UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)
[X]      Quarterly Report Under Section 13 or 15(d)of the Securities Exchange
         Act of 1934 For Six Month Period Ended December 31, 1996.

or

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

                           Commission File No. 0-24352


                                 INTERIORS, INC.
                                   ---------------
    (Doing Business in New York under the name A.P.F. Master Framemakers) (Exact
      name of small business issuer as specified in its charter)

           Delaware                             13-3590047
-------------------------------            -------------------
(State or other jurisdiction of             (I.R.S. Employer
incorporation or organization)             Identification No.)

                320 Washington Street, Mt. Vernon, New York 10553
              ---------------------------------------------------
              (Address of principal executive offices) (zip code)

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

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

The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of February 19, 1997 was 4,556,091 and 2,039,500,
respectively.

Transitional Small Business Disclosure Format (check one). Yes [ ]. No [X].


<PAGE>



                                 INTERIORS, INC.

                                TABLE OF CONTENTS

                                                                        Page No.

PART I - FINANCIAL INFORMATION

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

            Consolidated Balance Sheet as of December 31, 1996 .........   2

            Consolidated Statements of Operations -
                 For the Three Months Ended December 31, 1996 and 1995..   3

            Consolidated Statements of Operations -
                 For the Six Months Ended December 31, 1996 and 1995....   4

            Consolidated Statement Changes in Stockholders' Equity -
                 For the Six Months Ended December 31, 1996.............   5

            Consolidated Statements of Cash Flows-
                 For the Six Months Ended December 31, 1996 and 1995....   6

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

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

PART II - OTHER INFORMATION

Item 1.     Legal Proceeding............................................  25

Item 2.     Changes in Securities.......................................  27

Item 3.     Defaults Upon Senior Securities.............................  27

Item 4.     Submission of Matters to a Vote of Security Holders.........  27

Item 5.     Other Information...........................................  27

Item 6.     Exhibits and Reports on Form 8-K............................  27


<PAGE>




                                     PART 1

                              FINANCIAL INFORMATION


Item 1.   Financial Statements

      The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of December 31, 1996 and the results of operations
for the three and six month periods ended December 31, 1996 and 1995.

      The Company's results of operations during the three and six months ended
December 31, 1996 are not necessarily indicative of any future results. It is
suggested that the financial statements included in this report be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996.







                                       1


<PAGE>


                                 INTERIORS, INC.
                                  CONSOLIDATED
                                  BALANCE SHEET
                                   (unaudited)

                                                     December 31,
                            ASSETS                      1996     
                                                     -----------

CURRENT ASSETS:
  Cash                                                       $0   
  Accounts receivables -
    Trade, net allowance of $37,000                     556,902   

  Inventories                                         2,337,780   
  Prepaid expenses and other current assets             475,708   
                                                     ----------
              Total current assets                    3,370,390   
                                                     ----------


INVESTMENT IN AFFILIATE                               2,526,522
                                                     
                                                     
                                                     

PROPERTY AND EQUIPMENT, at cost                      
  Machinery and equipment                             1,969,365   
  Furniture and fixtures                                164,929   
  Leasehold improvements                                259,405   
                                                     ----------
            Total property and equipment, at cost     2,393,699   

 
 
                                                     
                                                     
  Less- Accumulated depreciation and                 
     amortization                                     1,289,490   
                                                     ----------
          Net property and equipment                  1,104,209    
                                                     
                                                     

                                                     
OTHER ASSETS                                            564,045
                                                     ----------
          Total assets                               $7,565,166
                                                     ==========

                                    
        The accompanying notes are an integral part of this balance sheet.

<PAGE>

[table restubbed]

                                 INTERIORS, INC.
                                  CONSOLIDATED
                                  BALANCE SHEET
                                   (unaudited)
                                              

                                                       December 31,        
             LIABILITIES AND STOCKHOLDERS' EQUITY          1996            
                                                       -----------

CURRENT LIABILITIES:                                    
  Notes payable and current maturities of               
     long-term debt                                    $2,479,565    
  Accounts payable and accrued liabilities              1,953,521    
  Liabilities and accrued expenses
  of discontinued operations                               24,597    
  Capital lease obligations                                 3,813    
                                                       ----------
            Total current liabilities                   4,461,496    
                                                       ----------


NON-CURRENT LIABILITIES:                               
                                                                     
  Capital lease obligations                                30,652    
                                                       ----------
            Total noncurrent liabilities                   30,652    
                                                       ----------
 
COMMITMENTS AND CONTINGENCIES
 
                                                       
STOCKHOLDERS' EQUITY:                                  
  Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,058,860 shares issued and outstanding                    10,589    
  Class A common stock, $.001 par value,               
30,000,000 shares authorized,
4,556,091 shares issued and outstanding                     4,556    
  Class B common stock, $.001 par value,               
2,500,000 shares authorized,                           
2,039,500 shares issued and outstanding                     2,040    
  Additional paid-in-capital                           12,394,130    
  Retained deficit                                     (8,900,197)   
  Treasury Stock                                             (600)
  Note receivable                                        (437,500)   
                                                       ----------
           Total stockholders' equity                   3,073,018    
                                                       ----------
           Total liabilities and stockholders' equity  $7,565,166    
                                                       ==========

        The accompanying notes are an integral part of this balance sheet.

                                        2
[end restubbed table]

<PAGE>


                                 INTERIORS, INC.

                                  CONSOLIDATED

                            STATEMENTS OF OPERATIONS

              FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                1996            1995
                                                             -----------    -----------
<S>                                                          <C>            <C> 
NET SALES                                                    $   873,865    $ 2,170,927

COST OF GOODS SOLD                                               504,251      1,169,101
                                                             -----------    -----------

          Gross profit from continuing operations                369,614      1,001,826

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                     384,102        906,347

                                                             -----------    -----------
           Operating expenses                                    384,102        906,347

            Income (loss) from continuing operations
               before interest and provision for taxes           (14,488)        95,479

INTEREST EXPENSE (including financing charges)                    83,010        142,970
                                                             -----------    -----------

            Income (loss) from continuing operations
                before provision for taxes                       (97,498)       (47,491)

PROVISION FOR INCOME TAXES                                         9,973          5,998
                                                             -----------    -----------

            Income (loss) from continuing operations            (107,471)       (53,489)

DISCONTINUED OPERATIONS (Note 3)
            Loss from operations of discontinued operation             0        518,255
                                                             -----------    -----------
                  Loss from discontinued operations                    0        518,255

NET INCOME (LOSS)                                              ($107,471)     ($571,744)
                                                             ===========    ===========

NET EARNINGS PER COMMON STOCK

                 CONTINUING OPERATIONS                            ($0.03)        ($0.02)
                 DISCONTINUED OPERATIONS                           $0.00         ($0.16)
                                                             -----------    -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK                       ($0.03)        ($0.18)
                                                             ===========    ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                            4,261,435      3,182,366
                                                             ===========    ===========

</TABLE>

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

                                        3

<PAGE>

                                 INTERIORS, INC.

                                  CONSOLIDATED

                            STATEMENTS OF OPERATIONS

               FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                 1996            1995
                                                              -----------    -----------
<S>                                                           <C>            <C>
NET SALES                                                     $ 2,053,035    $ 3,223,743

COST OF GOODS SOLD                                              1,125,704      1,633,920
                                                              -----------    -----------

          Gross profit from continuing operations                 927,331      1,589,823

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                      872,173      1,556,012

                                                              -----------    -----------
           Operating expenses                                     872,173      1,556,012

            Income (loss) from continuing operations
               before interest and provision for taxes             55,158         33,811

INTEREST EXPENSE (including financing charges)                    160,250        238,516
                                                              -----------    -----------

            Income (loss) from continuing operations
                before provision for taxes                       (105,092)      (204,705)

PROVISION FOR INCOME TAXES                                          9,973          5,998
                                                              -----------    -----------

            Income (loss) from continuing operations             (115,065)      (210,703)

DISCONTINUED OPERATIONS (Note 3)
            Loss from operations of discontinued operations             0        560,350
                                                              -----------    -----------
                  Loss from discontinued operations                     0        560,350

NET INCOME (LOSS)                                               ($115,065)   ($771,053)
                                                              ===========    ===========

NET EARNINGS PER COMMON STOCK

                 CONTINUING OPERATIONS                             ($0.03)        ($0.06)
                 DISCONTINUED OPERATIONS                            $0.00         ($0.18)
                                                              -----------    -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK                        ($0.03)        ($0.24)
                                                              ===========    ===========

WEIGHTED AVERAGE NUMBER OF SHARES USED
     IN COMPUTATION                                             4,261,435      3,182,366
                                                              ===========    ===========
</TABLE>

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

                                        4

<PAGE>

                                 INTERIORS, INC.

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                   FOR THE SIX MONTHS ENDED DECEMBER 31, 1996

                                   (unaudited)



<TABLE>
<CAPTION>
                                                            Series A                 Class A                  Class B
                                                         Preferred Stock          Common Stock             Common Stock
                                                     ---------------------------------------------------------------------
                                                        Shares      Amount      Shares      Amount      Shares      Amount
                                                     ---------   ---------   ---------   ---------   ---------    --------
<S>                                                  <C>         <C>         <C>         <C>         <C>          <C>     
BALANCE, June 30, 1996                                 790,000      $7,900   3,470,247      $3,470   2,039,500      $2,040

 Proceeds from the exercise of common stock warrants                           822,424        $822
 Proceeds from the exercise of pfd. stock options      350,000      $3,500
 Common stock issued to directors                                               20,000         $20
 Conversion of preferred stock to common stock         (81,140)      ($811)    243,420        $244
 Increase in valuation of investment in affiliate
 Net loss through December 31, 1996

                                                     ---------------------------------------------------------------------
BALANCE, December 31, 1996                           1,058,860     $10,589   4,556,091      $4,556   2,039,500      $2,040
                                                     =====================================================================
</TABLE>

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


[restubbed table]

<TABLE>
<CAPTION>
                                                        Additional  Retained
                                                         Paid-In    Earnings      Treasury     Note
                                                         Capital    (Deficit)       Stock    Receivable     Total
                                                       ----------  ------------  ---------   ----------  ----------
<S>                                                   <C>          <C>           <C>         <C>         <C>     
BALANCE, June 30, 1996                                 $8,564,741  ($8,785,132)     ($600)   ($437,500)   ($645,081)
 Proceeds from the exercise of common stock warrants   $1,291,820                                        $1,292,642
 Proceeds from the exercise of pfd. stock options        $821,500                                          $825,000
 Common stock issued to directors                         $14,980                                           $15,000
 Conversion of preferred stock to common stock               $567
 Increase in valuation of investment in affiliate      $1,700,522                                        $1,700,522
 Net loss through December 31, 1996                                 ($115,065)                            ($115,065)

                                                      -------------------------------------------------------------
BALANCE, December 31, 1996                             $12,394,130 ($8,900,197)     ($600)   ($437,500)  $3,073,018
                                                      =============================================================
</TABLE>

[END OF RESTUBBED TABLE]

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

                                        5


<PAGE>

                                 INTERIORS, INC.
                                  CONSOLIDATED
                             STATEMENT OF CASH FLOWS
               FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                                      SIX MONTHS ENDED
                                                                                                         DECEMBER 31
                                                                                              ------------------------------
                                                                                                    1996            1995
                                                                                              --------------  --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                               <C>             <C>       
  Net Income (Loss)                                                                               ($115,065)      ($771,053)

  Adjustments to reconcile net  loss to net cash used in operating activities:
    Depreciation and amortization                                                                   331,836         434,773
    Provision for losses on accounts receivable                                                                      33,766
    Accretion of interest expense
    Restructuring costs
    Non-cash provision for discontinued catalog operations                                                          350,000
    Non-cash satisfaction of debt
    Provision for issuance of stock                                                                  15,000         200,000
    Changes in assets and liabilities:
    Decrease (increase) in accounts receivable, trade                                               227,698        (854,167)
    Decrease (increase) in inventories                                                             (616,475)       (502,185)
    Decrease (increase) in prepaid catalog costs, prepaid expenses and other current assets        (123,851)       (147,858)
    Decrease (increase) in other assets                                                             165,220         (73,851)
    Increase (decrease) in notes payable and current maturities of long term debt                   (37,008)
    Increase (decrease) in accounts payable and accrued expenses                                   (793,638)        282,025
    Increase (decrease) in net liabilities and accrued expenses of discontinued operations          (43,488)
    Increase (decrease) in prepaid sales & customer deposits                                                          4,200
                                                                                              --------------  --------------
          Net cash used in operating activities                                                    (989,771)     (1,044,350)
                                                                                              --------------  --------------
                                                                                                              
CASH FLOWS FROM INVESTING ACTIVITIES:                                                         
  Capital expenditures                                                                             (306,013)       (385,197)
   Investment in Decor Group, Inc.                                                                 (826,000)
                                                                                              --------------  --------------
          Net cash used in investing activities                                                  (1,132,013)       (385,197)
                                                                                              --------------  --------------
                                                                                                              
CASH FLOWS FROM FINANCING ACTIVITIES:                                                         
  Net proceeds from issuance of debt
  Repayments of debt and capitalized lease obligations                                                             (193,025)
  Net proceeds from sale of Series A preferred stock and warrants                                                 1,664,492
  Net proceeds from exercise of common stock warrants                                             1,292,642
  Net proceeds from exercise of preferred stock options                                             825,000
                                                                                              --------------  --------------
      Net cash provided by  financing activities                                                  2,117,642       1,471,467
                                                                                              --------------  --------------
      Net Increase (decrease) in cash                                                                (4,142)         41,920

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

CASH, end of period                                                                                      $0         $44,034
                                                                                              ==============  ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                            
  Cash paid during the period for-
    Interest                                                                                       $119,095        $192,724
    Taxes                                                                                            $5,973          $5,150
NON-CASH FINANCING ACTIVITIES:
   Conversion of convertible debt into Class WC Warrants                                                           $100,000
   Conversion of convertible debt into Class A Preferred Stock                                                     $200,000


</TABLE>


        The accompanying notes are an integral part oinancial statements.
                                        6

<PAGE>

1.    BASIS OF PRESENTATION

The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Reference should be made to the Company's financial statements for the year
ended June 30, 1996 for a description of the accounting policies which have been
applied consistently. Also, reference should be made to the notes to the
Company's June 30, 1996 financial statements contained in the Company's Form
10-KSB for the fiscal year ended June 30, 1996, for additional details of the
Company's financial condition, results of operations and cash flows. The details
in those notes have not changed except as a result of normal transactions in the
interim. All adjustments (of normal recurring nature) which are, in the opinion
of management, necessary for a fair presentation of the results of the interim
period have been included. The results of operations for the three and six
months ended December 31, 1996 are not necessarily indicative of those to be
expected for the entire year. The Company, for the three and six months ended
December 31, 1996 and 1995, used the gross profit method to value inventory.

2.     ACQUISITIONS AND STRATEGIC ALLIANCES

                                       7

<PAGE>

   Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances with unrelated companies in
the decorative accessories industry to maximize market potential. For this
purpose, pursuant to a March 3, 1996 agreement relating to the capitalization of
Decor Group, Inc., ("Decor"), Decor issued to the Company 250,000 shares of its
Series A Non-Voting Convertible Preferred Stock and an option to purchase
10,000,000 shares of its Series B Non-Convertible Voting Preferred Stock (the
"Option Shares") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common stock and 200,000 shares of its Series A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. (The Decor securities are adjusted to
reflect a 1-for-two reverse split effected by Decor in October 1996.) Also, the
Company exercised its option to purchase the Option Shares in September 1996,
for total cash consideration of $2,000. Concurrent with the exercise of this
option, the Company executed a Voting Agreement (the "Voting Agreement") to vest
the power to vote the Option Shares in a Voting Trust (the "Voting Trust".) The
Voting Agreement will expire on December 31, 1997. The Voting Trust shall
comprise three individuals: the Company's President and Chief Executive Officer
(and also the Chairman of the Board of Decor), and two Directors of Decor who
are otherwise unrelated to the Company. As part of the Company's investment in
Decor, during the months of August and September 1996, the Company purchased
54,934 shares of Decor's Series C Non-Voting, Convertible, Preferred Stock at a
cost of $824,000. On November 12, 1996, (the "Effective Date") a public offering
by Decor of certain of its securities was declared effective by the Securities
and Exchange Commission. Subsequent to this effective date, the Company owns
approximately 79.6% of the total voting stock of Decor. As of December 31, 1996,
the holding in Decor is recorded on the Company's financial statements at the
market value on November 12, 1996 (the "Measurement Date") of the Company's
trading securities previously transferred to Decor during March 1996. (See
subsequent paragraph). In December 1996, Decor declared and issued a dividend on
its common stock payable in the form of two (2) shares of common stock for each
one (1) share of common stock held as of the record date of December 16, 1996.
Each share of Decor's Series A and Series C Preferred stock are convertible into
three (3) shares of Decor's common stock effective December 16, 1996. Subsequent
to the date of this filing, the Company intends to sell its entire holdings of
Series A Convertible Preferred Stock. Assuming conversion by the subsequent
holder to common stock, the Company will own approximately 77.3% of the total
voting stock of Decor subsequent to such sale and conversion.

   In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. Subsequent
to the date of this filing, the Company and Decor intend to amend this agreement
to increase this payment to $90,000 per annum. Additional transfers of funds
from Decor to the Company will be subject to the attainment by Decor of excess
cash flow totaling $4,000,000 per year through December 31, 1999. At December
31, 1996, the Company has accrued approximately $38,000 of fees pursuant to this
agreement.


                                       8

<PAGE>

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

   Pursuant to a March 31, 1996 agreement relating to the capitalization of
Decor, Laurie Munn, wife of the Company's President and Chief Executive Officer
purchased and was issued certain shares of the Common Stock of Decor. As of
December 31, 1996, Ms. Munn was issued 300,000 shares of the outstanding
5,122,500 common shares of Decor, adjusted to reflect a 1-for-2 reverse split
effected by Decor in October 1996, and a stock dividend of two (2) common shares
for each common share owned as of December 16, 1996.

3. COMMITMENTS AND CONTINGENCIES

The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement, the
Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement of certain expenses, $50,000 in various installments
during the four months ending December 1996. The Company also entered into a
non-compete agreement with Ms. Stevens for which the Company will make bi-weekly
payments to Ms. Stevens to total $25,000 per year for seven years, plus
automobile and insurance costs for five years. As of June 30, 1996, the Company
issued to Ms. Stevens 50,000 shares of the Company's Class A Common Shares,
which were previously committed to Ms. Stevens pursuant to her 1995 employment
agreement. The Company filed a registration statement with the Securities and
Exchange Commission (the "Commission") on January 14, 1997 to register these, as
well as other shares as disclosed elsewhere in this filing. As of the date of
this filing, this registration statement has not been declared effective by the
Commission. As of June 30, 1996, the Company issued 1,250,000 shares of its
Class B Common Shares (the "Escrow Shares") to Michael Levine, Esq., attorney of
Ms. Stevens, as escrow agent (the "Escrow Agent"). The Escrow Agent shall
abstain from voting the Escrow Shares for any purpose, except in the event of
either the failure by the Company to adhere to the payment provisions noted
above or the financial insolvency of the Company. If either event occurs, Ms.
Stevens will be in a position to elect replacement Directors. Once the payment
provisions in the severance and non-compete agreements are satisfied, the Escrow
Agent shall return the Escrow Shares to the Company.


                                       9
<PAGE>

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

 In August 1995 the Company entered into a four year employment agreement with
Ann Stevens, then Executive Vice President, with an annual salary of $150,000.
In addition, on or about September 30, 1995, the agreement entitled Ms. Stevens
to receive a one time payment of either, at the Company's option, $50,000 or
50,000 shares of Class A Common Stock. Pursuant to this agreement, Ms. Stevens,
who is the sister of Max Munn, President and Chief Executive Officer of the
Company, was also entitled to receive stock options, stock bonuses and other
equity instruments in an amount equal to that received by Max Munn or members of
his immediate family. In June 1996, the Company executed an employment severance
agreement with Ms. Stevens which terminated the provisions of the August 1995
employment agreement. The employment severance agreement stipulated that the
Company will pay to Ms. Stevens an initial payment of $63,000, and make various
periodic payments over seven years. In addition, the Company agreed to issue to
Ms. Stevens 50,000 shares of the Company's Class A Common Shares. Such shares
were issued on July 25, 1996 and included in a registration statement filed by
the Company with the Securities and Exchange Commission (the "Commission") on
January 14, 1997. As of the date of this filing, this registration statement has
not been declared effective by the Commission. (See "Legal Proceedings.")

On May 8, 1995, the Company entered into an Employment Agreement with Donald
Feldman, Vice President of Sales and Marketing of the Company, as well as a
member of its Board of Directors. The Agreement is for a term of four years
beginning June 1995 and may be terminated by the Company after the first year
with payment of 80% of the employee's salary, reduced by the employee's other
income. The Agreement provides that the Vice President of Sales and Marketing
will be employed at a base salary of $117,500 plus a sales commission structure
based on increases in net sales for the Company and for Italia. Mr. Feldman will
be granted an option to purchase 10,000 shares of the Company's Class A Common
Stock for every full year under the employment agreement at a price of $2.50 per
share. Mr. Feldman has been named President and Chief Financial Officer of
Decor, whose initial public offering was declared effective by the Securities
and Exchange Commission on November 12, 1996. Because Mr. Feldman's position
with Decor is expected to occupy most of his time, on January 31, 1997, the
Company and Mr. Feldman will terminate Mr. Feldman's Employment Agreement as
well his status as a Director of the Company.

                                       10

<PAGE>

Submitted with this filing is a copy of Mr. Feldman's resignation from the
Company's Board of Directors effective January 31, 1997.

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

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

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

4.    SHAREHOLDERS' EQUITY

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

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


                                       11

<PAGE>

filing, independent holders of 81,140 shares of Preferred Stock have converted
such shares into 243,420 shares of the Company's Class A Common Stock.

In September 1995, the Company lowered the exercise price of the Company's Class
WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a "Regulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed below. On July 16, 1996, the Company
filed a Registration Statement with the Securities and Exchange Commission to
register the Class WA Warrants and underlying Common A Shares. The Commission
declared this Registration Statement effective on July 19, 1996. Through the
date of this filing, 704,412 of the Company's Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these proceeds, $811,500 was used to purchase 54,100 shares (adjusted for a
1-for-2 reverse split effected in October 1996) of Decor Group, Inc.'s Series C
Non-Voting, Convertible, Preferred Stock. The balance of the proceeds was
retained by the Company for working capital needs, for the repayment to Decor of
outstanding loans of $50,000, and for the provision of additional loans to
Decor. At December 31, 1996, the balance of loans to Decor totals $50,238.

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

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

In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. As of the date of this filing, the Company has not
declared or established a record date for a dividend for its Series A 10%
Cumulative Convertible Preferred Stock for September 1996. The Company expects
to declare a stock dividend equivalent to $.50 per share to its Series A 10%
Cumulative Convertible Preferred Stockholders. The record date will be
determined in February 1997, and is

                                       12


<PAGE>

expected to allow for a payment date within March 1997. This dividend, when
declared and paid, will satisfy the Company's obligation to pay its semi-annual
cumulative dividend on its Series A 10% Cumulative Preferred Stock for September
1996, which has not yet been paid, and for March 1997.

In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock, in consideration
for past consulting services provided. These shares, bearing a restrictive
legend, were issued on April 12, 1996. The Company included these shares in a
registration statement filed with the Securities and Exchange Commission (the
"Commission") on January 14, 1997. As of the date of this filing, the Commission
has not declared this registration statement to be effective. In conjunction
with the issuance of these shares, approximately $54,000 of charges were
recorded against earnings during the year ended June 30, 1996.

In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all bearing a restrictive
legend, were issued on April 24, 1996 to various independent investors (the
"Investors") generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
Commencing thirty (30) days following the date of the close of the private
placement, any of the Investors had the right to demand in writing (the "Demand
Notice") that the Company file a registration statement with the Securities and
Exchange Commission (the "Commission") which shall cover the shares and allow
the Investor to sell the shares to the public. Within fifteen (15) days
following receipt of the Demand Notice, the Company is required to file such
registration statement and use its best efforts to have such registration
statement declared effective by the Commission and such state securities
regulators as reasonably requested by the Investor. The Company included these
shares in a registration statement filed with the Securities and Exchange
Commission (the "Commission") on January 14, 1997. As of the date of this
filing, the Commission has not declared this registration statement to be
effective.

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

Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain services. As part of this agreement, over the subsequent
five-years, the Company will pay Mr. Munn $54,000 per annum in equal bi-weekly
installments, and issue to Mr. Munn options to purchase up to 350,000 shares of
the Company's Series A Preferred stock. These options were fully exercised

                                       13

<PAGE>

during July to September 1996, generating net proceeds to the Company totaling
$787,500. Of these proceeds, approximately $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens, a former Company executive
(See "Legal Proceedings."), and $12,500 was used to purchase 834 shares
(adjusted for a 1-for-2 reverse split effected in October 1996) of Decor Group,
Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The balance of
proceeds was retained by the Company to support working capital needs. In
conjunction with the issuance of the options to Mr. Munn, the Company recorded
charges against earnings totaling $87,500 at June 30, 1996.

Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. The Company
included these shares in a registration statement filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1997. As of the date of
this filing, the Commission has not declared this registration statement to be
effective. Also pursuant to the Settlement, the Company issued to Michael Levine
as escrow agent (the "Escrow Agent") 1,250,000 unregistered shares of the
Company's Class B Common shares (the "Escrow Shares".) The Escrow Shares shall
not be voted by the Escrow Agent, unless the Company defaults on its obligations
under the agreement. Upon satisfaction of such obligations, the Escrow Shares
shall be returned by the Escrow Agent to the Company. (See "Legal Proceedings".)
In conjunction with the issuance of the Company's shares to Ms. Stevens, the
Company recorded charges against earnings totaling $71,400 at June 30, 1996.

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

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


5.    RECENT DEVELOPMENTS

On October 24, 1996, the Company received notification from the Nasdaq Stock
Market, Inc. ("Nasdaq") that the Company's capital and surplus at June 30, 1996
was less than $1,000,000, thereby failing to satisfy a requirement for continued
listing of its securities on The Nasdaq SmallCap Market. The Company was subject
to delisting effective November 7, 1996 if the Company did not demonstrate that
it currently meets all Nasdaq SmallCap Market listing criteria. On November 13,
1996, the Company was advised by Nasdaq that the Company currently meets Nasdaq
SmallCap Market listing criteria.


                                       14

<PAGE>

   Because of declining revenues and high operating costs, on December 16, 1996,
the Board of Directors decided to discontinue and dissolve Italia. On December
27, 1996, a Notice of Public Auction was distributed by Italia, advising all
interested parties that a public auction of all the assets of Italia consisting
of molds, equipment, models, and inventory listed in a Security Agreement
entered into between Italia, as debtor, and United Credit Corporation, as
secured party, was to occur, and there being due to the secured party
approximately $1,094,028 plus legal fees and expenses of the sale. The auction
took place on January 10, 1997 and the Company was the successful bidder,
thereby acquiring all of the assets of Italia in consideration for a payment of
$2,000 and the assumption by the Company of the liabilities of Italia to United
Credit Corp., which as of January 31, 1997 totaled $811,628. Since the financial
statements of Italia are consolidated into those of the Company, such
liabilities have already been reflected on the Company's consolidated financial
statements. Thus, no additional liabilities need to be recorded pursuant to this
assumption of liabilities.

   As part of its efforts to refinance business activities, during the month of
February 1997, the Company is finalizing the terms by which it will obtain
$600,000 of new debt financing at an annual rate of 15% interest, and $375,000
of proceeds relating to the sale by the Company of its holdings of 250,000
shares of Series A Convertible Preferred Stock of Decor Group, Inc.

   In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid the greater of (1) $75,000 or (2) 1.5% of
excess cashflow as defined in the agreement. During February 1997, the Company
and Decor will amend this agreement to increase this payment to $95,000 per
annum. Additional transfers of funds from Decor to the Company will be subject
to the attainment by Decor of excess cash flow totaling $4,000,000 per year
through December 31, 1999. At December 31, 1996, the Company has accrued
approximately $38,000 of fees pursuant to this agreement.

Item 2.  Management's Discussion

      The following discussion should be read in conjunction with the
information contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the "Notes") thereto appearing elsewhere herein and
in conjunction with the Management's Discussion and Analysis set forth in the
Company's Form 10-KSB for the fiscal year ended June 30, 1996, which discussion
is incorporated herein by reference.

Results of Operations

Period Ended December 31, 1996 as Compared to Period Ended December 31, 1995.

      The Company's net sales from continuing operations for the quarter ended
December 31, 1996 decreased by $1,297,000 or 60% to $874,000 from $2,171,000 for
the quarter ended December 31, 1995, restated to reflect the discontinuation of
the Company's catalog operation.

                                       15


<PAGE>

The Company's net sales from continuing operations for the six months ended
December 31, 1996 decreased $1,171,000 or 36% to $2,053,000 from $3,224,000 for
the six months ended December 31, 1995, restated to reflect the discontinuation
of the Company's catalog operation. (See "Discontinuation of Certain
Operations.")

      Net sales for the A.P.F. Master Framemakers division for the quarter ended
December 31, 1996 decreased $51,000 or 5% to $923,000 from $974,000 for the
quarter ended December 31, 1995. Net sales for the A.P.F. Master Framemakers
division for the six months ended December 31, 1996 increased $354,000 or 22% to
$1,988,000 from $1,634,000 for the six months ended December 31, 1995. Net sales
for the Italia Collection subsidiary for the quarter ended December 31, 1996
decreased $1,246,000 or 104% to ($49,000) from $1,197,000 for the quarter ended
December 30, 1995. The negative sales for the current quarter reflect certain
returns of merchandise by customers during the current quarter. Net sales for
the Italia Collection subsidiary for the six months ended December 31, 1996
decreased $1,525,000 or 96% to $65,000 from $1,590,000 for the six months ended
December 31, 1995. Because of declining revenues and high operating costs, the
Company decided to discontinue and dissolve Italia. (See "Recent Developments.")

      The Company's cost of goods sold as a percentage of net sales increased to
55% for the six months ended December 31, 1996, from 51% for the six months
ended December 31, 1995. Revenues of Italia have historically been generated at
a higher gross margin than those of the A.P.F. Master Framemakers Division.
Since Italia revenues have been significantly reduced during the current period
versus the prior period, the consolidated gross margins for the current period
have declined versus the prior period. The Company used during the three and six
months ended December 31, 1996 and 1995 the gross profit method to value
inventory. During the quarter ended December 31, 1996, the Company began the
implementation of a perpetual inventory system. The Company believes that such a
system will enable it to determine product costing and margins more precisely.
Although the Company is planning to install this system by fiscal year-end, no
assurances can be given that this will occur.

      The Company's selling, general and administrative expenses as a percentage
of net sales totaled 42% for the six months ended December 31, 1996, versus 41%
for the three months ended September 30, 1996. For the six months ended December
31, 1995, selling, general and administrative expenses as a percentage of sales
totaled 48%. To achieve the reduction in the ratio of selling, general, and
administrative expenses as a percentage of net sales for the six months ended
December 31, 1996 versus the prior year, the Company has taken certain measures
to reduce expenses. For example, reductions of administrative personnel have led
to reduced salaries, benefits, and travel expenses. Also discretionary spending
for such items as stationery and supplies, advertising, and consulting fees has
been curtailed. Finally, due to the overall reduction of revenues, sales
commission expenses are reduced in the current period versus the prior period.
Interest expense as a percentage of sales remained constant at approximately 7%
for the three and six months ended December 31, 1996, and the three and six
months ended December 31, 1995. In absolute dollars however. interest expense is
approximately $78,000 lower in the six months ended December 31, 1996 versus the
six months ended December 31,

                                       16


<PAGE>

1995 because of reduced balances in interest-bearing debt. Interest as a percent
of sales is largely unchanged because of the reduced sales of the current period
versus the prior period.

      For the quarter ended December 31, 1996, the Company realized a net loss
of approximately $107,000 ($.03 per share), versus a net loss from continuing
operations of $53,000 ($.02 per share), and a loss from discontinued operations
of $518,000 ($.16 per share) for the quarter ended December 31, 1995. For the
six months ended December 31, 1996, the Company realized a net loss of
approximately $$115,000 ($.03 per share), versus a net loss from continuing
operations of $211,000 ($.06 per share), and a loss from discontinued operations
of $560,000 ($.18 per share) for the six months ended December 31, 1995.


Liquidity and Capital Resources

      At December 31, 1996, no cash balances were recorded as compared to
approximately $4,000 at June 30, 1996. Net cash used in operating activities
during the six months ended December 31, 1996 totaled approximately $990,000
compared with net cash used in operating activity of approximately $1,044,000
during the six months ended December 31, 1995. During the six months ended
December 31, 1996, cash used from operations is largely due to the current
period's net loss of approximately $115,000, increased by non-cash charges for
depreciation, amortization, and stock issuances of approximately $347,000, and
impacted by decreases in trade receivables of approximately $228,000, increases
in inventories of approximately $616,000, increases in prepaid expenses of
approximately $123,000, decreases in other assets of approximately $165,000, and
decreases in accounts payables and accrued expenses of approximately $794,000.

      Net cash used in investing activities during the six months ended December
31, 1996 totaled approximately $1,132,000 versus approximately $385,000 for the
six months ended December 31, 1995. During the current period, the Company
invested $826,000 of cash to acquire 54,934 shares of Series C Non-Voting
Convertible Preferred Stock and 10,000,000 shares of Series B Non Convertible
Voting Preferred Stock of Decor Group, Inc., (See "Acquisitions and Strategic
Alliances.") During the same current period, an additional amount of
approximately $306,000 was used to acquire equipment, versus approximately
$385,000 for the six months ended December 31, 1995.

      Net cash provided by financing activities totaled approximately $2,118,000
during the six months ended December 31, 1996 versus approximately $1,471,000
during the six months ended December 31, 1995. During the current period, the
funding was the result of the exercise by investors of 704,412 Class WA Warrants
to acquire 704,412 shares of Class A Common shares and 704,412 Class WB Warrants
for an exercise price of $1.50, and the exercise by investors of 118,012 Class
WB Warrants to acquire 118,012 shares of Class A Common shares for an exercise
price of $2.00, and the exercise of an option to acquire 350,000 shares of
Series A Preferred Shares at a net exercise price of $2.25. During the six
months ended December 31, 1995, the funding was the result of the sale by the
Company of 460,000 shares of Series A Preferred Stock

                                       17


<PAGE>

registered by the Company in September 1995, offset by debt repayments totaling
approximately $193,000.

      As of December 31, 1996, the Company's financial position reflected a
working capital deficit of approximately $1,091,000, versus a working capital
deficit of approximately $2,512,000 at June 30, 1996. Of this working capital
deficit at December 31, 1996, $826,000 is directly attributable to the Company's
direct investment in Decor Group, Inc. (See above.) As of December 31, 1996
versus June 30, 1996, trade receivables decreased approximately $228,000,
inventories increased approximately $616,000, and accounts payable and accrued
expenses decreased approximately $794,000, due largely to the proceeds received
from the equity transactions described in the preceding paragraph.

In July 1994, The Company replaced its then existing financing agreement with a
line of credit of up to $950,000 with a New York Bank following the Company's
Initial Public Offering in June 1994. Such borrowings are based on trade
receivables and inventory. The borrowings under such line of credit are secured
by a lien on all personal property and fixtures of the Company and personally
guaranteed by the President and Chief Executive Officer of the Company. In March
1996, the Company agreed with the bank to reduce the then outstanding credit by
$10,000 per month, and has since increased the monthly reduction to $20,000. As
of the date of this filing, the outstanding credit has been reduced to $795,000.
This outstanding credit bears interest at a rate of prime plus 1% (9.25% as of
the date of this filing.) The Company is also seeking alternative sources of
financing to ultimately replace the current line of credit, but there can be no
assurance it will be able to do so.

In connection with the Company's plan to restructure its wholesale business, the
Company, through its wholly owned subsidiary, Italia Collection, Inc.
("Italia"), acquired the businesses of two privately held Florida-based
companies, Murano Crystal Corp. ("Murano") and Ceramic Productions, Corp.
("CPC"), which manufacture and market upscale decorative ceramic accessories to
the home furnishings industry through a showroom in High Point, North Carolina
and a network of sales representatives. Closing on such acquisitions occurred on
October 21, 1994. These acquisitions were accounted for under the purchase
method of accounting. In connection therewith, the Company agreed to pay the
seller on the basis of a formula purchase price computed as a factor of future
earnings from continuing operations, subject to certain adjustments and offsets
in cash and/or Class A Shares. Because of declining revenues and high operating
costs, on December 16, 1996, the Board of Directors decided to discontinue and
dissolve Italia. (See "Recent Developments." and below.)

On February 15, 1995, Italia Collection entered into a Financing Agreement with
a New York based secured lender whereby Italia Collection may borrow pursuant to
an asset-related formula. The agreement remains in effect as of the date of this
filing, and may be terminated by either party upon notice to the other and
payment of the commitment fee for the unexpired term of this agreement. Because
of declining revenues and high operating costs, on December 16, 1996, the Board
of Directors decided to discontinue and dissolve Italia. On December 27, 1996, a
Notice of Public Auction was distributed by Italia, advising all interested
parties that a public auction of all the assets of Italia consisting of molds,
equipment, models, and inventory listed in a

                                       18


<PAGE>

Security Agreement entered into between Italia, as debtor, and United Credit
Corporation, as secured party, was to occur because of the default of Italia in
making payments due thereunder, and there being due to the secured party
approximately $1,094,028 plus legal fees and expenses of the sale. The auction
took place on January 10, 1997 and the Company was the successful bidder,
thereby acquiring all of the assets of Italia in consideration for a payment of
$2,000 and the assumption by the Company of the liabilities of Italia to United
Credit Corp., which as of January 31, 1997 totaled $811,628. Since the financial
statements of Italia are consolidated into those of the Company, such
liabilities have already been reflected on the Company's consolidated financial
statements. Thus, no additional liabilities need to be recorded pursuant to this
assumption of liabilities.

      The Company is currently pursuing alternative financing agreements, but as
of the date of this filing, no such arrangements have been finalized. According
to the current agreement with United Credit Corporation, interest is calculated
on the daily cash balance at the rate of prime plus 9% per annum (17.25% as of
the date of this filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. As of the date of this filing, the amount due to
the lender was approximately $803,000. In addition, the secured lender received
personal guarantees from Max Munn, President and Chief Executive Officer of the
Company, and his spouse. During February 1996, the Company's President and Chief
Executive Officer arranged for $160,000 additional financing from this lender at
the rates in effect for existing loans. The President and Chief Executive
Officer, and his spouse, have provided personal guarantees for this additional
funding, in addition to a security interest in certain real estate and Company
stock owned by his spouse. Of these proceeds, approximately $121,000 was used to
pay outstanding tax liabilities. The balance of the proceeds was loaned by the
Company to the President and Chief Executive Officer. A $38,000 demand loan
dated February 8, 1996, bearing an annual rate of interest of 18% was executed
by the President and Chief Executive Officer, and countersigned by the Chief
Financial Officer. On May 13, 1996, the Company's Board of Directors affirmed by
majority vote the loan by the Company to its President and Chief Executive
Officer. The principal balance of the loan was partially offset by reimbursed
business expenses generated by the President and Chief Executive Officer. The
remaining loan balance will be repaid by the President and Chief Executive
Officer to the Company, with interest as provided above, during the twelve
months ended October 1997.

In March 1996, the Company executed an agreement with the Internal Revenue
Service (the "Service") for the payment of outstanding payroll tax liabilities
totaling approximately $100,000. The agreement will require the Company to pay
approximately $9,000 per month until the liability is fully paid down. The final
payment will be made on February 28, 1997 for an amount of $11,000.

On November 23, 1994, the Company borrowed the sum of $225,000 from Ekistics
Corp., a Bahamian corporation, pursuant to a promissory note due March 30, 1995,
together with interest at the rate of 14% per annum and a 5% financing charge.
In April 1995, the Company paid $25,000, plus interest on account of the
principal amount of said Note and entered into a revised note for the $200,000
balance with such revised note providing for payment of principal on October 20,
1995, having an interest rate of 14% per annum and being convertible into 80,000


                                       19

<PAGE>

shares of Preferred Stock and 40,000 Class WC Warrants. On December 15, 1995,
this conversion took place. The 80,000 Preferred Shares and 40,000 WC Warrants
were registered in a Registration Statement declared effective September 18,
1996.

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

In September 1995, the Company issued 460,000 shares of Series A, 10% Cumulative
Convertible Preferred Stock ("Preferred Stock") and 230,000 Redeemable Class WC
Warrants ("Warrants") to purchase Preferred Stock at the exercise price of $5.50
per share. The net proceeds from this Offering were approximately $1,633,000,
including over-allotments. Each share of Preferred Stock is convertible,
commencing one year from the date of issue, subject to adjustment, into three
shares of Class A Common Stock of the Company. As of the date of this filing,
independent holders of 81,140 shares of Preferred Stock have converted such
shares into 243,420 shares of the Company's Class A Common Stock.

In September 1995, the Company lowered the exercise price of the Company's Class
WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a "Regulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed below. On July 16, 1996, the Company
filed a Registration Statement with the Securities and Exchange Commission to
register the Class WA Warrants and underlying Common A Shares. The Commission
declared this Registration Statement effective on July 19, 1996. Through the
date of this filing, 704.412 of the Company's Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these proceeds, $811,500 was used to purchase 54,100 shares of Decor Group,
Inc.'s ("Decor") Series C Non-Voting, Convertible, Preferred Stock, adjusted to
reflect a 1-for-2 reverse split effected by Decor in October 1996. The balance
of the proceeds was retained by the Company for working capital needs, and for
the provision of loans to Decor Group, Inc. At December 31, 1996, the balance of
loans to Decor totals $50,238.

On October 16, 1995, the Company entered into an agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12, 1995,
bearing interest at the rate of 18% payable monthly with 135% of the principal
which was also due and payable in full on September 30, 1995 with a Nevis, BWI
Corporation. As of October 16, 1995 the parties agreed the Company owes the
lender, including interest and monthly extension fees of approximately $102,500
through December 15, 1995, an aggregate amount of approximately $805,000.
Pursuant to the new agreement, the Company paid $405,000 to the Nevis
Corporation upon acceptance of the


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<PAGE>

agreement. The Company also delivered a Promissory Note in the principal amount
of approximately $400,000, in extension and replacement of the remaining balance
due and payable of $180,000 on or before December 15, 1995 and $220,000 on July
31, 1996. The new agreement also stipulates that the lender shall sell the
180,000 shares of the Company's Class A Common Stock, held in escrow by the
lender, for $180,000 to an unaffiliated third party. The proceeds of such sale
will be applied against the note and during January 1996. In addition, during
December 1995, the Company issued to the lender 35,000 unregistered shares of
Class A Common Stock. Such shares shall be afforded a piggyback registration
right for all registration statements filed by the Company before July 31, 1996
and a one time demand registration right commencing after July 31, 1996.
Approximately $25,000 was charged against earnings during the quarter ended
December 31, 1995 in conjunction with the issuance of these shares. The
promissory note is also guaranteed by Max Munn, President and Chief Executive
Officer of the Company. The note is collateralized by 600,000 shares of the
Company's Class A Common Stock owned by the Company's Italia Collections Inc.
subsidiary. The Company has reached a general agreement with this lender to
restructure the repayment schedule of approximately $269,000 of outstanding
principal and interest payable.

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

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

In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. As of the date of this filing, the Company has not
declared or established a record date for a dividend for its Series A 10%
Cumulative Convertible Preferred Stock for September 1996. The Company expects
to declare a stock dividend equivalent to $.50 per share to its Series A 10%
Cumulative Convertible Preferred Stockholders. The record date will be
determined in February 1997, and is expected to allow for a payment date within
March 1997. This dividend, when declared and paid, will satisfy the Company's
obligation to pay its semi-annual cumulative dividend on its Series A

                                       21


<PAGE>

10% Cumulative Preferred Stock for September 1996, which has not yet been paid,
and for March 1997.

In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock, in consideration
for past consulting services provided. These shares, bearing a restrictive
legend, were issued on April 12, 1996. The Company included these shares in a
registration statement filed with the Securities and Exchange Commission (the
"Commission") on January 14, 1997. As of the date of this filing, the Commission
has not declared this registration statement to be effective. In conjunction
with the issuance of these shares, approximately $54,000 of charges were
recorded against earnings during the year ended June 30, 1996.

In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all bearing a restrictive
legend, were issued on April 24, 1996 to various independent investors (the
"Investors") generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
Commencing thirty (30) days following the date of the close of the private
placement, any of the Investors had the right to demand in writing (the "Demand
Notice") that the Company file a registration statement with the Securities and
Exchange Commission (the "Commission") which shall cover the shares and allow
the Investor to sell the shares to the public. Within fifteen (15) days
following receipt of the Demand Notice, the Company is required to file such
registration statement and use its best efforts to have such registration
statement declared effective by the Commission and such state securities
regulators as reasonably requested by the Investor. The Company included these
shares in a registration statement filed with the Securities and Exchange
Commission (the "Commission") on January 14, 1997. As of the date of this
filing, the Commission has not declared this registration statement to be
effective.

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

Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain services. As part of this agreement, over the subsequent
five-years, the Company will pay Mr. Munn $54,000 per annum in equal bi-weekly
installments, and issue to Mr. Munn options to purchase up to 350,000 shares of
the Company's Series A Preferred stock. These options were fully exercised
during July to September 1996, generating net proceeds to the Company totaling
$787,500. Of these proceeds, approximately $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens, a former Company executive
(See "Legal Proceedings."), and


                                       22

<PAGE>

$12,500 was used to purchase 834 shares of Decor Group, Inc.'s Series C
Non-Voting, Convertible, Preferred Stock. The balance of proceeds was retained
by the Company to support working capital needs. In conjunction with the
issuance of the options to Mr. Munn, the Company recorded charges against
earnings totaling $87,500 at June 30, 1996.

Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. The Company
included these shares in a registration statement filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1997. As of the date of
this filing, the Commission has not declared this registration statement to be
effective. Also pursuant to the Settlement, the Company issued to Michael Levine
as escrow agent (the "Escrow Agent") 1,250,000 unregistered shares of the
Company's Class B Common shares (the "Escrow Shares".) The Escrow Shares shall
not be voted by the Escrow Agent, unless the Company defaults on its obligations
under the agreement. Upon satisfaction of such obligations, the Escrow Shares
shall be returned by the Escrow Agent to the Company. (See "Legal Proceedings".)
In conjunction with the issuance of the Company's shares to Ms. Stevens, the
Company recorded charges against earnings totaling $71,400 at June 30, 1996.

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

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

Management believes that cash flow from operations as they currently exist are
not sufficient to support such operations. Accordingly, Company management is
now identifying and implementing what it believes to be the corrective changes
deemed necessary. Specific action taken as of the date of this filing include
the following: a) The Company is seeking either the acquisition of or entering
into strategic alliances with unrelated companies in the decorative accessories
industry. As part of this strategy, a public offering of certain securities of
Decor Group, Inc. ("Decor"), an affiliate of the Company, has been declared
effective by the Securities and Exchange Commission on November 12, 1996 (the
"Effective Date".) On November 18, 1996, Decor acquired substantially all of the
operating assets and assumed certain liabilities of Artisan House, Inc., a
California based manufacturer and distributor of metal wall, table, and
freestanding sculptures. ( see "Acquisitions and Strategic Alliances."), b) Due
to declining revenues and high operating costs, the Company has discontinued its
catalog business effective March 31, 1996 (See "Discontinuation of Certain
Operations."), c) Beginning with the quarter ended March 31, 1996, the Company
has begun to reduce operating expenses through a combination of staff reductions
and expense controls, d) Due to declining revenues and high


                                       23

<PAGE>

operating costs, in December 1996, the Company dissolved its Italia Collections
subsidiary. (See "Recent Developments".), and e) The Company is seeking
additional sources of revenues. Two specific initiatives have been announced as
of the date of this filing. On September 17, 1996, the Company announced that it
has signed an exclusive licensing agreement to reproduce the artwork of James
Rizzi, a noted contemporary artist, for decorative accessories in ceramic and
related materials. Also, on October 12, 1996, the Company announced that it has
entered into an exclusive three year agreement with a major party plan marketer
of customized, canvas based enlargements of photographs. No assurances can be
given that these, or any subsequent initiatives by the Company will produce the
desired positive cash flow from operations. Finally, the Company has begun to
implement a marketing program meant to increase revenues of its Master
Framemakers Division. No assurances can be given that these measures will
generate the fiscal improvement sought by the Company.

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

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

Impact of Inflation

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

Sales Variations

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


                                       24

<PAGE>

                                     PART II

                                OTHER INFORMATION

Item 1.   Legal Proceeding

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

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

Gear Holdings, Inc. brought an action against the Company for the alleged breach
of a licensing agreement. The Company denies that it was a party to an agreement
with Gear, or that any sum of money is owed. The complaint demands sums Gear
allegedly would have received under the agreement in a sum to be determined, but
not less than $250,000.

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

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

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

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

                                       25


<PAGE>


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

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

The Munn Trust of 1975, Sol Munn and Evelyn A. Munn, Co-Trustees commenced an
action against the Company as well as Max Munn, the Company's President and
Chief Executive Officer and Laurie Munn, his wife.

SJP  Contractors  of New York,  Inc.  commenced  an action in  September  1996
against the predecessor  entity of the Company,  A.P.F.  Holdings,  Inc. , and
others for  $208,165  for work,  labor and  services  allegedly  performed  in
January 1991 for the  renovation  of the  Company's  premises.  The  Company's
answer pleads that payment was made for the amount owed.

Artagraph Reproduction Technology, Inc., a Canadian company, brought an action
against the Company demanding the sum of $27,838.08 plus attorney's fees,
alleging that the Company was obligated to deliver a confession of judgment in
connection with the sale of merchandise. Artagraph seeks injunctive relief; the
Company is not aware of a determination of this motion by the Court and denies
any obligation to Artagraph.

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


                                       26

<PAGE>


Item 2.   Changes in Securities

          None in addition to those disclosed herein.

Item 3.   Defaults Upon Senior Securities

          None

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

          None

Item 5.   Other Information

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits

    11    Statement re: computation of per share earnings.

    12    Donald Feldman's January 16, 1997 letter of resignation.

    27    Financial data summary.

(b) Reports on Form 8-K

          During the Three Months Ended December 31, 1996, no report on Form 8-K
was filed.

                                       27