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

(Mark one)

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

For the quarterly period ended September 30, 2001
                               ------------------

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

For the transition period from _____________________to________________________

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

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

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

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

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

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

      State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 18, 2001, the
registrant had 51,192,371 and 2,455,000 outstanding shares of Class A Common
Stock and Class B Common Stock, respectively.

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

<PAGE>

                                 INTERIORS, INC.

                                Table Of Contents

PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets as of September 30, 2001 and June 30, 2001...      1

Consolidated Statements of Operations for the Three Months Ended
September 30, 2001 and 2000..............................................      2

Consolidated Statement of Stockholders' Equity for the Three Months Ended
September 30, 2001.......................................................      3

Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2001 and 2000..............................................      4

Notes to Consolidated Financial Statements...............................      5

Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................      6

PART II OTHER INFORMATION

Item 1.  Legal Proceedings ..............................................     20

Item 2.  Changes in Securities and Use of Proceeds ......................     20

Item 3.  Defaults Upon Senior Securities ................................     20

Item 5.  Other Information...............................................     20

Item 6.  Exhibits and Reports on Form 8-K................................     20

<PAGE>

                                     PART I
                              FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                                                 (Unaudited)
                                                                                                 September 30,    June 30,
                                                                                                     2001           2001
                                                                                                   --------       --------
                                            Assets
<S>                                                                                                <C>            <C>
Current Assets:
  Cash and cash equivalents .................................................................      $    166       $    450
  Accounts receivable, net of reserves of $25 and $433 at September 30 and June 30,
     respectively ...........................................................................         1,181          1,021
  Inventories ...............................................................................         1,296          1,224
  Other current assets ......................................................................           457            408
                                                                                                   --------       --------
         Total current assets ...............................................................         3,100          3,103
                                                                                                   --------       --------

Property and Equipment, net .................................................................           373            402

Other Assets, net ...........................................................................           124            152
                                                                                                   --------       --------
         Total assets .......................................................................      $  3,597       $  3,657
                                                                                                   ========       ========

                             Liabilities and Stockholders' Equity

Current Liabilities:
  Notes payable and current maturities of long-term debt ....................................         8,808          5,484
  Accounts payable ..........................................................................           969          2,000
  Accrued liabilities .......................................................................         3,987          3,729
  Liabilities of businesses held for disposition, net .......................................         7,557          8,708
                                                                                                   --------       --------
         Total current liabilities ..........................................................        21,321         19,921
                                                                                                   --------       --------

Stockholders' Equity:
  Preferred stock, $.01 par value, 5,300,000 shares authorized:
     Series A Redeemable Convertible Preferred Stock, $.01 par value, 2,870,000
       shares authorized, 804,937 shares issued and outstanding at September 30,
       and June 30, 2001, respectively ......................................................             8              8
  Series E Redeemable Convertible Preferred Stock, $1,000 liquidation value, 2,000 shares
     authorized, 1,000 shares issued and outstanding at September 30 and June 30, 2001,
     respectively ...........................................................................         1,000          1,000
  Class A common stock, $.001 par value, 60,000,000 shares authorized, 48,549,743 shares
     issued at September 30 and June 30, 2001, respectively .................................            49             49
  Class B common stock, $.001 par value, 2,500,000 shares authorized, 2,455,000 shares issued
     and outstanding at September 30 and June 30, 2001 ......................................             2              2
  Treasury stock, at cost, 7,402,771 shares at September 30 and June 30, 2001, respectively .          (629)          (629)
  Additional paid-in-capital ................................................................        66,119         66,119
  Accumulated deficit .......................................................................       (80,811)       (79,351)
  Notes receivable ..........................................................................        (3,462)        (3,462)
                                                                                                   --------       --------
         Total stockholders' equity .........................................................       (17,724)       (16,264)
                                                                                                   --------       --------
              Total liabilities and stockholders' equity ....................................      $  3,597       $  3,657
                                                                                                   ========       ========
</TABLE>

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


                                       1
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                       September 30,
                                                                                  -----------------------
                                                                                    2001           2000
                                                                                  --------       --------
<S>                                                                               <C>            <C>
Net Sales .................................................................      $  1,901       $  2,067

Cost of Goods Sold ........................................................         1,153          1,159
                                                                                 --------       --------

Gross profit ..............................................................           748            908

Selling, General, and Administrative Expenses .............................         1,670          2,060
                                                                                 --------       --------

(Loss) from continuing operations .........................................          (922)        (1,152)
                                                                                 --------       --------

Other Expenses (Income):
Interest expense ..........................................................           429            180
                                                                                 --------       --------

(Loss) Income from continuing operations before provision for income tax ..        (1,351)        (1,332)

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

Loss from continuing operations ...........................................        (1,351)        (1,332)
Income from discontinued operations, net of provision for income taxes of
 $94 ......................................................................            --            501
                                                                                 --------       --------
Net (Loss) Income .........................................................      $ (1,351)      $   (831)
                                                                                 ========       ========

Earnings (Loss) Per Common Share - Basic and diluted
    (Loss) Income from continuing operations ..............................      $   (.03)      $   (.03)
    Income from discontinued operations ...................................            --            .01
                                                                                 --------       --------
Total .....................................................................      $   (.03)      $   (.02)
                                                                                 ========       ========

Weighted average number of shares used in computation of earnings per share:
    Basic and diluted .....................................................        43,602         41,857
</TABLE>

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


                                       2
<PAGE>

                        Interiors, Inc. and Subsidiaries
                 Consolidated Statement of Stockholders' Equity
                  For the three months ended September 30, 2001
                             (amounts in thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                       Series A          Series E           Class A            Class B        Additional
                                    Preferred Stock   Preferred Stock    Common Stock        Common Stock   Paid in Capital
                                    ---------------   ---------------    ------------        ------------   ---------------
                                    Shares    Amount  Shares  Amount    Shares    Amount   Shares    Amount
                                    ------    ------  ------  ------    ------    ------   ------    ------
<S>                                    <C>   <C>        <C>   <C>       <C>       <C>       <C>      <C>      <C>
Balance June 30, 2001                  805   $     8    1     $1,000    48,550    $   49    2,455    $    2   $    66,119

  Dividends declared on Series A
  and B Preferred Stock

  Net loss through
   September 30, 2001

                                  ------------------------------------------------------------------------------------------
Balance  September 30, 2001            805   $     8    1     $1,000    48,550    $   49    2,455    $    2   $    66,119
                                  ==========================================================================================

<CAPTION>
                                   Accumulated   Treasury     Notes
                                    (Deficit)      Stock    Receivable      Total
                                    ---------      -----    ----------      -----
<S>                               <C>           <C>         <C>        <C>
Balance June 30, 2001             $  (79,351)   $   (629)   $ (3,462)  $  (16,264)

  Dividends declared on Series A
  and B Preferred Stock                 (109)                               (109)

  Net loss through
   September 30, 2001                 (1,351)                             (1,351)

                                  -------------------------------------------------
Balance  September 30, 2001       $  (80,811)   $   (629)   $ (3,462)  $ (17,724)
                                  =================================================
</TABLE>

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                       September 30,
                                                                                   ---------------------
                                                                                    2001           2000
                                                                                   -------       -------
<S>                                                                                <C>           <C>
Cash Flow From Operating Activities:
     Net (loss) income from continuing operations ...........................      $(1,351)      $(1,332)
     Adjustments to reconcile net (loss) income to net cash used in operating
         activities:
     Depreciation and amortization ..........................................           90           119
     Changes In Assets and Liabilities:
        Increase in accounts receivable, trade ..............................         (160)         (176)
        Increase in inventories .............................................          (72)       (1,042)
        Increase in prepaid expenses and other assets .......................          (49)         (731)
        Increase in accounts payable and accrued expenses ...................          875         1,255
                                                                                   -------       -------
     Net cash used in continuing operating activities .......................         (667)       (1,907)
     Net cash used in discontinued operating activities .....................           --          (203)
                                                                                   -------       -------
     Net cash used in operations ............................................         (667)       (2,110)
                                                                                   -------       -------
Cash Flow From Investing Activities:
     Capital expenditures ...................................................          (33)         (133)
                                                                                   -------       -------
     Net cash used in investing activities ..................................          (33)         (133)
                                                                                   -------       -------
Cash Flow From Financing Activities:
     Borrowing from Foothill under revolving loans ..........................        3,325         3,186
     Repayments of debt and capitalized lease obligations ...................           (1)           --
     Payments for and advances to discontinued business units ...............       (2,908)           --
                                                                                   -------       -------
     Net cash provided by financing activities ..............................          416         3,186
                                                                                   -------       -------
     Net (decrease) increase in cash ........................................         (284)          943
     Cash, beginning of period ..............................................          450           152
                                                                                   -------       -------
     Cash, end of period ....................................................      $   166       $ 1,095
                                                                                   =======       =======
</TABLE>

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


                                       4
<PAGE>

                        Interiors, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements
                               September 30, 2001

1. Basis of Presentation.

Business

      The financial statements included herein are unaudited and have been
prepared by Interiors, Inc., a Delaware corporation ("Interiors"), in accordance
with accounting principles generally accepted in the United States and pursuant
to the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, these statements include all adjustments necessary to
present fairly the financial condition of Interiors and its subsidiaries (the
"Company"), as of September 30, 2001 and the results of operations of the
Company for the three months ended September 30, 2001 and 2000.

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

      Throughout 2000 and 2001, the Company had difficulty integrating many of
the businesses it had recently acquired. The Company also defaulted on the high
interest rate debt obligations undertaken to finance its acquisition strategy.
Therefore, in an effort to generate cash needed to reduce the Company's debt and
maximize shareholder value, the Board of Directors adopted a formal plan during
the second half of 2000 to sell substantially all of the recently acquired
businesses. The Company retained DN Partners, an investment-banking firm, to
assist in the sale of the various businesses. The proceeds from the sale of
these businesses were used to repay Foothill debt. As of November 19, 2001, the
Company had completed the sales of all of these businesses with the exception of
Petals and Concepts. Following these transactions, the Company's business will
once again primarily consist of its APF Master Framemakers division located in
Mount Vernon, New York.

Going Concern Matters

      The accompanying consolidated financial statements have been prepared on a
going concern basis that contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. For the years
ended June 30, 2001 and 2000, the Company had net losses of $39,192,000 and
$18,581,000, respectively. The net loss for the fiscal year 2001 includes
$28,600,000 representing estimated loss on the disposal of businesses. The loss
from continuing operations for the three months ended September 30, 2001 and
2000 were $1,351,000 and $1,332,000, respectively. In addition, as of September
30 and June 30, 2001, the Company classified $28,070,000 and $27,070,000 of its
long term debt as current liabilities, including debt applicable to discontinued
operations, because of its failure to meet certain requirements contained in the
agreements governing these instruments. These factors and the items discussed
below raise substantial doubt about the Company's ability to continue as a going
concern.

Limited Liquidity

      At September 30, 2001, the Company had negative working capital of
approximately $18,221,000. The Company continues to experience working capital
limitations which materially impair its ability to generate positive cash flow.
The cash proceeds received from the sales of various business units were
required to be used to repay debt. The Company's credit facility provides for
availability based upon inventory and account receivable levels and,
accordingly, the Company has experienced limitations on the availability under
this facility. The sales of Petals and Concepts during fiscal 2002 will be
required to repay outstanding debt obligations. If the Company continues to
experience working capital limitations it will materially impact the Company's
financial condition and results of operations.

Estimated Loss on Disposal of Businesses; Failure to Satisfy Obligations

      At June 30, 2001, the Company estimated that as a result of the disposal
of all discontinued operations the Company will incur a net loss. In addition,
as of September 30, 2001, the Company's continuing operations had a working
capital deficit of $10,664,000 and reported a loss of $1,351,000. The Company
will attempt to complete its plan to discontinue certain of its operations by
December 31, 2001. The completion of such plan is dependent on numerous factors
beyond the control of the Company, including without limitation, the
marketability of the Company's subsidiaries and divisions, other comparable
assets being offered by other sellers, interest rates, the Company's ability to
find willing buyers, the capital markets, the continued performance of the
Company's subsidiaries and divisions, and the Company's defaults under senior
debt instruments and lack of capital resources needed to accomplish such sales.
Notwithstanding the Company's ability to


                                       5
<PAGE>

complete the sale of its discontinued obligations, it will not have sufficient
proceeds to satisfy all of its obligations. The Company will be forced to seek
additional financing alternatives or seek a liquidation of its remaining assets.

2. Discontinued Operations.

      In an effort to generate cash needed to reduce the Company's high interest
rate debt and maximize shareholder value, during the second quarter of fiscal
2001, the Company's Board of Directors adopted a formal plan to sell various
businesses including, without limitation, Petals, Inc. ("Petals"), Stylecraft
Lamps, Inc. ("Stylecraft"), Habitat Solutions, Inc. ("Habitat Solutions") and
the West Coast operations. Following the contemplated transactions, the
Company's business will primarily consist of its APF Master Framemakers division
located in Mt. Vernon, New York. The Company retained DN Partners, an
investment-banking firm, to assist in the sale of the various businesses. The
West Coast is comprised of the operations of Troy and CSL, which were sold in
February 2001, Windsor Art, Inc. ("Windsor"), which was sold in June 2001, and
Artisan House, Inc. ("Artisan House"), a wholly owned subsidiary of Decor Group,
Inc. ("Decor"), which as sold in August 2001. Habitat Solutions is comprised of
Concepts 4, Inc. ("Concepts") and Model Home Interiors, Inc. ("Model Home"),
which was sold in April 2001. The Company's lighting products are sold by
Stylecraft which was sold on October 1, 2001, its silk floral and tree products
are sold by Petals, its architectural and design services are provided by
Habitat Solutions and its wall decor products were sold by Windsor and Artisan.
During the second quarter of fiscal 2001, the Company accounted for these
business units as discontinued operations. As of September 30, 2001, the
Company's wholly owned subsidiaries, Petals and Concepts, which remain to be
sold, were also considered discontinued operations. The consolidated financial
statements for the period ended September 30, 2000 have been restated to reflect
the discontinued operations.

      In August 2001, the Company completed the sale of stock of Artisan House,
a wholly owned subsidiary of Decor, receiving net proceeds of $640,000 comprised
of cash of $605,000 and an 8% note for $35,000. Decor retained $463,000 of
Foothill debt, which was repaid with the proceeds from the sale. The loss on the
disposal of this business unit was approximately $1,100,000.

      Cash received of $2,731,000 from the sales of Windsor and Artisan House
was used to repay outstanding borrowings under the Foothill revolving loans. Of
this amount, $2,126,000 from the sale of Windsor became available from escrow in
early July 2001.

      On October 1, 2001, the Company completed the sale of substantially all of
the assets of Stylecraft to Stylecraft Acquisition, Inc. for $24,700,000 in
cash. The cash proceeds were used to repay debt owed to Foothill in the amount
of $9,900,000, the Investors Note (as defined below) in the amount of
$5,200,000, the Limeridge Note and the Endeavour Note (both as defined below) in
the aggregate amount of $2,800,000, a real estate mortgage owed to Bank of
America in the amount of $2,200,000 and the Landis Note (as defined below) in
the amount of $500,000. As part of the transaction, a personal loan of Max Munn,
the Company's Chief Executive Officer, in the amount of $250,000, owed to Jimmy
Webster, the Chief Executive of Stylecraft, was transferred to the Company and
the Company set up a corresponding receivable from Mr. Munn. The Company also
paid an aggregate of approximately $1,200,000 out of $2,400,000 of retention
incentives owed to its executive officers. The Company paid approximately
$600,000 in fees and expenses. The remaining balance of approximately $2,300,000
was used for general working capital purposes of the Company. The gain on the
disposal of this business unit was approximately $16,200,000.

      As of June 30, 2001, the losses incurred on the sales of businesses which
occurred as of such date and the anticipated sales of the other businesses were
estimated to result in a net loss. During the first quarter of fiscal 2002, the
Company sold the stock of Artisan House and, on October 1, 2001, it sold the
assets of Stylecraft. The Company will attempt to complete the sales of Petals
and Concepts in the second quarter of fiscal 2002. The estimated loss of
$28,600,000 on the disposal of all businesses was recorded in the fourth quarter
of fiscal 2001. This estimated loss includes losses on businesses sold during
the third quarter of fiscal 2001, which had been previously deferred in
accordance with EITF 85-36 - "Discontinued Operations With Expected Gain and
Interim Losses" since, at that time, it was anticipated that the sales of all
the businesses would result in a net gain. The change to an estimated net loss
is due to actual sale prices of businesses sold during the fourth quarter of
fiscal 2001 and in early fiscal 2002 being lower than previously estimated. The
sales prices have decreased because of poor operating results and deteriorating
general economic conditions since the decision was made to sell these
businesses. The results of operations of discontinued operations since December
31, 2000 were deferred and included in the loss on disposal of the businesses.

      The estimated loss of $28,600,000 is comprised of the following: (a)
actual losses of approximately $29,000,000 on businesses sold prior to June 30,
2001, (b) actual losses of $5,900,000 for the results of operations of
discontinued operations from December 31, 2000 until the date of disposition if
prior to June 30, 2001, (c) estimated losses of approximately $15,500,000 for
the results of operations (including interest on debt obligations, estimated
investment fees and retention


                                       6
<PAGE>

incentives) from June 30, 2001 until the actual or anticipated date of
disposition of businesses not disposed of as of June 30, 2001 and (d) estimated
net gains of approximately $21,800,000 on the sales of businesses not disposed
of as of June 30, 2001.

      The result of the discontinued operations for the three months ended
September 30, 2000 are summarized as follows:

                                                    (amounts in thousands)
            -------------------------------------------------------------
                                                         September 30,
                                                              2000
                                                        -----------------
            Net sales..............................              $39,347
            Gross profit...........................               15,430
            Interest expense.......................                2,204
            Depreciation/amortization..............                1,115
            Amortization of goodwill...............                  281

      Interest expense and default penalties due under the Limeridge Note and
the Endeavor Note, as well as the depreciation expense on a computer system that
is no longer being implemented by the discontinued operations are reported in
discontinued operations.

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

      Net liabilities of discontinued operations in the accompanying
consolidated balance sheets as of September 30 and June 30, 2001, are comprised
of the following:

<TABLE>
<CAPTION>
                                                                       (amounts in thousands)
                                                                     -------------------------
                                                                     September 30,    June 30,
                                                                         2001           2001
                                                                     ----------       --------
<S>                                                                    <C>            <C>
      Current assets ............................................      $ 31,575       $ 32,185
      Property, plant and equipment, net ........................         6,489          5,871
      Goodwill, net .............................................        20,670         20,670
      Other assets ..............................................         6,146          2,373
      Notes payable and current maturities of long-term debt ....       (34,573)       (38,119)
      Accounts payable ..........................................       (16,410)       (13,533)
      Accrued expenses ..........................................       (19,025)       (15,792)
      Other non current liabilities .............................        (2,429)        (2,363)
                                                                       --------       --------
      Net liabilities of discontinued operations held
        for sale ................................................      $ (7,557)      $ (8,708)
                                                                       ========       ========
</TABLE>

      Debt applicable to discontinued operations as of September 30 and June 30,
2001, is as follows:

<TABLE>
<CAPTION>
                                                                       (amounts in thousands)
                                                                     -------------------------
                                                                     September 30,    June 30,
                                                                         2001           2001
                                                                     ----------       --------
<S>                                                                    <C>            <C>
        Bank Revolving Loans (a) ................................      $  6,668       $  9,193
        Bank Term Loans (a) .....................................           699          1,250
        29% Notes - Limeridge and Endeavour (b) .................        14,735         14,735
        10% Convertible Debenture - Petals (c) ..................         2,000          2,000
        Promissory Note - Bank of America (d) ...................         2,240          2,240
        16% Senior subordinated Secured Note (e) ................         5,000          5,000
        8% Promissory Notes -Concepts Deferred Purchase Price (f)         1,708          1,708
        Other notes payable (g) .................................         1,523          1,993
                                                                       --------       --------
                 Total ..........................................        34,573         38,119
                                                                       --------       --------
        Less current portion comprised of:
           Limeridge and Endeavor Notes .........................       (14,735)       (14,735)
           Foothill revolving loans and term loans ..............        (7,367)       (10,443)
           Other ................................................       (12,471)       (12,941)
                                                                       --------       --------
                 Total current portion ..........................       (34,753)       (38,119)
                                                                       --------       --------
        Long term portion .......................................      $     --       $     --
                                                                       ========       ========
</TABLE>


                                       7
<PAGE>

(a)   In June 2000, the Company and Foothill Capital Corporation ("Foothill")
      entered into a Loan and Security Agreement ("Foothill Agreement") pursuant
      to which Foothill agreed to make revolving credit loans and advances based
      on agreed upon percentages of eligible accounts receivable and inventory
      of Artisan House, Inc., CSL, Model Home, Petals, Stylecraft, Troy,
      Vanguard and Windsor (collectively with Interiors, the "Borrowers"). The
      credit facility is a combination of revolving loans and two thirty-two
      (32) month term loans. See Note 10 for information regarding the revolving
      loans applicable to continuing operations. The interest rates on the
      revolving loans and term loans were prime plus 1.25% and prime plus 1.50%,
      respectively. As of March 1, 2001, the interest rates were increased to
      prime plus 2.50% on both the revolving and term loans. At September 30,
      2001 and 2000, the prime rate was 6.0% and 9.50%, respectively, announced
      by Wells Fargo Bank. Borrowings under the credit facility are secured by
      substantially all of the assets of the Company, including accounts
      receivable and inventory. The credit facility contains financial and other
      covenants, including minimum net worth, and earnings before interest,
      income taxes and depreciation and amortization. The Foothill Agreement is
      in default and related borrowings are included in current liabilities in
      the accompanying financial statements because Foothill has the right to
      accelerate these obligations.

      As of August 15, 2000, the Company entered into Amendment No. 1 to Loan
      Documents with Foothill (the "Foothill Amendment No. 1") pursuant to which
      Foothill agreed to extend the Company an overadvance of $500,000 until
      September 1, 2000 and forbear from taking any action to collect the
      amounts owed to them until the earlier to occur of (i) June 30, 2001 or
      (ii) a default under the Foothill Amendment No. 1.

      As of October 13, 2000, the Company entered into Amendment No. 2 to Loan
      Documents and Waiver with Foothill (the "Foothill Amendment No. 2")
      pursuant to which Foothill agreed to amend certain financial covenants and
      to waive cross defaults under the Limeridge Note and Endeavour Note until
      the earlier to occur of (i) October 1, 2000 or (ii) a default under the
      Foothill Amendment No. 2. The fee charged by Foothill for such amendment
      was $15,000.

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

      As of June 29, 2001, the Company entered into Amendment No. 4 to Loan
      Documents and Extended Forbearance Agreement with Foothill (the "Foothill
      Amendment No. 4") pursuant to which Foothill agreed to extend the Company
      an overadvance of $650,000 until August 24, 2001, amend certain financial
      covenants and forbear from taking any action to collect the amounts owed
      to them until August 31, 2001 or (ii) a default under the Foothill
      Amendment No. 4. The fee charged by Foothill for such amendment was
      $50,000. The Company's interest rate was also increased to 2.5% per annum
      over the prime rate and its maximum borrowing under its credit facility
      was reduced from $17,000,000 to $16,500,000. In addition, the Company was
      charged an early termination fee of $600,000, which is payable upon
      termination of the credit facility.

      As of August 31, 2001, the Company entered into Amendment No. 5 to Loan
      Documents and Second Extended Forbearance Agreement with Foothill (the
      "Foothill Amendment No. 5") pursuant to which Foothill agreed to forbear
      from taking any action to collect the amounts owed to them until September
      28, 2001 or (ii) a default under the Foothill Amendment No. 5. The fee
      charged by Foothill for such forbearance was $65,000. The Company's
      maximum borrowing under its credit facility was reduced from $16,500,000
      to $13,500,000.

      As of October 1, 2001, the Company entered into Amendment No. 6 to Loan
      Documents and Third Extended Forbearance Agreement with Foothill (the
      "Foothill Amendment No. 6") pursuant to which Foothill agreed to forbear
      from taking any action to collect the amounts owed to them until December
      14, 2001 or (ii) a default under the Foothill Amendment No. 6. The fee
      charged by Foothill for such forbearance was $300,000. The Company's
      maximum borrowing under its credit facility was reduced from $13,500,000
      to $2,325,000.

(b)   In October 1999, the Company consummated a transaction with Limeridge LLC
      ("Limeridge") pursuant to which $5,027,000 principal amount of Series C
      Preferred Shares, plus accrued and unpaid dividends in the amount of
      $215,000, were exchanged for a Secure Convertible Note due September 30,
      2004 bearing interest at 17% per annum (the "Limeridge Note"). The Company
      also received aggregate proceeds of $7,500,000 and after certain fees and
      expenses, net proceeds of approximately $7,500,000 in the transaction. In
      addition, the Company owed Limeridge an additional $799,000 which
      consisted primarily of penalties. The Limeridge Note has a principal
      amount of $13,541,000, is secured by the common stock of Petals, Inc., a
      wholly owned subsidiary of the Company


                                       8
<PAGE>

      ("Petals"), and convertible after September 30, 2000 into Class A Shares
      at the fair market value of such securities at the time of conversion.
      Interest on the Limeridge Note is not payable until the earlier of a
      redemption, conversion or default of such security, however, the Company
      is required to pay an administrative fee in connection with the Limeridge
      Note equal to 1% of the outstanding principal amount of the security per
      month until the earlier of a redemption, conversion or default of such
      security. The 1% administrative fee is recorded as interest expense in the
      accompanying consolidated financial statements. In connection therewith,
      the Company issued a warrant to purchase 1,000,000 Class A Shares at an
      exercise price of $2.00 per share (the "Limeridge Warrant"). At any time,
      the Company may redeem the Limeridge Note at its face value, plus all
      accrued and unpaid interest, and redeem the Limeridge Warrant at $0.25 per
      warrant share. The fair market value of the Limeridge Warrant of
      approximately $629,000 is being amortized over the term of the Limeridge
      Note as a deferred financing charge.

      In December 1999, the Company consummated a transaction with Endeavour
      Capital Fund, SA ("Endeavour") pursuant to which $1,500,000 principal
      amount of Series C Preferred Shares, plus accrued and unpaid dividends in
      the amount of $65,000, and accrued and unpaid interest in the amount of
      $180,000 were exchanged for a Secured Convertible Note due September 30,
      2004 bearing interest at 17% per annum (the "Endeavour Note"). The
      Endeavour Note has a principal amount of $1,745,000, is secured by the
      common stock of Petals, and convertible after September 20, 2000 into
      Class A Shares at fair market value of such securities at the time of
      conversion. Interest on the Endeavour Note is not payable until the
      earlier of a redemption, conversion or default of such security, however,
      the Company is required to pay an administrative fee in connection with
      the Endeavour Note equal to 1% of the outstanding principal amount of the
      security per month until the earlier of a redemption, conversion or
      default of such security. The 1% administrative fee is recorded as
      interest expense. In connection therewith, the Company issued a warrant to
      purchase 110,000 Class A Shares at an exercise price of $2.00 per share
      (the "Endeavour Warrant"). At any time, the Company may redeem the
      Endeavour Note at its face value, plus all accrued and unpaid interest,
      and redeem the Endeavour Warrant at $0.25 per warrant share. The fair
      market value of the Endeavour Warrant of approximately $33,000 is being
      amortized over the term of the Endeavour Note as a deferred financing
      cost.

      Pursuant to the registration rights agreements with Limeridge and
      Endeavour, (a) the Limeridge Note, the Endeavour Note, the Limeridge
      Warrant and the Endeavour Warrant were required to be covered by an
      effective registration statement by September 30, 2000 and (b) the Company
      is required to keep its Class A Shares listed on the Nasdaq SmallCap
      Market or its equivalent. As of September 30, 2000, the securities were
      not covered by an effective registration statement and the Company had
      received a notice from NASDAQ of its intention to delist the Class A
      Shares. Accordingly, the Company is subject to liquidated damages in the
      amount of 2% per month after such date on the principal amount of the
      Limeridge Note and the Endeavour Note and such parties are entitled to
      accelerate the entire principal amount of the notes. As of June 30, 2000
      and the Company was also in arrears on interest payments in the aggregate
      amount of $542,000, which also entitles Limeridge and Endeavor to
      accelerate its note, subject to the Company's right to cure. As a result
      these rights to accelerate, the Limeridge Note and the Endeavour Note are
      classified as current liabilities in the Company's consolidated balance
      sheet as of June 30, 2000.

      In April 2001, the Company entered into a Forbearance and Acknowledgement
      Agreement with Limeridge and Endeavour (the "Limeridge/Endeavour
      Forbearance Agreement") pursuant to which Limeridge and Endeavour agreed
      not to take any action to collect any amounts owed to them until the
      earlier of (i) July 31, 2001, (ii) the date upon which the proceeds from
      the sale of the assets or capital stock of the Company's subsidiaries are
      sufficient to satisfy the Limeridge Note and the Endeavour Note or (iii) a
      default under the Limeridge/Endeavour Forbearance Agreement. The
      Limeridge/Endeavour Forbearance expired by its terms on July 31, 2001.
      Pursuant to the Limeridge/Endeavour Forbearance Agreement, Petals,
      Stylecraft and Habitat Solutions became primary obligors on these
      obligations. The proceeds from the sale of assets of these businesses are
      required to repay this debt.

      As part of the Stylecraft transaction, the Company entered into the
      Comprehensive Amendment, Guaranty and Security Agreement dated as of
      September 28, 2001, pursuant to which the Company granted Limeridge and
      Endeavour a security interest in substantially all of the Company's assets
      in exchange for such parties' forbearance from foreclosing on the
      Limeridge Note and the Endeavour Note until December 31, 2001
      notwithstanding that the Company remains in default with respect to the
      Limeridge Note and the Endeavour Note. The security interest is
      subordinated to the security interests securing the Foothill debt, the
      Investors Note and the Landis Note.

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


                                       9
<PAGE>

(c)   Issued to DMB Property Ventures LP in connection with the acquisition of
      Petals, Inc. The note was originally due March 23, 2001 and convertible
      into Class A Shares at $2.00 per share.

(d)   In June 2000, the Company issued a $2,300,000 promissory note at 8.97% to
      Bank of America. The note is due July 1, 2005 and secured by the Company's
      real estate located in Mississippi. Foothill has a second mortgage on the
      property. The note is payable in 59 equal monthly payments of $23,000 and
      one last payment of $1,872,000. As of March 31, 2001 the Bank of America
      mortgage loan maturity date has been accelerated to September 30, 2001 and
      the monthly payments has been increased to $24,049 and the interest rate
      was increased to 9.47%. On October 1, 2001, as part of the sale of
      Stylecraft, this loan was repaid out of the proceeds of the sale.

(e)   On March 19, 2001, Petals and Stylecraft, wholly owned subsidiaries of the
      Company, executed a Senior Subordinated Secured Note due March 14, 2002
      ("Investors Note") in favor of Interiors Investors, LLC, a Delaware
      limited liability company ("Interiors Investors") in the original
      principal amount of $5,000,000. The Investors Note is subordinated to the
      Company's obligations owed to Foothill, secured by substantially all of
      the Company's assets and guaranteed by Interiors and the Company's
      Chairman, President and Chief Executive Officer and his spouse. The
      Investors Note accrues interest at 16% per annum until September 30, 2001
      and 18% thereafter and is payable monthly commencing May 31, 2001. From
      time to time, the Company is required to prepay the Investors Note out of
      the proceeds of the sale of the assets or capital stock of the Company's
      subsidiaries. Interiors Investors is owned by Robert Berman, who controls
      Berman Industries, Inc., Stylecraft's largest vendor ("Berman
      Industries"), and Jimmy Webster, Stylecraft's Chief Executive Officer. The
      Company received net proceeds of $4,941,000, of which $2,000,000 was
      loaned to Stylecraft to pay accounts payable owed to Berman Industries,
      $2,941,000 was loaned to Petals for wording capital requirements, of which
      $450,000 was paid to Foothill on behalf of Interiors to pay down the
      revolving loan. In connection with the sale of Stylecraft, the Company
      repaid $3,000,000 principal amount of the Investors Note and the interest
      rate was increased to 20.0%.

      As part of the sale of Stylecraft, on September 28, 2001, Petals,
      Stylecraft and Interiors Investors entered into a letter agreement (the
      "Second Investors Letter Agreement") pursuant to which upon the sale of
      the assets or capital stock of Petals, the Company is obligated to pay
      Interiors Investors $200,000 plus $30,000 for each calendar month after
      April 1, 2002 until such event occurs. The Second Investors Letter
      Agreement expires on September 28, 2004. The amount will be included as
      part of the calculation of a gain or loss on discontinued operations. In
      addition, Petals issued a promissory note due March 31, 2002 in the amount
      of $224,894 in favor of Berman Industries, Inc., Stylecraft's largest
      vendor. The Company also issued a note in the amount of $665,000 (the
      "Webster Note") to Jimmy Webster as compensation triggered by the sale of
      Stylecraft. The Webster Note is personally guaranteed by Max Munn and his
      spouse and secured by all capital stock in the Company owned by Mr. Munn
      and his wife.

(f)   During fiscal year 2001, the Company issued 8% notes due to the former
      owners of Concepts totaling $2,059,000 comprised of the December 2000
      purchase price payment of $770,000 and the calendar year 2000 earnout of
      $1,289,000. These notes are due in December 2001 and June 2002,
      respectively.

(g)   Includes $1,523,000 and $1,718,000 of capital lease obligations as of
      September 30 and June 30, 2001, respectively. It is anticipated that the
      proceeds from the sales of businesses during fiscal year 2002 will be used
      in part to repay these obligations.

3. Debt.

Debt outstanding as of September 30 and June 30, 2001 is as follows:

                                                 (amounts in thousands)
                                               --------------------------
                                               September 30,      June 30,
                                                  2001              2001
                                               ----------         -------
      Bank Revolving Loans (a) ...........        $ 5,968         $ 2,642
      15% Convertible Demand Notes (b) ...            140             140
      12% Convertible Demand Notes (c) ...            686             686
      Promissory Note - Landis (d) .......          2,000           2,000
      Capital lease obligations ..........             14              16
                                                  -------         -------
               Total .....................          8,808           5,484
      Less current portion ...............         (8,808)         (5,484)
                                                  -------         -------
      Long term portion ..................        $    --         $    --
                                                  =======         =======


                                       10
<PAGE>

(a)   In June 2000, the Company and Foothill entered into the Foothill Agreement
      as more fully discussed in Note 3 - Discontinued Operations. The interest
      rates on the revolving loans is prime plus 1.25% and on the term loans is
      prime plus 1.50%. As of March 1, 2001, the interest rates were increased
      to prime plus 2.5% on the revolving loans. At June 30, 2000, the prime
      rate was 6.75% and 9.50%, respectively, announced by Wells Fargo Bank. The
      credit facility contains financial and other covenants, including minimum
      net worth, and earnings before interest, income taxes and depreciation and
      amortization. Borrowings under the credit facility are secured by
      substantially all the assets of the Company, including accounts receivable
      and inventory. This debt is classified as current liabilities because
      Foothill has the right to accelerate this obligation in the event other
      debt obligations which are currently in default were accelerated by other
      lenders.

(b)   Issued to four accredited investors and convertible into Class A Shares at
      $1.50 per share.

(c)   Issued to five accredited investors and convertible into Class A Shares at
      $1.125 per share and accrued interest.

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


                                       11
<PAGE>

4. Earnings (Loss) Per Share.

      Reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings for the quarters ended September 30,
2001, and 2000, respectively is as follows:

<TABLE>
<CAPTION>
                                                                           (amounts in thousands,
                                                                            except per share data)
                                                                          -------------------------
                                                                                September 30,
                                                                          -------------------------
                                                                            2001             2000
                                                                          --------         --------
<S>                                                                       <C>              <C>
      Numerator for basic and diluted earnings per share:
      Loss from continuing operations ............................        $ (1,351)        $ (1,332)
      Less:
           Dividends on non-convertible preferred stock ..........            (109)            (144)
                                                                          --------         --------
      (Loss) from continuing operations applicable to common stock          (1,460)          (1,476)
      Income (loss) from discontinued operations .................              --              501
                                                                          --------         --------
      Net loss applicable to common stock ........................        $  1,460         $   (975)
                                                                          ========         ========
      Denominator for basic and diluted earnings per share:
      Weighted  average  shares  outstanding  used in the
        computation of per share earnings:
      Common stock issued ........................................          43,602           41,857
                                                                          --------         --------
      Weighted Average shares outstanding - basic and diluted ....          43,602           41,857
                                                                          --------         --------
      Earnings (loss) per share:
      Basic and diluted:
      Continuing .................................................        $   (.03)        $   (.03)
      Discontinued:
      Income (loss) from operations ..............................              --              .01
                                                                          --------         --------
      Net loss applicable to common stock ........................        $   (.03)        $   (.02)
                                                                          ========         ========
</TABLE>

      For the three months ended September 30, 2001 and 2000, the conversion of
804,937 and 836,492, respectively, Series A Preferred Shares and for the three
months ended September 30, 2000, 200,000 Series B Preferred Shares were not
included for computation purposes since the effect would be antidilutive. For
the three months ended September 30, 2001, the 1,000 Series E Preferred Shares
were not included for computation purposes since the effect would be
antidilutive. Also not included in the computation were options on approximately
4.1 million shares since the exercise price was higher than the market price of
the Company's stock price.

      The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." In accordance with SFAS No. 128, net
earnings per share amounts ("basic EPS") were computed by dividing net earnings
by the weighted average number of common shares outstanding, excluding any
potential dilution. For purposes of this calculation, common shares include both
Class A Common Stock, par value $.001 per share ("Class A Shares"), and Class B
Common Stock, par value $.001 per share, of the Company. Net earnings per
diluted share amounts ("diluted EPS") were computed assuming there was no
potential dilution from the exercise of outstanding stock options, warrants and
other securities since the exercise price was higher than the market price. All
periods presented include a deduction for the dividend requirement of the
Company's 10% Series A Cumulative Convertible Preferred Stock, par value $.01
per share ("Series A Preferred Shares"), Series B Preferred Stock, par value
$.01 per share ("Series B Preferred Shares"), and Series E Preferred Stock,
$1,000 per share liquidation value ("Series E Preferred Shares").


                                       12
<PAGE>

5. Supplemental Cash Flow Information.

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

<TABLE>
<CAPTION>
                                                                                          (amounts in thousands)
                                                                                        ----------------------------
                                                                                            Three Months Ended
                                                                                                September,
                                                                                        ----------------------------
                                                                                           2001             2000
                                                                                        ------------     -----------
<S>                                                                                         <C>              <C>
          Cash Paid During the Period for:
               Interest...............................................................      $   402          $   38
          Non-Cash Financial Activities:
               Conversion of Series A Preferred Stock to Class A Common Stock.........           --               1
               Dividend accrual and accretion of dividends on preferred shares........          109             144
</TABLE>

      Cash flow information for the discontinued operations for the three months
ended September 30, 2001 are not presented since the operating results for the
business units were included in the loss on the disposal of the businesses as of
June 30, 2001. Cash flow information related to discontinued operations for the
three months ended September 30, 2000, is as follows:

<TABLE>
<CAPTION>
                                                                                      (amounts in thousands)
                                                                                      ----------------------
                                                                                        Three Months Ended
                                                                                        September 30, 2000
                                                                                      ----------------------
<S>                                                                                         <C>
      Net Cash Used in Discontinued Operations:
           Net income from discontinued operations .................................        $   501
      Adjustments to reconcile net income from discontinuing  operations to net cash
        used in discontinuing operating activities:
           Depreciation and amortization ...........................................          1,210
           Net book value of property disposed .....................................            348
           Noncash finance charges .................................................            311
           Reserve for inventory ...................................................             68
           Provision for losses on accounts receivable .............................             86
           Changes in Assets and Liabilities:
               Increase in accounts receivable .....................................         (2,849)
               Increase in inventories .............................................         (2,650)
               Decrease in prepaid expense and other assets ........................          1,534
               Increase in accounts payable and accrued expenses ...................          1,473
           Capital expenditures ....................................................         (1,141)
           Borrowing under Foothill revolving loans ................................          1,505
           Repayment of debt and capital lease obligations .........................           (599)
                                                                                            -------
      Net Cash Used By Discontinued Activities: ....................................        $  (203)
                                                                                            =======

<CAPTION>
                                                                                        (amounts in thousands)
                                                                                      ---------------------------
                                                                                          Three Months Ended
                                                                                            September 30,
                                                                                      ---------------------------
                                                                                         2001            2000
                                                                                      ------------    -----------
<S>                                                                                        <C>              <C>
        Supplemental disclosure of non cash items from financing activities:
             Issuance of debt in connection with acquisitions.......................       $  --            $  5
        Supplemental disclosure of non cash items from investing activities:
             Issuance of common stock in connection with acquisitions...............          --               5
</TABLE>


                                       13
<PAGE>

6. Related Party.

      In connection with the sale of Stylecraft, the personal loan for $250,000
of Mr. Munn, the Company's Chief Executive Officer, owed to Mr. Webster, the
Chief Executive Officer of Stylecraft, was transferred to the Company and the
Company set up a corresponding receivable form Mr. Munn.

7. Subsequent Events.

      On October 1, 2001, the Company completed the sale of substantially all of
the assets of Stylecraft to Stylecraft Acquisition, Inc. for $24,700,000 in
cash. See Note 2 "Discontinued Operations."

      On October 18, 2001, Mr. Munn offered to purchase the Company's APF Master
Framemakers division. The Company has formed an independent committee of outside
directors to examine the offer and determine an appropriate response which may
include, without limitation, selling the division to Mr. Munn, looking for other
potential buyers, or determining not to sell the division.


                                       14
<PAGE>

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

Overview

      Interiors, Inc., a Delaware corporation ("Interiors" or the "Company"), is
a designer, manufacturer and marketer of museum-quality traditional and
contemporary picture frames, framed wall mirrors, oil paintings and prints under
glass for the residential, commercial, institutional and contract markets. The
Company primarily markets its products to museums, art galleries, designers,
interior decorators and custom frame retailers. The Company's principal
operations are located in Mount Vernon, New York.

Ability to Continue as a Going Concern

      The report of the Company's independent public accountants in connection
with the Company's financial statements as of and for the years ended June 30,
2001 and 2000 contain an explanatory paragraph as to the Company's ability to
continue as a going concern. See "Item 5 Other Information."

Discontinued Operations

      In an effort to generate cash needed to reduce the Company's high interest
rate debt and maximize shareholder value, during the second quarter of fiscal
2001, the Company's Board of Directors adopted a formal plan to sell various
businesses including, without limitation, Petals, Inc. ("Petals"), Stylecraft
Lamps, Inc. ("Stylecraft"), Habitat Solutions, Inc. ("Habitat Solutions") and
the West Coast operations. Following the contemplated transactions, the
Company's business will primarily consist of its APF Master Framemakers division
located in Mt. Vernon, New York. The Company retained DN Partners, an
investment-banking firm, to assist in the sale of the various businesses. The
West Coast is comprised of the operations of Troy and CSL, which were sold in
February 2001, Windsor Art, Inc. ("Windsor"), which was sold in June 2001, and
Artisan House, Inc. ("Artisan House"), a wholly owned subsidiary of Decor Group,
Inc. ("Decor"), which as sold in August 2001. Habitat Solutions is comprised of
Concepts 4, Inc. ("Concepts") and Model Home Interiors, Inc. ("Model Home"),
which was sold in April 2001. The Company's lighting products are sold by
Stylecraft which was sold on October 1, 2001, its silk floral and tree products
are sold by Petals, its architectural and design services are provided by
Habitat Solutions and its wall decor products were sold by Windsor and Artisan.
During the second quarter of fiscal 2001, the Company accounted for these
business units as discontinued operations. As of September 30, 2001, the
Company's wholly owned subsidiaries, Petals and Concepts, which remain to be
sold, were also considered discontinued operations. The consolidated financial
statements for the period ended September 30, 2000 have been restated to reflect
the discontinued operations.

      The results of operations, through September 30, 2000, for the businesses
to be disposed of have been shown as discontinued operations in the accompanying
financial statements and are summarized as follows:

<TABLE>
<CAPTION>
                                                                       (amounts in thousands)
                                        -------------------------------------------------------------------------------------
                                                                        West           Habitat
3 Months Ended 9/30/00                   Stylecraft      Petals         Coast         Solutions       Other           Total
                                        -----------    -----------   -----------     -----------    ----------    -----------
<S>                                      <C>            <C>           <C>              <C>          <C>             <C>
Net sales.......................         $ 12,060       $ 8,883       $ 9,957          $ 8,537      $    (90)       $39,347
Gross profit....................            3,137         4,848         3,556            3,889            --         15,430
Interest expense................              207            35           259               42         1,661          2,204
Depreciation/amortization.......               22           143           212              479           259          1,115
Amortization of goodwill........               34            35           139               73            --            281
</TABLE>

      Revenues for the businesses presented above are from external sales.
Inter-segment sales totaled $90,000 for the three months ended September 30,
2000 and is reported under the other category. Inter-segment sales were not
significant for any business.

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

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


                                       15
<PAGE>

Results of Operations

Comparison of Three Months Ended September 30, 2001 and 2000

      Net sales for the three months ended September 30, 2001 were $1,901,000 as
compared to $2,067,000 for the comparable period of the prior year, a decrease
of $166,000. The decrease in net sales was primarily due to the Company's
decision during fiscal 2001 to close down the rug and accessory businesses.
Excluding rugs and accessories, sales increased $337,000. This increase in the
frames business was from major contract customers partially offset by lower
sales of custom frames.

      Cost of goods sold for the three months ended September 30, 2001 were
about the same as the comparable period of the prior year. Cost of goods sold
includes the costs directly related to the recognition of the Company's net
sales. Excluding the rug and accessory businesses, cost of sales of the frame
business increased $304,000 primarily due to higher contract business which is a
lower margin product.

      Selling, general and administrative expenses decreased to $1,670,000 for
the three months ended September 30, 2001 as compared to $2,060,000 for the
comparable period of the prior year, a decrease of $390,000. This decrease
primarily resulted from the decision to close down the rug and accessory
businesses. General and administrative expenses represent overhead and
administrative expenses excluding costs directly related to operations and the
recognition of the Company's net sales. Excluding the selling, general and
administrative expenses of the rug and accessory businesses, expenses increased
$141,000 primarily due to higher salaries and freight expenses in the frame
business

      Interest expense increased to $429,000 for the three months ended
September 30, 2001 from $180,000 for the comparable period of the prior year
primarily due to the higher borrowings under the Foothill revolver partially
offset by lower interstate.

Liquidity and Capital Resources

      The consolidated financial statements that accompany this Form 10-Q have
been prepared on a going concern basis that contemplates the realization of
assets and the satisfaction of liabilities as discussed below and in Note 2 -
"Discontinued Operations."

      Since the beginning of the fiscal year, the Company has primarily used its
cash to support operating activities. The Company's primary sources of cash
during this period have been borrowings under the Foothill revolving loan
agreement. At September 30, 2001, the Company had a working capital deficit of
$18,221,000. Working capital deficit, excluding the liabilities of expenses held
for disposition, was $10,664,000, which includes $5,968,000 representing debt
classified as current because the Company was not in compliance with certain
requirements governing these instruments.

      Net cash (used in) continuing operating activities during the quarters
ended September 30, 2001 and 2000 was $667,000 and $1,907,000, respectively. The
lower net cash usage during the quarter ended September 30, 2001 compared to the
quarter ended September 30, 2000, is principally due to decreases in inventory
resulting from the decision to shut down the rug and accessories businesses. In
addition, the quarter ended September 30, 2001 had a loss from continuing
operations of $1,351,000 compared to the loss of $1,332,000 for the quarter
ended September 30, 2000.

      Net cash used in investing activities during the three month periods ended
September 30, 2001 and 2000 was $33,000 and $133,000, respectively, for capital
expenditures.

      Net cash provided by financing activities during the three month periods
ended September 30, 2001 and 2000 was $416,000 and $3,186,000, respectively,
representing the net borrowing during the respective periods. For the three
months ended September 30, 2001, the borrowings under the Foothill revolving
loans was $3,324,000 of which $2,908,000 was used for working capital purposes
as well as advances to the business units to be disposed of.

      As of October 1, 2001, the Company entered into Amendment No. 6 to Loan
Documents and Third Extended Forbearance Agreement with Foothill (the "Foothill
Amendment No. 6") pursuant to which Foothill agreed to forbear from taking any
action to collect the amounts owed to them until December 14, 2001 or (ii) a
default under the Foothill Amendment No. 6. The fee charged by Foothill for such
forbearance was $300,000. The Company's maximum borrowing under its credit
facility was reduced from $13,500,000 to $2,335,000.


                                       16
<PAGE>

      As part of the Stylecraft transaction, the Company entered into the
Comprehensive Amendment, Guaranty and Security Agreement dated as of September
28, 2001, pursuant to which the Company granted Limeridge and Endeavour a
security interest in substantially all of the Company's assets in exchange for
such parties' forbearance from foreclosing on the Limeridge Note and the
Endeavour Note until December 31, 2001 notwithstanding that the Company remains
in default with respect to the Limeridge Note and the Endeavour Note. The
security interest is subordinated to the security interests securing the
Foothill debt, the Investors Note and the Landis Note.

      On March 19, 2001, Petals and Stylecraft, wholly owned subsidiaries of the
Company, executed a Senior Subordinated Secured Note due March 14, 2002 (the
"Investors Note") in favor of Interiors Investors, LLC, a Delaware limited
liability company ("Interiors Investors") in the original principal amount of
$5,000,000. The Investors Note is subordinated to the Company's obligations owed
to Foothill, secured by substantially all of the Company's assets and guaranteed
by Interiors and the Company's Chairman, President and Chief Executive Officer
and his spouse. The Investors Note accrues interest at 16% per annum until
September 30, 2001 and 18% thereafter and is payable monthly commencing May 31,
2001. From time to time, the Company is required to prepay the Investors Note
out of the proceeds of the sale of the assets or capital stock of the Company's
subsidiaries. Interiors Investors is owned by Robert Berman, who controls Berman
Industries, Inc., Stylecraft's largest vendor ("Berman Industries"), and Jimmy
Webster, Stylecraft's Chief Executive Officer. The Company received net proceeds
of $4,941,000, of which $2,000,000 was loaned to Stylecraft to pay accounts
payable owed to Berman Industries, $2,941,000 was loaned to Petals for working
capital requirements, of which $450,000 was paid to Foothill on behalf of
Interiors to pay down the revolving loan. In connection with the sale of
Stylecraft, the Company repaid $3.0 million principal amount of the Investors
Note and the interest rate was increased to 20.0%

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

      As part of the sale of Stylecraft, on September 28, 2001, Petals,
Stylecraft and Interiors Investors entered into a letter agreement (the "Second
Investors Letter Agreement") pursuant to which upon the sale of the assets or
capital stock of Petals, the Company is obligated to pay Interiors Investors
$200,000 plus $30,000 for each calendar month after April 1, 2002 until such
event occurs. The Second Investors Letter Agreement expires on September 28,
2004. The amount will be included as part of the calculation of a gain or loss
on discontinued operations. In addition, Petals issued a promissory note due
March 31, 2002 in the amount of $224,894 in favor of Berman Industries, Inc.,
Stylecraft's largest vendor. The Company also issued a note in the amount of
$665,000 (the "Webster Note") to Jimmy Webster as compensation triggered by the
sale of Stylecraft. The Webster Note is personally guaranteed by Max Munn and
his spouse and secured by all capital stock in the Company owned by Mr. Munn and
his wife.

      On October 12, 2000, the Company and the former shareholders of Concepts
amended the terms of the purchase agreement pursuant to which the Company
acquired all of the common stock of Concepts. Pursuant to the amended terms, the
Company paid the former shareholders $3,388,000 during the second quarter of
2000. The Company also has purchase price obligations consisting of (a) a cash
payment of $770,000 payable on December 15, 2000, which was satisfied by the
delivery of a note as discussed below, (b) a cash payment of $1,218,000 payable
on December 15, 2001, (c) a cash payment of $1,218,000 payable on December 15,
2002, and (e) a cash payment of $1,007,289 payable on March 10, 2003. Pursuant
to the transaction, the Company also agreed to pay the former shareholders up to
$4,500,000 upon the attainment of certain earnings goals by the Company. The
amount, if any, will be determined by the earnings of Concepts for the fiscal
years 2000, 2001 and 2002. For the calendar year 2000, the earnout was
$1,289,000, which was recorded as additional goodwill. All purchase price
obligations of the Company can be satisfied by the delivery of twelve month
promissory notes bearing interest at 8% per annum and all earnout obligations
can be satisfied by the delivery of eighteen month promissory notes bearing
interest at 8% per annum. The December 15, 2000 payment of $770,000 and the
earnout of $1,289,000 were satisfied by the issuance of promissory notes to the
former shareholders of Concepts. During the third and fourth quarters of fiscal
2001, $351,000 has been paid on the $770,000 promissory note.

      The Company has also agreed to maintain an escrow account containing Class
A Shares in an amount sufficient to satisfy all purchase price and earnout
obligations relating to Concepts as they become due under the terms of the
transaction. The former shareholders have agreed to vote such shares in support
of the election of the nominees of Board of Directors as long as the Company is
not in default under the amended purchase agreements. As of June 30, 2001, there
was an aggregate of 9,999,999 Class A Shares held in the escrow account. The
former shareholders have the option of removing Class A Shares from the escrow
account in an amount necessary to satisfy any outstanding purchase price
obligations or promissory notes delivered in connection therewith. The Company
does not expect the shareholders to exercise this option given the current
trading price of the Class A Shares.


                                       17
<PAGE>

      The Company will attempt to complete its plan to discontinue certain of
its operations by December 31, 2001. The completion of such plan is dependent on
numerous factors beyond the control of the Company, including without
limitation, the marketability of the Company's subsidiaries and divisions, other
comparable assets being offered by other sellers, interest rates, the Company's
ability to find willing buyers, the capital markets, the continued performance
of the Company's subsidiaries and divisions, and the Company's defaults under
senior debt instruments and lack of capital resources needed to accomplish such
sales. Notwithstanding the Company's ability to complete the sale of its
discontinued obligations, it will not have sufficient proceeds to satisfy all of
its obligations. The Company will be forced to seek additional financing
alternatives or seek a liquidation of its remaining assets. See "Item 5 Other
Matters."

Impact of Inflation

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

Sales Variations

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      The Company is exposed to market risk related to changes in interest rates
based primarily on its financing activities. As of September 30, 2001,
approximately $13,335,000 of the Company's total liabilities was subject to
floating rates of which $7,367,000 is applicable to discontinued operations and
$5,968,000 is applicable to continuing operations. The Company does not enter
into financial instruments for hedging, speculation or for trading purposes.


                                       18
<PAGE>

Forward Looking Statements

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

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


                                       19
<PAGE>

                        INTERIORS, INC. AND SUBSIDIARIES
                                     PART II
                                OTHER INFORMATION

Item 1. Legal Proceedings.

      Matrix Funding Corporation v. Stylecraft Lamps, Interiors, Inc and Petals,
Inc. This matter was brought by the plaintiff in the Third Judicial District
Court of Salt Lake County, Salt Lake Department, State of Utah and relates to
the non-payment of a computer equipment lease. The equipment covered by the
lease is not integral to the Company's business. The plaintiff obtained a
default judgment in the amount of approximately $1,900,000 in damages. The
plaintiff has offered to settle the matter for significantly less than the
amount of the judgment. The Company is currently considering this offer.

Item 2. Changes in Securities and Use of Proceeds.

      In November 2001, the Company retired 7,261,103 Class A Shares that were
returned to the Company in connection with the sale of Model Home Interiors,
Inc.

Item 3. Defaults Upon Senior Securities.

      As of September 30, 2001, the Company had $831,000 of accrued and unpaid
dividends on its Series A Preferred Shares for $805,000 and $26,000 on its
Series E Preferred shares.

      The Company is currently in default with respect to its debt obligations
owed under the Foothill credit facility, the Limeridge Note, the Endeavour Note,
and the Landis Note. See "Note 3 - Debt" to the consolidated financial
statements accompanying this Form 10-Q.

Item 5. Other Information.

      On October 1, 2001, the Company completed the sale of substantially all of
the assets of Stylecraft to Stylecraft Acquisition, Inc. for $24,700,000 in
cash. The cash proceeds were used to repay debt owed to Foothill in the amount
of $9,900,000, the Investors Note in the amount of $5,200,000, the Limeridge
Note and the Endeavour Note in the aggregate amount of $2,800,000, a real estate
mortgage owed to Bank of America in the amount of $2,200,000 and the Landis Note
(as defined below) in the amount of $500,000. As part of the transaction, a
personal loan of Max Munn, the Company's Chief Executive Officer, in the amount
of $250,000, owed to Jimmy Webster, the Chief Executive of Stylecraft, was
transferred to the Company and the Company set up a corresponding receivable
from Mr. Munn. The Company also paid an aggregate of approximately $1,200,000
out of $2,400,000 of retention incentives owed to its executive officers. The
Company paid approximately $600,000 in fees and expenses. The remaining balance
of approximately $2,300,000 was used for general working capital purposes of the
Company. In addition, Petals issued a promissory note due March 31, 2002 in the
amount of $224,894 in favor of Berman Industries, Inc., Stylecraft's largest
vendor. The Company also issued a note in the amount of $665,000 (the "Webster
Note") to Jimmy Webster as compensation triggered by the sale of Stylecraft. The
Webster Note is personally guaranteed by Max Munn and his spouse and secured by
all capital stock in the Company owned by Mr. Munn and his wife.

      On October 1, 2001, Mr. Munn, the Company's Chief Executive Officer,
executed the Consolidated Promissory Note due November 1, 2005 in the principal
amount of $568,624.97 bearing interest at 6.5% in favor of the Company. At
maturity, all accrued interest plus $48,679.92 of previously accrued interest is
due and payable.

      On October 18, 2001, Mr. Munn offered to purchase the Company's APF Master
Framemakers division. The Company has formed an independent committee of outside
directors to examine the offer and determine an appropriate response which may
include, without limitation, selling the division to Mr. Munn, looking for other
potential buyers, or determining not to sell the division.

Ability to Continue as a Going Concern

      The report of the Company's independent public accountants in connection
with the Company's financial statements as of and for the years ended June 30,
2001 and 2000, filed with the Company's Form 10-K, contain an explanatory
paragraph as to Company's ability to continue as a going concern. Among the
factors contributing to the substantial doubt about the Company's ability to
continue as a going concern are recurring net losses and the Company's default
with respect


                                       20
<PAGE>

to significant debt obligations. For the years ended June 30, 2001, 2000 and
1999, the Company had net losses of $39,192,000, $18,581,000 and $8,771,000,
respectively, see Note 3 - Discontinued Operations. The net loss for the year
ended June 30, 2001 of $39,192,000 includes a charge of $28,600,000 for the
estimated loss on the disposal of businesses. The Company had operating cash
flow of $193,000 for the year ended June 30, 2001 but had negative operating
cash flows of $920,000 and $31,540,000 (which was used primarily for
acquisitions), for the years ended June 30, 2000 and 1999, respectively. As of
June 30, 2001, the Company had classified $27,070,000 of its long term debt,
including debt applicable to discontinued operations of $24,428,000, as current
liabilities because of its failure to meet requirements contained in the
instruments governing these debt obligations. Such amount can currently be
accelerated by the holders of these instruments as a result of the defaults.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.

Limited Liquidity

      At September 30, 2001, the Company had negative working capital of
approximately $18,221,000. The Company continues to experience working capital
limitations which materially impair its ability to generate positive cash flow.
The cash proceeds received from the sales of various business units were
required to be used to repay debt. The Company's credit facility provides for
availability based upon inventory and account receivable levels and,
accordingly, the Company has experienced limitations on the availability under
this facility. The sales of Petals and Concepts during fiscal 2002 will be
required to repay outstanding debt obligations. If the Company continues to
experience working capital limitations it will materially impact the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

Estimated Loss on Disposal of Businesses; Failure to Satisfy Obligations

      The Company currently estimates that as a result of the disposal of all
discontinued operations the Company will incur a net loss. In addition, as of
September 30, 2001, the Company's continuing operations had a working capital
deficit of $10664,000 and reported a net loss of $1,351,000. Accordingly, the
Company does not expect that there will be sufficient proceeds from the sale of
its remaining discontinued operations or results of continuing operations to
satisfy all of its remaining obligations. The Company will be forced to seek
additional financing alternatives or seek a liquidation of its remaining assets.

Significant Financing Costs

      The Company has incurred significant costs in the financing of its
business operations and acquisition strategy. As of September 30, 2001, the
Company, including debt applicable to discontinued operations of $34,753,000,
had total debt in the aggregate principal amount of approximately $43,561,000.
As a consequence of the Company's significant financing costs, a substantial
portion of the Company's cash flow from operations and cash proceeds from the
sales of business units is committed to the payment of debt service and is not
available to the Company for other purposes. As of September 30, 2001, the
Company is in default with respect to $28,070,000 of debt obligations.
Substantial decreases in the proceeds from the businesses to be sold and in
operating cash flow or an increase in expenses would make it even more difficult
for the Company to meet its other debt service requirements and force it to
modify its operations. If this event were to occur, it would have a material
adverse effect on the Company's financial position and results of operations.


                                       21
<PAGE>

Delisting of Securities; Limited Trading Market

      In August 2000, the Company received a notice from the Nasdaq Stock Market
of its intention to delist the Company's securities from the Nasdaq Small Cap
Market because of the Company's failure to maintain at least $2.0 million in net
tangible assets and a bid price of $1.00 per share. Marketplace Rule
4310(c)(2)(B) requires that an issuer have net tangible assets of at least
$2,000,000 or a market capitalization of $35,000,000 or net income of $500,000.
Marketplace Rule 4310(c)(4) requires that the Company's securities maintain a
minimum bid price of $1.00 per share. The Company does not currently satisfy
these criteria. On October 11, 2000, the Company received notice from Nasdaq
that it had determined to delist the Company's securities. The Company
securities are now traded on the OTC Bulletin Board. There can be no assurance
that there will continue to be a market maker for the Company's securities or
that an active market will develop on the OTC Bulletin Board.

"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
the Company's Securities

      The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price of less than $5.00 per share, subject to certain
exemptions such as being listed on the Nasdaq SmallCap Market. As a result of
being delisted, the Company's securities are subject to rules, which impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally, those persons with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of the securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell the securities and adversely affect the
marketability of the Company's securities.

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

(a)  Exhibits

Exhibit No.                            Description
----------                             -----------
2.1         Asset Purchase Agreement by and between Stylecraft Lamps, Inc.,
            Interiors, Inc. and Stylecraft Acquisition, Inc.*
2.2         Amendment No. 1 to Asset Purchase Agreement by and between
            Stylecraft Lamps, Inc., Interiors, Inc. and Stylecraft Acquisition,
            Inc.*
2.3         Amendment No. 2 to Asset Purchase Agreement by and between
            Stylecraft Lamps, Inc., Interiors, Inc. and Stylecraft Acquisition,
            Inc.*
10.1        Comprehensive Amendment, Guaranty and Security Agreement dated as of
            September 28, 2001 among Interiors, Inc., et al and Limeridge LLC,
            The Endeavour Capital Fund, S.A. and The Endeavour Capital
            Investment Fund. S.A.*
10.2        Consolidated Promissory Note dated October 1, 2001 of Max Munn*

* To be filed by amendment.

(b) Reports on Form 8-K

None


                                       22
<PAGE>

                                   SIGNATURES

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

      Dated:                      INTERIORS, INC.


      November 19, 2001           By: /s/ Max Munn
                                  ---------------------------------------------
                                          Max Munn
                                          President and Chief Executive Officer


      November 19, 2001           By: /s/ Robert J. Conologue
                                  ---------------------------------------------
                                          Robert J Conologue
                                          Executive Vice President and
                                          Chief Financial Officer


                                       23