shares and 40,000 WC
Warrants  were  registered  in  a  Registration   Statement  declared  effective
September 18, 1996.

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.  The Company is planning
to register these securities with the Securities and Exchange  Commission during
the quarter ended December 31, 1996. In  conjunction  with the issuance of these
shares,  approximately $105,000 of charges against earnings were recorded during
the year ended June 30, 1996.

In June and July 1995, the Company delivered to unaffiliated  parties promissory
notes in the  aggregate  amount of $300,000 with interest at the rate of 10% per
annum (the "10% Notes") and promissory notes in the principal amount of $100,000
with interest at the rate of 6% per annum (the "6% Notes".) The 10% Notes and 6%
Notes were each  payable in June and July 1996 or the closing of the sale by the
Company of an issue of Preferred Stock,  whichever is earlier. The 6% Notes were
convertible, in whole or in part, at the option of the holder, into a maximum of
2,000,000  WC  Warrants  entitling  the  holders  for a period of five  years to
purchase one share of  Preferred  Stock per Class WC Warrant at a price of $5.50
per share. These Warrants are redeemable by the Company.  The Notes were secured
by a lien on the Company's  assets. In September 1995 the Company repaid all 10%
Notes in full,  plus all accrued  interest  for both the 10% Notes and 6% Notes.
All holders of 6% Notes have converted in full,  into a total of 2,000,000 Class
WC  Warrants,  which  were  registered  in  a  Registration  Statement  declared
effective by the Securities and Exchange Commission on September 18, 1995.

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.

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 "Regulation 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,  635,252 of the Company's  Class WA Warrants were exercised
at $1.50 per warrant,  generating proceeds to the Company totaling $952,878.  Of
these  proceeds,  $811,500  was used to purchase  54,100  shares of 

                                       21

<PAGE>

Decor Group,Inc.'s ("Decor") Series C Non-Voting,  Convertible, Preferred Stock,
adjusted to reflect a 1-for-2  reverse split  effected by Decor in October 1996.
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 October 16, 1995,  the Company  entered into an  agreement to  restructure  a
promissory  note dated May 1995, with the principal  amount of $500,000  bearing
interest  at the rate of 18% per  annum  with the  principal  which  was due and
payable in full on  September  30, 1995 and a $150,000  note dated May 12, 1995,
bearing  interest at the rate of 18% payable  monthly with 135% of the principal
which was also due and payable in full on September  30, 1995 with a Nevis,  BWI
Corporation.  As of October  16, 1995 the  parties  agreed the Company  owes the
lender,  including interest and monthly extension fees of approximately $102,500
through  December  15,  1995,  an aggregate  amount of  approximately  $805,000.
Pursuant  to  the  new  agreement,  the  Company  paid  $405,000  to  the  Nevis
Corporation  upon  acceptance  of the  agreement.  The Company also  delivered a
Promissory Note in the principal amount of approximately  $400,000, in extension
and  replacement  of the  remaining  balance  due and  payable of $180,000 on or
before  December 15, 1995 and $220,000 on July 31, 1996.  The new agreement also
stipulates  that the lender shall sell the 180,000 shares of the Company's Class
A Common Stock,  held in escrow by the lender,  for $180,000 to an  unaffiliated
third  party.  The  proceeds  of such sale will be applied  against the note and
during  January 1996. In addition,  during  December 1995, the Company issued to
the lender 35,000 unregistered shares of Class A Common Stock. Such shares shall
be afforded a piggyback registration right for all registration statements filed
by the Company  before July 31,  1996 and a one time demand  registration  right
commencing  after July 31,  1996.  Approximately  $25,000  was  charged  against
earnings  during the quarter  ended  December 31, 1995 in  conjunction  with the
issuance of these shares.  The promissory  note is also  guaranteed by Max Munn,
President and Chief Executive Officer of the Company. The note is collateralized
by 600,000  shares of the Company's  Class A Common Stock owned by the Company's
Italia Collections Inc. subsidiary.  The Company has reached a general agreement
with this lender to restructure the repayment schedule of approximately $245,000
of outstanding principal and interest payable.

In December 1995, in consideration for certain services rendered,  10,000 shares
of the Company's Class A Common Stock were issued to various individuals related
to Richard Josephberg, an outside Director of the Company.  Approximately $7,000
was charged  against  earnings  during the quarter  ended  December  31, 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,  90,636 of the  Company's  Class WB Options  have been
exercised at an exercise price of $2.00,  generating  proceeds to the Company of
$181,272.  These  proceeds were used by the Company to support  working  capital
needs, and for the provision of loans to Decor Group, Inc.

                                       22
<PAGE>

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.  As of the date of this  filing,  the Company has not
declared  or  established  a record  date for a  dividend  for its  Series A 10%
Cumulative Convertible Preferred Stock for September 1996.

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 is planning to register these
securities with the Securities and Exchange  Commission during the quarter ended
December 31, 1996. These shares, which bear a 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.

On March 3, 1996,  the Company  acquired  250,000 shares of Series A Convertible
Preferred  Stock  and an option  to  purchase  10,000,000  shares  (the  "Option
Shares") of Series B  Non-Convertible  Voting  Preferred  Stock of Decor  Group,
Inc.,  ("Decor")  in  exchange  for  issuance to Decor by the Company of 200,000
shares  of its  Class  A  Common  stock  and  200,000  shares  of its  Series  A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. (The Decor securities are adjusted to
reflect a 1-for-2  reverse split  effected by Decor in October  1996.) 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 on December  31,  1997.  The Voting  Trust shall
comprise three individuals:  the Company's President and Chief Executive Officer
(and also the  Chairman of the Board of Decor),  and two  Directors of Decor who
are  otherwise  unrelated to the Company.  Conversion  of the 250,000  shares of
Series A  Convertible  Preferred  stock into common stock would give the Company
approximately  88.6% of the voting stock of Decor as of the date of this filing.
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  this   effective   date,   the  Company  will  own
approximately  86.0% of the total  voting  stock of Decor.  The holding in Decor
will be recorded on the Company's  financial  statements under the equity method
of accounting  until such time the Company obtains  unconditional  and effective
control of Decor,  which is expected to occur upon the  expiration of the Voting
Agreement.

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 bear a
restrictive  legend,  were  issued  on April  24,  

                                       23
<PAGE>

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 is 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.  The  Company  is  planning  to  register  these  securities  with the
Securities and Exchange Commission during the quarter ended December 31, 1996.

On April 4, 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  guarantee and pledge of her assets
for certain  Company debt.  The shares were issued to Ms. Munn on April 8, 1996.
Ms. Munn has executed a Promissory  Note and Security  Agreement in  conjunction
with the  issuance  of these  shares.  The  Company  obtained  an  appraisal  to
determine the fair market values of this transaction.

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.  As part of this agreement,  over the subsequent
five-years,  the Company will pay Mr. Munn $54,000 per annum in equal  bi-weekly
installments,  and issue 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 totalling
$787,500.  Of these  proceeds,  approximately  $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens,  a former Company executive
(See "Legal Proceedings."), and $12,500 was used to purchase 834 shares of Decor
Group, Inc.'s Series C Non-Voting,  Convertible, Preferred Stock. The balance of
proceeds  was  retained  by the Company to support  working  capital  needs.  In
conjunction  with the issuance of the options to Mr. Munn, the Company  recorded
charges against earnings totaling $87,500 at June 30, 1996.

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.  The Company is
planning  to  register  these   securities  with  the  Securities  and  Exchange
Commission  during the quarter  ended  December 31, 1996.  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
(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.

                                       24
<PAGE>


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, adjusted to reflect a 1-for-2 reverse
split  effected by Decor in October  1996,  at a cost of $824,000.  As disclosed
above,  the  funds for this  investment  were  generated  from two  sources:  1)
$811,500 of the $952,878 proceeds  generated by the Company from the exercise of
$952,878 of its Class WA Warrants  through the date of this filing were so used,
and 2)  $12,500 of the  $787,500  proceeds  generated  by the  Company  from the
exercise by Morris Munn,  father of the Company's  President and Chief Executive
Officer,  of an option to  purchase  350,000  shares of the  Company's  Series A
Preferred Shares were also so used.

During September 1996, pursuant to the Company's Director Stock Option Plan, 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.

Except as otherwise  set forth herein,  the Company has no material  commitments
for capital  expenditures  other than for ordinary  expenses incurred during the
usual  course of  business.  In order to fund  growth  over the long  term,  the
Company  anticipates  possible  future  issuance of its securities  resulting in
further dilution to its security holders.

Management  believes that cash flow from  operations as they currently exist are
not sufficient to support such operations.  Accordingly,  Company  management is
now identifying and implementing  what it believes to be the corrective  changes
deemed  necessary.  Specific  action taken as of the date of this filing include
the following:  a) The Company is seeking either the  acquisition of or entering
into strategic alliances with unrelated companies in the decorative  accessories
industry.  As part of this strategy,  a public offering of certain securities of
Decor Group,  Inc.  ("Decor"),  an affiliate of the Company,  has been  declared
effective by the  Securities  and Exchange  Commission on November 12, 1996 (the
"Effective Date".)  Contemporaneously  with the effective date, Decor expects to
acquire substantially all of the operating assets and assume certain liabilities
of Artisan House, Inc., a California based manufacturer and distributor of metal
wall,  table, and freestanding  sculptures.  ( see  "Acquisitions  and Strategic
Alliances."), b) Due to declining revenues and high operating costs, the Company
has   discontinued   its  catalog   business   effective  March  31,  1996  (See
"Discontinuation of Certain  Operations."),  c) Beginning with the quarter ended
March 31, 1996,  the Company has begun to reduce  operating  expenses  through a
combination  of  staff  reductions  and  expense  controls,  d) The  Company  is
currently  restructuring the operations of its Italia Collections  subsidiary in
an effort to generate greater revenues and operating margins (See  "Acquisitions
and Strategic Alliances".),  and e) The Company is seeking additional sources of
revenues.  Two specific  initiatives  have been announced as of the date of this
filing.  On September  17,  1996,  the Company  announced  that it has signed an
exclusive  licensing  agreement to reproduce the artwork of James Rizzi, a noted
contemporary   artist,  for  decorative   accessories  in  ceramic  and  related
materials.  Also, on October 12, 1996, the Company announced that it has entered
into an  exclusive  three year  agreement  with a major  party plan  marketer of
customized, canvas based enlargements of photographs. No assurances can be 

                                       25
<PAGE>

given that these, or any subsequent  initiatives by the Company will produce the
desired positive cash flow from operations.

The  Company  has no current  plans to employ  financing  strategies  which will
materially affect the Company's operating results or financial condition,  other
than those disclosed herein.

While  the  Company  operates  pursuant  to a policy  that  generally  precludes
acceptance   of  goods  on  a  non-cash   basis   (sometimes   known  as  barter
transactions), the Company does from time to time execute upon goods provided by
a customer in the event of non-payment by that customer.

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 by  quarter.  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.

                                       26
<PAGE>

                                     PART II

                                OTHER INFORMATION

Item 1.        Legal Proceeding

During April and May of 1995,  Hide  Tashiro  commenced  two law suits  totaling
$225,000 (plus interest and attorneys' fees) against the Company and others. The
Company believes it has meritorious defenses against these claims. In April 1996
the  plaintiff's  motions for summary  judgement  were denied and the court held
that there was an issue of fact to be tried.

On or about  December 28, 1994,  Merrill Corp.  filed a complaint in the Supreme
Court of the State of New York,  county of New York against the Company  seeking
payment for goods sold and  delivered to the Company.  The matter was settled in
July 1996.

In July 1995, the Company through its attorneys made demand against Morgan Steel
Ltd. the office of which is located on the Isle of Man, England, for the payment
to the Company of $362,507 on account of a perceived violation of Section 16 (b)
of the  Securities  and Exchange Act. No response to said demand for payment has
been made to date. On May 23, 1996,  the Company's  Board of Directors  resolved
that the Company and its  officers and  directors  undertake no action given the
uncertainty  of the cost of  collectibility,  and  ultimate  legal  liability of
Morgan Steel Ltd. either in the United States or the Isle of Man.

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
allegedly would have received under the agreement in a sum to be determined, but
not less than $250,000.

On October 13, 1995, Ted Stevens,  individually,  as a Shareholder  and Director
and Morris Munn,  individually and as a Director and on behalf of themselves and
all other similarly  situated  Shareholders and Directors of the Company filed a
complaint in the Supreme Court of the State of New York,  County of Westchester,
against the Company and its directors  seeking  unspecified  damages and certain
changes in the composition of the Company's Board.

On December 1, 1995,  Ted Stevens  filed a complaint in United  States  District
Court,  Southern  District of New York,  against  Laurie Munn and American Stock
Transfer & Trust Company seeking, among other things, the equitable recission of
a stock sale  agreement  between Mr. Stevens and Ms. Munn. On February 29, 1996,
the Court held that Mr.  Stevens did not have the right to recission  and denied
Mr.  Stevens'  motion for a preliminary  injunction  and on April 17, 1996,  the
Court dismissed the action for lack of subject matter jurisdiction.

On December 12, 1995,  Ann Stevens filed a complaint in the Supreme Court of the
State of New York,  County of Nassau  against the Company and certain  Directors
deeking,  among other things,  compensatory  and punitive damages arising out of
the alleged breach of Ann Stevens' Employment Agreement.

                                       27
<PAGE>


On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery of the
State of Delaware against the Company and certain Directors, seeking among other
things,  the recission of a certain stock sale agreement between the Company and
Laurie Munn.

In July 1996, all litigation  brought against the Company and its principals and
Directors by Ted Stevens, Ann Stevens and Morris Munn was settled. Settlement of
the lawsuits by Ted Stevens and Morris Munn against the Company and its officers
and Directors are subject to Court approval.

The  litigation  relating to the  termination of the 1995  employment  agreement
between Ann Stevens and the  Company  has been  settled 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 will pay Ms.
Stevens for reimbursement of certain expenses,  $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  commited 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 "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 Munn Trust of 1975,  Sol Munn and Evelyn A. Munn,  Co-Trustees  commenced an
action  against the Company as well as Max Munn,  the  Company's  President  and
Chief Executive Officer and Laurie Munn, his wife.

SJP Contractors of New York, Inc.  commenced an action in September 1996 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.  The  Company's  answer pleads that
payment was made for the amount owed.

Artagraph Reproduction  Technology,  Inc., a Canadian company, brought an action
against  the Company  demanding  the sum of  $27,838.08  plus  attorney's  fees,
alleging  that the Company was obligated to deliver a confession of judgement in
connection with the sale of merchandise.  

                                       28
<PAGE>

Artagraph seeks injunctive  relief;  the Company is not aware of a determination
of this motion by the Court and denies any obligation to Artagraph.

In September 1991,  without admitting or denying the allegations,  Max Munn, the
Company's  President and Chief  Executive  Officer agreed with the Federal Trade
Commission  (FTC) to the entry of a Consent Order in an action  brought  against
Mr. Munn and  others;  which  action  arose out of the  advertisisng  of certain
lithographs of original works of art as regards to whether or not the artist had
played a substantial role in the production of lithographs. The case was settled
before trial or discovery  solely with entry of the above Consent  Order;  which
enjoins Mr. Munn from making certain representations in connection with the sale
of any works of art.  The Consent  Order also  requires Mr. Munn for a period of
five years (which expired as of September 1996) as to the maintenance of certain
records as they concern the sale of certain lithographs.

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

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

Item 6.        Exhibits and Reports on Form 8-K

(a)   Exhibits

      11       Statement re: computation of per share earnings.


      27       Financial data summary.

(b)   Reports on Form 8-K

               During the Three Months Ended  September  30, 1996,  no report on
Form 8-K was filed.

                                       29


<PAGE>

                                   SIGNATURES


     Pursuant to the  requirements  of the Security  exchange  Act of 1934,  the
registrant  has duly  caused 0 this  report to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                 INTERIORS, INC.



November 15, 1996                          By:  /s/Max Munn
                                                --------------------------------
                                                Max Munn, President and
                                                 chief Executive office



November 15, 1996                          By:  /s/Michael J. Amore
                                                --------------------------------
                                                Micahel J. Amore, Vice President
                                                 and Chief Financial Officer