1


                                  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, 1997.

or

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

                           Commission File No. 0-24352


                                 INTERIORS, INC.



         (Exact name of small business issuer as specified in its charter)



                                    Delaware 13-3590047

                 (State or other jurisdiction of (I.R.S. Employer

                 incorporation or organization) Identification No.)



                  320 Washington Street, Mt. Vernon, New York 10553

                (Address of principal executive offices) (zip code)



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



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



The number of shares  outstanding of the issuer's Class A Common Stock and Class
B  Common  Stock  as  of  November  12,  1997  was  5,261,241   and   1,769,750,
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



               Consolidated Balance Sheet as of September 30, 1997.............2


               Consolidated Statements of Operations -
                    For the Three Months Ended September 30, 1997 and 1996.....3


               Consolidated Statement Changes in Stockholders' Equity -
                    For the Three Months Ended September 30, 1997..............4


               Consolidated Statements of Cash Flows -
                    For the Three Months Ended September 30, 1997 and 1996.....5



               Notes to Consolidated Financial Statements......................6



Item 2.  Management's Discussion and Analysis.................................13



PART II - OTHER INFORMATION


Item 1.  Legal Proceedings....................................................19

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

Item 3.  Defaults Upon Senior Securities......................................21

Item 4.  Submission of Matters to a Vote of Security Holders..................21

Item 5.  Other Information....................................................21

Item 6.  Exhibits and Reports on Form 8-K.....................................21



<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, 1997 and the results of operations
for the three month period ended September 30, 1997 and 1996.



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





<PAGE>




                                  INTERIORS, INC.
                                  BALANCE SHEET

                                   (unaudited)


                                   September 30,
                                       1997

CURRENT ASSETS:
  Cash                                                   $  194,195
  Accounts receivable
     Trade, net allowance of $268,000                       962,537
  Inventories                                             1,622,546
  Prepaid expenses and other current assets                 918,967
                                                         ----------             
           Total current assets                           3,698,245
                                                         ----------            
INVESTMENTS

  Investments                                             3,976,679
                                                         ----------
              Total investments                           3,976,679
                                                         ----------

PROPERTY AND EQUIPMENT, at cost
  Machinery and equipment                                 1,576,346
  Furniture and fixtures                                    144,297
  Leasehold improvements                                    213,010
                                                         ----------
            Total property and equipment, at cost         1,933,653
                     
  Less- Accumulated depreciation and
    amortization                                          1,148,790            
                                                         ----------
            Net property and equipment                      784,863
                                                         ----------


 


OTHER ASSETS                                                246,520
                                                         ----------
          Total assets                                   $8,706,307
                                                         ==========

<PAGE>



                                                       September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY                        1997

CURRENT LIABILITIES:
  Notes payable and current maturities of
    long-term debt                                       $1,596,923
  Accounts payable and accrued liabilities                1,954,671
                                                         ----------
            Total current liabilities                     3,551,594
                                                         ----------

NON-CURRENT LIABILITIES:
  Notes Payable                                             890,000
  Loan Payable                                               17,954
                                                         ----------
            Total noncurrent liabilities                    907,954
                                                         ----------
COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,147,060 shares issued and outstanding                      11,471
  Class A common stock, $.001 par value
30,000,000 shares authorized,
5,261,241 shares issued and outstanding                       5,261
  Class B common stock, $.001 par value,
2,500,000 shares authorized,
1,769,750 shares issued and outstanding                       1,770
  Additional paid-in-capital                             13,237,657
 Accumulated deficit                                     (8,571,300)
  Treasury Stock                                               (600)
  Note receivable                                          (437,500)
                                                         ----------
           Total stockholders' equity                     4,246,759
                                                         ----------
           Total liabilities and stockholders' equity    $8,706,307
                                                         ==========






      The accompanying notes are an integral part of this balance sheet









<PAGE>
                            INTERIORS,  INC.

                         STATEMENTS OF OPERATIONS

         FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                (unaudited)
<TABLE>

                                                             1997           1996
                                                             ----           ----

<S>                                                      <C>             <C>       
NET SALES                                                  $1,517,782    $1,179,170
                       
COST OF GOODS SOLD                                            956,203       621,453
                                                         ------------    ----------
     Gross profit from continuing operations                  561,579       557,717

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                  341,169       488,071
                                                         ------------    ----------
           Operating expenses                                 341,169       488,071

            Income (loss) from continuing operations
               before interest and provision for taxes        220,410        69,646

INTEREST EXPENSE (including financing charges)                 112,502        77,240
                                                         ------------    ----------
            Income (loss) from continuing operations
                before provision for taxes                    107,908        (7,594)

PROVISION FOR INCOME TAXES                                          0             0
                                                         ------------    ----------
            Income (loss) from continuing operations          107,908        (7,594)
       
DISCONTINUED OPERATIONS (Note 3)
            Loss from operations of discontinued 
              operations                                            0             0
                                                         ------------    ----------   
            Loss from discontinued operations                       0             0

NET INCOME (LOSS)                                            $107,908       ($7,594)
                                                         ============    ==========
NET EARNINGS PER COMMON STOCK

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

WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                         4,780,991     3,927,116
                                                            =========     =========
</TABLE>

      the accompanying notes are an integral part of these financial statements
                                  
<PAGE>
<TABLE>

                                                                   INTERIORS, INC.

                                                    STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                                    FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997

                                                                     (unaudited)

                


                             Series A            Class A           Class B    Additional   Retained
                          Preferred Stock      Common Stock      Common Stock   Paid-In    Earnings  Treasury   Note
                          Shares    Amount    Shares  Amount  Shares    Amount  Capital    (Deficit)   Stock  Receivable    Total

<S>                       <C>       <C>     <C>       <C>    <C>       <C>    <C>         <C>          <C>    <C>        <C>       
BALANCE-June 30, 1997     1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830


  Reduction of legal fees
   in connection with 
   investment                                                                     $21,021                                   $21,021

  Net income through 
   September 30, 1997                                                                        $107,908                      $107,908
                          --------- ------- --------- ------ --------- ------ ----------- -----------  -----  ---------  ----------
BALANCE-September 30,1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770 $13,237,657 ($8,571,300) ($600) ($437,500) $4,246,759
                          ========= ======= ========= ====== ========= ====== =========== ===========  =====  =========  ==========
                              
      The accompanying notes are an integral part of these financial statements.

</TABLE>
                                                                               








<PAGE>
                                             INTERIORS, INC.
                                         STATEMENT OF CASH FLOWS
                          FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                              (unaudited)
<TABLE>

                                                                                      YEARS ENDED
                                                                                        SEPT. 30
                                                                                   1997          1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                             <C>            <C>     
  Net Income (loss)                                                             $107,908       ($7,594)
                                                                                --------       -------
  Adjustments  to  reconcile  net  Income  (loss) to net cash used in  operating
activities:

    Depreciation and amortization                                                155,092       158,875

 Changes in assets and liabilities:
    Decrease (increase) in accounts receivable, trade                            (15,709)      (26,444)
    Decrease (increase) in inventories                                          (101,717)     (228,261)
    Decrease (increase) in prepaid expenses and other current asset              (20,576)      (36,300)
    Decrease (increase) in other assets                                           16,720
    Increase (decrease) in notes payable and current maturities of 
       long term debt                                                            (20,936)       67,013
    Increase (decrease) in accounts payable and accrued expenses                (145,063)     (616,024)
    Increase (decrease) in net liabilities and accrued expenses of discontinued
       operations                                                                              (90,557)
                                                                                --------      --------    
         Net cash used in operating activities                                   (24,281)     (779,292)
                                                                                --------      -------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                                         (59,850)
  Investment in Decor Group, Inc.                                                             (824,000)
                                                                                              --------
          Net cash used in investing activities                                               (883,850)
                                                                                              -------- 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of debt                                              61,051  
  Repayments of debt and  capitalized lease  obligations                        (113,983)
  Net  proceeds  from sale of Series A  preferred stock,  common stocks, 
   and warrants                           
  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                                     (52,932)    1,659,000
                                                                                --------     ---------
  Net Increase (decrease) in cash                                                (77,213)       (4,142)

CASH, beginning of period                                                        271,408         4,142
                                                                                --------     ---------          
CASH, end of period                                                             $194,195            $0
                                                                                ========     =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the period for-
    Interest                                                                     $20,725       $21,157
    Taxes                                                                           $300        $5,566
NON-CASH FINANCING ACTIVITIES:

The accompanying notes are an integral part of these financial statements

</TABLE>

                           
<PAGE>



1.   BASIS OF PRESENTATION



      The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles,  and
pursuant to the rules and regulations of the Securities and Exchange Commission.
All  adjustments  (of normal  recurring  nature)  which are,  in the  opinion of
management,  necessary  for a fair  presentation  of the  results of the interim
period have been included.  The results of operations for the three months ended
September  30, 1997 are not  necessarily  indicative of those to be expected for
the entire year. The Company,  for the three months ended September 30, 1997 and
1996, 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,  (registered  in 1997) and 200,000 shares of
its  Series A  Convertible  Preferred  stock  (also  registered  in 1997)  and a
guarantee with respect to certain  indebtedness  should such indebtedness become
necessary.  Also, the Company exercised its option to purchase the Option Shares
in September 1996, for total cash  consideration of $2,000.  Concurrent with the
exercise of this option,  the Company  executed a Voting  Agreement (the "Voting
Agreement")  to vest the power to vote the Option  Shares in a Voting Trust (the
"Voting  Trust".) The Voting  Agreement will expire upon the earlier of February
7,  2007 or upon  the  Company's  repayment  in  full of its  obligations  to BH
Funding,  LLC,  (Note 3) but in no event  earlier than  December  31, 1997.  The
Voting Trust  comprises  three  individuals:  the Company's  President and Chief
Executive  Officer  (and  also the  Chairman  of the  Board of  Decor),  and two
Directors of Decor.  As part of the Company's  investment  in Decor,  during the
months of August and  September  1996,  the Company  purchased  54,934 shares of
Decor's Series C Non-Voting, Convertible, Preferred Stock at a cost of $824,000.
In the formation of Decor,  the  Company's  intention was to create an affiliate
with a  corporate  identity  clearly  separate  and  distinct  from  that of the
Company.  Decor  was  organized  for  the  purpose  of  acquiring  the  business
operations of unrelated companies.  On November 12, 1996, (the "Effective Date")
a public  offering by Decor of certain of its securities was declared  effective
by the Securities and Exchange  Commission.  Subsequent to the effective date of
Decor's initial public offering,  the Company owned  approximately  79.6% of the
total  voting  stock of Decor.  In December  1996,  Decor  declared and issued a
dividend  on its  common  stock  payable in the form of two (2) shares of common
stock for each one (1)  share of  common  stock  held as of the  record  date of
December 16, 1996.  Each share of Decor's Series A and Series C Preferred  stock
are convertible into three (3) shares of Decor's common stock effective December
16, 1996. During February 1997, the Company sold its entire holdings of Series A
Convertible Preferred Stock to an independent investor.  After the conversion by
the subsequent holder to common stock, the Company owned  approximately 77.5% of
the total voting stock of Decor.  During 1997,  Decor  reverse  split its common
stock  issuing  one new common  share in exchange  for three prior owned  common
shares.  As of  September  30,  1997,  the  holding in Decor is  recorded on the
Company's  financial  statements  at the market value on November 12, 1996,  the
"Measurement Date" of the Company's trading securities previously transferred to
Decor during March 1996, plus acquisition costs less the proportionate  value of
the securities sold during February 1997. On November 5, 1997, two of the Voting
Trustees  (the  Company's  CEO remains the sole Voting  Trustee)  resigned  from
Voting Trust.

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

      In May 1996,  the  Company  entered  into a two year  Management  Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale,  marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative  services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives.  Pursuant to this
agreement,  the  Company  will be paid on an  annual  basis the  greater  of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement.  The Company
and Decor amended this  agreement to increase this payment to $90,000 per annum.
Additional  transfers  of funds from Decor to the Company will be subject to the
attainment  by Decor of excess cash flow  totaling  $4,000,000  per year through
December 31, 1999. At September 30, 1997, the Company has accrued  approximately
$99,000 of fees pursuant to this agreement.

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

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



<PAGE>




3.   NOTES PAYABLE

      At  September  30,  1997,  the  Company  has  aggregate  notes  payable of
approximately $2,500,000. The components of these notes are discussed below.

      The  Company  has  outstanding   secured   financing  with  United  Credit
Corporation totaling approximately $1,300,000 at September 30, 1997. Interest is
determined  at an annual rate of 16% plus related  fees.  The Company  signed an
agreement in February,  1997, whereby it agreed to issue 100,000 shares of Class
A common  stock to this  lender.  As of this date,  these  shares  have not been
issued.  The  company  has agreed to reduce the  outstanding  loan by $5,000 per
month.

 . The  Company  has  outstanding  secured  financing  with  the Bank of New York
totaling approximately $370,000 at September 30, 1997. Interest is determined at
an annual  rate of prime  plus 1%,  (9.50% as of the date of this  filing.)  The
Company has agreed to reduce the outstanding principal by $5,000 per month.

      The Company  received  $600,000 of loans from BH Funding in February 1997.
This  loan is to be  repaid  with  interest  on  April  28,  1998.  Interest  is
determined  at an  annual  rate  of 15%.  This  loan  is  secured  by all of the
Company's Preferred Stock in Decor.

      The Company has  outstanding  secured  financing with Infinity  Investors,
Ltd.  totaling  approximately  $186,000 at September  30,  1997.  The Company is
currently  paying  principal  and interest of $7,500 per month  calculated at an
annual rate of 15% against the unpaid principal balance. This loan is secured by
600,000 shares of the Company's Class A common stock.

      The Company  received  $100,000 of demand loans from Laurie Munn,  wife of
the Company's  President and Chief  Executive  Officer  during March 1997, at an
annual interest rate of 6.5%. The September 30, 1997 balance due on this loan is
approximately $11,000. This debt was repaid in October 1997.



4.   COMMITMENTS AND CONTINGENCIES



      The  litigation  relating  to  the  termination  of  the  1995  employment
agreement  between Ann Stevens and the Company has been settled by the execution
during  July 1996,  of an  employment  severance  agreement  (the  "Agreement").
Pursuant to the Agreement,  the Company paid Ms. Stevens $63,000 for accrued and
unpaid compensation upon execution of the Agreement.  Subsequently, for a period
of seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000  for the first  year,  $70,000  for each of the next  three  years,  and
$50,000 for each of the final  three  years.  As  additional  compensation,  the
Company  paid  Ms.  Stevens  for  reimbursement  for  certain  expenses  in  the
approximate  amount of $50,000 in various  installments  during the four  months
ending December 1996. The Company also entered into a non-compete agreement with
Ms. Stevens for which the Company will make bi-weekly payments to Ms. Stevens to
total $25,000 per year for seven years,  plus automobile and insurance costs for
five years. As of June 30, 1996, the Company issued to Ms. Stevens 50,000 shares
of the Company's Class A Common Shares,  which were previously  committed to Ms.
Stevens  pursuant to her 1995  employment  agreement.  As of June 30, 1996,  the
Company  issued  1,250,000  shares of its  Class B Common  Shares  (the  "Escrow
Shares") to Michael Levine,  Esq., attorney of Ms. Stevens, as escrow agent (the
"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.  In February  1997,  the terms of the agreement  with Ms.
Stevens were modified to provide for additional  payments of approximately  $550
per  month  over  18  months,  and  to  provide  for  approximately   $6,000  as
reimbursement  for  legal  expenses.  During  November  1997 the  Company  added
2,500,000  Common A shares  to the  Escrow  shares  under  the  same  terms  and
conditions of the original Escrow shares agreement.

      On 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
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.
Presently,  the President and Chief Executive  Officer draws an annual salary of
$150,000  (50% of which is currently  deferred) and has the use of an automobile
provided 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  improvements  in antiquing,
woodworking,  gilding and carving  processes;  and attend  trade shows for frame
making and mold  making.  Fees under the  agreement  are  payable at $54,000 per
annum for one year renewable at the Company's  option.  On June 30, 1996, Morris
Munn's  Consulting  Agreement  was extended for five (5) years.  Pursuant to the
terms of this new  agreement,  the  Company  agreed to issue to  Morris  Munn an
option to purchase up to 350,000 shares of the Company's  Preferred  Shares at a
net exercise price of $2.25 per share.  The Preferred  Shares  issuable upon the
exercise  of the  Option  were  registered  for  sale  to  the  public  under  a
Registration  Statement  in Form S-8  filed  with the  Securities  and  Exchange
Commission  on July 3,  1996.  The  Option was fully  exercised  during  July to
September 1996  generating  net proceeds to the Company  totaling  $787,500.  In
addition,  the new  agreement  provides  for  bi-weekly  payments to Morris Munn
totaling $54,000 per year for five years. In exchange, Morris Munn has agreed to
assist the Company with marketing,  acquisitions,  divestitures,  joint ventures
and other strategic initiatives. In conjunction with the issuance of the Option,
the Company  recorded  charges  against  earnings  of $87,500 at June 30,  1996.
During  March  1997,  the Company  modified  its  agreement  with Morris Munn to
provide  additional  monthly  payments  of $975 over two years for the rental of
certain machinery used by the Company in its production processes.

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

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

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



5.   SHAREHOLDERS' EQUITY



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

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

      In September 1995, the Company lowered the exercise price of the Company's
Class WA Warrant to $1.50 per share and arranged to place 180,000  shares of the
Company's Class A shares which were previously sold pursuant to a "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,  704,412 of the Company's  Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these  proceeds,  $811,500 was used to purchase  54,100  shares  (adjusted for a
1-for-2 reverse split effected in October 1996) of Decor Group,  Inc.'s Series C
Non-Voting,  Convertible,  Preferred  Stock.  The  balance of the  proceeds  was
retained by the Company for working capital needs, for the repayment to Decor of
outstanding  loans of $50,000,  and for the  provision  of  additional  loans to
Decor. At September 30, 1997, the balance of loans to Decor totals $110,000.  On
May 7, 1997, the Company  announced that it would extend the exercise  period of
its Class WA Warrant to June 22, 1998.

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

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

      In  February  1996,  the  Company's  Board of  Directors  declared a stock
dividend  equivalent  to  $0.25  per  share  to  its  Series  A  10%  Cumulative
Convertible  Preferred  Stockholders  of record as of the close of  business  on
February  23, 1996 (the record  date.)  Payment was made on March 1, 1996 by the
issuance of 0.10231 of a share of the  Company's  Class A Common  Stock for each
share  of  Series  A  Preferred  Stock  held  of  record  on  the  record  date.
Accordingly,  55,247 shares of the Company's Class A Common Stock was issued for
this  purpose.   Retained  earnings  was  charged  $165,741  in  March  1996  in
conjunction with the issuance of these shares. The Company has declared a record
date of  December  10,  1997  for a  dividend  on its  Series  A 10%  Cumulative
Convertible  Preferred Stock for September  1996,  March 1997 or September 1997.
The dividend  ($.75 per  Preferred  Share) will be payable on January 2, 1998 in
the form of the Company's  Common A Shares.  Cumulative but unpaid  dividends on
Series  A 10%  Cumulative  Preferred  Stock  as of  September  30,  1997  totals
approximately $810,000.

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

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

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

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

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

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

      During February 1997, pursuant to an agreement which BH Funding,  LLC will
provide certain  advisory  services to the Company over five years,  the Company
agreed to issue to BH Funding  100,000  shares of its Class A Common  shares and
100,000 shares of its Series A Preferred shares.

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



6.   RECENT DEVELOPMENTS



      Because of declining  revenues and high operating  costs,  on December 16,
1996,  the  Board of  Directors  decided  to  discontinue  and  dissolve  Italia
Collection,  Inc. ("Italia"), a subsidiary of the Company. On December 27, 1996,
a Notice of Public Auction was  distributed  by Italia,  advising all interested
parties that a public  auction of all the assets of Italia  consisting of molds,
equipment,  models,  and inventory listed in a Security  Agreement  entered into
between Italia, as debtor, and United Credit Corporation,  as secured party, was
to occur.  The  auction  took place on January  10, 1997 and the Company was the
successful   bidder,   thereby   acquiring  all  of  the  assets  of  Italia  in
consideration  for a payment of $2,000 and the  assumption by the Company of the
liabilities  of Italia to United  Credit  Corp.,  which as of January  31,  1997
totaled  approximately  $806,000.  Since the financial statements of Italia were
consolidated into those of the Company,  Italia's  liabilities have already been
reflected on the Company's  historical  consolidated  financial  statements.  At
March 31, 1997, the Company made the adjustments  necessary to properly  restate
recorded   assets  and   liabilities,   together  with  a  general   reserve  of
approximately $56,000.

      As part of its efforts to refinance business activities,  during the month
of February 1997, the Company  arranged to obtain $600,000 of new debt financing
at an annual rate of 15% interest, and $375,000 of proceeds relating to the sale
by the  Company  of its  holdings  of  250,000  shares of  Series A  Convertible
Preferred  Stock of Decor Group,  Inc. The loan is to be repaid with interest on
April 28, 1998.

      In May 1996,  the  Company  entered  into a two year  Management  Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale,  marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative  services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives.  Pursuant to this
agreement,  the  Company  will be paid the greater of (1) $75,000 or (2) 1.5% of
excess cashflow as defined in the agreement.  The Company and Decor amended this
agreement to increase this payment to $90,000 per annum. Additional transfers of
funds from Decor to the Company  will be subject to the  attainment  by Decor of
excess cash flow  totaling  $4,000,000  per year through  December 31, 1999.  At
September  30,  1997,  the  Company has  accrued  approximately  $99,000 of fees
pursuant to this agreement.



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, 1997,  which discussion
is incorporated herein by reference.




Results of Operations

Period Ended September 30, 1997 as Compared to Period Ended September 30, 1996.

      The Company's net sales from  operations  for the quarter ended  September
30, 1997  increased by $339,000 or 28.8% to $1,518,000  from  $1,179,000 for the
quarter  ended  September  30, 1996.  The growth in revenue was the result of an
increase in sales to a large customer and in it's custom frame division, as well
as the  implementation  of an approximate  5% price  increase  initiated in June
1997.

      The Company's cost of goods sold as a percentage of net sales increased to
63.0% for the three months ended  September  30, 1997,  from 52.7% for the three
months ended  September 30, 1996.  Cost of goods sold for the current period was
approximately  $956,000 versus  $621,000 for the prior period.  This increase in
percentage  was due to an increase in labor costs  arising from a staff build up
in  anticipation of substantial  growth in shipments for the subsequent  period.
The Company elected to conservatively estimate its current work-in-progress. The
Company used the gross profit method to value inventory  during the three months
ended September 30, 1997 and 1996.

      The Company's selling, general and administrative expenses as a percentage
of net sales totaled 22.5% for the three months ended September 30, 1997, versus
41.4% for the three months ended  September 30, 1996. A  substantial  portion of
the  $147,000  decrease  is  attributable  to a drop in  administrative  payroll
relating to a reduction in personnel.  To achieve this reduction in the ratio of
selling,  general, and administrative  expenses as a percentage of net sales for
the three months ended  September 30, 1997 versus the prior period,  the Company
has taken  certain  measures to reduce  expenses.  For  example,  reductions  of
administrative  personnel  have led to reduced  salaries,  benefits,  and travel
expenses. Also discretionary spending for such items as stationery and supplies,
advertising,  and  consulting  fees has been  curtailed.  Interest  expense as a
percentage  of net sales totaled  approximately  7.4% for the three months ended
September  30,  1997,  versus  approximately  6.5% for the  three  months  ended
September 30, 1996.  Interest expense  increased  approximately  $35,000 for the
three months ended  September  30, 1997 in  comparison to the three months ended
September 30, 1996 because of new loans.

      For the quarter ended September 30, 1997, the Company  realized net income
of approximately  $108,000 ($0.02 per share), versus net loss from operations of
approximately $8,000 ($0.00 per share) for the period ended September 30, 1996.



<PAGE>





Liquidity and Capital Resources



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

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

As of September 30, 1997, the Company  reflected cash balances of  approximately
$194,000  as compared to cash  balances  of  approximately  $271,000 at June 30,
1997, representing an decrease of $77,000. Net cash used in operating activities
was approximately $24,000 at September 30, 1997, as compared to net cash used in
operating  activities of  approximately  $779,000 at September 30, 1996. The net
cash used in operating  activities  during the three months ended  September 30,
1997 was primarily a result of net income of  approximately  $108,000 as well as
the following approximate changes from continuing  operations:  non-cash charges
for depreciation of $155,000,  decrease in accounts payable and accrued expenses
of $145,000, an increases in inventories of $102,000, and accounts receivable of
$16,000. Provision for accounts receivable was constant from $268,000 as of June
30, 1997 to $268,000 as of September 30, 1997.  (see  "Results of  Operations").
The inventory and accounts  receivable  change was due to significant  growth of
sales to a large customer.

      Net cash used in investing  activities  during the quarter ended September
30,  1997  totaled  $0  versus  approximately  $884,000  for the  quarter  ended
September  30,  1996.  During the three  months ended  September  30, 1997,  the
Company invested $0 to acquire equipment,  versus approximately  $60,000 used to
acquire  equipment and other assets during the three months ended  September 30,
1996.

      Net cash utilized by financing activities totaled approximately  $(53,000)
during the three months ended  September  30, 1997 as debt was paid off,  versus
approximately  $1,659,000  during the three  months  ended  September  30, 1996.
During the current period,  funding was the result of United Credit  Corporation
asset based  borrowing in the  approximate net amount $61,000 The primary source
of the  prior  year's  financing  was  the  conversion  of the  Company's  stock
warrants.  Bank of New York debt  decreased from $380,000 as of June 30, 1997 to
$370,000 as of  September  30, 1997.  The debt  continues to be amortized at the
rate of $5,000 per month. The liability to Infinity  Investors,  Ltd.  decreased
$22,500 during the current quarter.

      As of September 30, 1997,  the Company's  financial  position  reflected a
working  capital  surplus of  approximately  $147,000,  versus a working capital
deficit of  approximately  $99,000 at June 30, 1997.  As of  September  30, 1997
versus June 30, 1997, there were increases in trade receivables of approximately
$16,000,  inventories  of  approximately  $102,000,  and a  decrease  in current
liabilities of  approximately  $185,000.  These changes were due to increases in
sales and debt repayments.

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

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

      In January  1996,  the Company's  Board of Directors  elected to lower the
exercise  price of the  Company's  Class WB  Warrant to $2.00 per Class A Common
share, subject to the filing and effectiveness of a Registration  Statement with
the Securities and Exchange  Commission.  Such Registration  Statement was filed
with the  Commission  on July 16, 1996 and declared  effective on July 19, 1996.
This  registration  statement  registered  all Class WB Warrants  issuable  upon
exercise of all outstanding  Class WA Warrants,  as well as Class A Common Stock
issuable upon exercise of all potentially  outstanding  warrants. As of the date
of this  filing,  118,012 of the  Company's  Class WB  Warrants  were  exercised
generating  gross  proceeds of $236,024.  These  proceeds  were  retained by the
Company to support  working  capital  needs,  and for the  provision of loans to
Decor Group, Inc.

      In  February  1996,  the  Company's  Board of  Directors  declared a stock
dividend  equivalent  to  $0.25  per  share  to  its  Series  A  10%  Cumulative
Convertible  Preferred  Stockholders  of record as of the close of  business  on
February  23, 1996 (the record  date.)  Payment was made on March 1, 1996 by the
issuance of 0.10231 of a share of the  Company's  Class A Common  Stock for each
share  of  Series  A  Preferred  Stock  held  of  record  on  the  record  date.
Accordingly,  55,247 shares of the Company's Class A Common Stock was issued for
this  purpose.   Retained  earnings  was  charged  $165,741  in  March  1996  in
conjunction with the issuance of these shares. The Company has declared a record
date of  December  10,  1997  for a  dividend  on its  Series  A 10%  Cumulative
Convertible  Preferred Stock for September  1996,  March 1997 or September 1997.
The dividend  ($.75 per  Preferred  Share) will be payable on January 2, 1998 in
the form of the Company's  Common A Shares.  Cumulative but unpaid  dividends on
Series  A 10%  Cumulative  Preferred  Stock  as of  September  30,  1997  totals
approximately $810,000.

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

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

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

      The Company has  outstanding  secured  financing with Infinity  Investors,
Ltd.  totaling  approximately  $186,000 at September 30, 1997.  The Company paid
approximately  $30,000 in principal  and  interest  towards this debt during the
three months ending  September 30, 1997 and will  subsequently pay principal and
interest  of $7,500 per month  calculated  at an annual  rate of 15% against the
unpaid principal  balance for nine (9) months plus a balloon payment  comprising
all financing  interest and principal on March 15, 1998. In connection  with the
settlement  of terms  agreement  (March  1996),  the Company also issued  25,000
Warrants purchase Common Stock at $2.50 per share. This lender also continues to
hold 600,000 Class A Common shares of the Company as collateral.

      In February 1997 the Company  received a loan from BH Funding,  LLC ("BH")
in the  aggregate  principal  amount of $600,000 to be utilized to repay certain
indebtedness of the Company and for continued operating expenses. The Company in
order to collateralize  the loan to BH pledged and assigned to BH and granted to
BH a continuing security interest in the Company's 20,000,000 shares of Series B
Non-Convertible  Preferred  Stock of Decor,  and the Company's  54,934 shares of
Series C Convertible  Preferred Stock of Decor.  Simultaneously with the loan to
the Company,  BH purchased all of the Company's  Series A Convertible  Preferred
Stock holdings in Decor Group,  Inc., a total of 250,000 shares.  The loan is to
be repaid to BH Funding,  LLC with interest on April 28, 1998. In addition,  the
Company  entered into a Consulting  Agreement  with BH whereby BH would agree to
provide  consulting  and other  services to the Company in exchange  for 100,000
shares of each of the Company's Series A Convertible Preferred stock and Class A
Common stock (the "Consulting Shares").

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

      As of September  30, 1997,  the Company has various  unpaid State taxes of
approximately  $181,000.  In  July,  1997,  the  Company  entered  into a payout
arrangement  with New York State to satisfy  $64,890 of back  payroll  and sales
taxes  through  twelve  monthly  payments  of  $5,407.  The  Company  expects to
negotiate a  settlement  for the  remaining  taxes due in the second  quarter of
1998.

      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.

      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.

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


Impact of Inflation


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


Sales Variations


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



<PAGE>



                                     PART II



                                OTHER INFORMATION



Item 1 .   Legal Proceedings


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

      The  litigation  relating  to  the  termination  of  the  1995  employment
agreement  between Ann Stevens and the Company has been settled during July 1996
by  the  execution  of an  employment  severance  agreement  (the  "Agreement").
Pursuant to the Agreement,  the Company paid Ms. Stevens $63,000 for accrued and
unpaid compensation upon execution of the Agreement.  Subsequently, for a period
of seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000  for the first  year,  $70,000  for each of the next  three  years,  and
$50,000 for each of the final  three  years.  As  additional  compensation,  the
Company  paid  Ms.  Stevens  for  reimbursement  for  certain  expenses  in  the
approximate  amount of $50,000 in various  installments  during the four  months
ending December 1996. The Company also entered into a non-compete agreement with
Ms. Stevens for which the Company will make bi-weekly payments to Ms. Stevens to
total $25,000 per year commencing in July 1996, for seven years, plus automobile
and insurance  costs for five years.  As of June 30, 1996, the Company issued to
Ms.  Stevens 50,000 shares of the Company's  Class A Common  Shares,  which were
previously  committed to Ms. Stevens pursuant to her 1995 employment  agreement.
The 50,000 Class A Common Shares are subject to a "lock-up"  agreement  with VTR
Capital  Corporation,  the Company's investment bankers. The Company placed into
escrow  1,250,000  shares of its Class B Common  Shares  and  2,500,000  Class A
Common shares (the "Escrow Shares") with Michael Levine,  Esq.,  attorney of Ms.
Stevens,  as escrow agent (the "Escrow  Agent").  The Escrow Agent shall abstain
from voting the Escrow Shares for any purpose, except in the event of either the
failure by the  Company to adhere to the payment  provisions  noted above or the
financial insolvency of the Company. If either event occurs, Ms. Stevens will be
in a position to elect replacement Directors. Once the payment provisions in the
severance  and  non-compete  agreements  are  satisfied,  the Escrow Agent shall
return the Escrow Shares to the Company. The Company paid $36,707 in the quarter
ended  September  30,  1997  to Ms.  Stevens  in  compliance  with  the  various
settlement related Agreements. The status of the Escrow shares remain unchanged.
Related litigation between Ted Stevens, Ms. Steven's husband, and the Company as
well as others was settled simultaneously without payment by either party to the
other.  Ted Stevens resigned as an officer and director of the  Company in 
September 1995.

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

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

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

      In August 1996, a lawsuit,  now settled,  was brought by The Munn Trust of
1975,  Sol Munn and  Evelyn  A.  Munn,  Co-Trustees  commenced  an action in the
Supreme Court of New York,  County of Suffolk against the Company as well as Max
Munn, the Company's  President and Chief Executive  Officer and Laurie Munn, his
wife for  non-payment  of $150,000 plus  interest.  The Company  claims that any
obligation that it had pursuant to this matter has been satisfied by the Company
in the prior  fiscal year and that any amounts that may be unpaid are due solely
by Mr. and Mrs.  Munn.  The Company has not guaranteed  such  liabilities.  This
matter has been  settled  and  releases  exchanged  without  any  payment by the
Company or by the Munn Trust.

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

      In July 1997, an action was brought against the Company and certain of the
Company's  officers and  directors,  by Mary Stewart  Lepp, in the United States
District  Court for the  Southern  District  of New  York.  Ms.  Lepp,  a former
employee of the Company,  claims  among other  things,  that she was  discharged
because  she was  pregnant,  and seeks  compensatory  and  punitive  damages  in
unspecified  amounts  for  alleged  violations  of  various  federal  and  state
employment and discrimination laws.  Management believes this claim to be wholly
without merit and that the claim will  eventually be dismissed or adjudicated in
the Company's favor.


      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



            None


Item 6.   Exhibits and Reports on Form 8-K



            (a)   Exhibits

                        None




            (b)   Reports on Form 8-K

                        None


<PAGE>





                                   Signatures





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



                                 INTERIORS, INC.




November 17, 1997                                By:  /s/
                                                      -------------------------
                                                      Max Munn, President and
                                                      Chief Executive,Financial
                                                      and Accounting Officer