INTERIORS INC, SB-2, 1997-01-14

INTERIORS INC
SB-2, 1997-01-14
LUMBER & WOOD PRODUCTS (NO FURNITURE)

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<PAGE>
As filed with the Securities and Exchange Commission on January 14, 1997
Registration No. 333-
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.

----------

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------

INTERIORS, INC.
(Name of small business issuer in its charter)

Delaware 5961 13-3590047
-------- ---------------------------- -------------------
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)

320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Address and telephone number
of principal executive offices and principal place of business)

Max Munn
President
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Name, address and telephone number of agent for service)

Copies to:

Hartley T. Bernstein, Esq.
Bernstein & Wasserman, LLP
950 Third Avenue
New York, NY 10022
(212) 826-0730

Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act
of 1933, check the following box: | |

If this Form is filed to register additional securities for an offering

pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. | |

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. | |

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. | |

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.

<PAGE>

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed Proposed maximum Amount of
securities to be registered registered maximum offering aggregate offering Registration
price per price(1) Fee
Securities(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock par 175,000 $2.00 $350,000 $106.05
value, $.001 per share (2)
- -------------------------------------------------------------------------------------------------------------
Series A Convertible 50,000 $6.66 $330,000 $100.90
Preferred Stock par value,
$.01 per share (2)
- -------------------------------------------------------------------------------------------------------------
Class A Common Stock par 50,000 $2.00 $100,000 $30.30
value, $.001 per share(3)
- -------------------------------------------------------------------------------------------------------------
Class A Common Stock 150,000 $2.00 $300,000 $90.90
pare value, $.001 per
share(4)
- -------------------------------------------------------------------------------------------------------------
Total Registration Fee $1,080,000 $328.15
- -------------------------------------------------------------------------------------------------------------
</TABLE>

- -------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities A t of 1933. The proposed
maximum offering price was calculating based upon the average of the high
and low price of the Company's securities on the Nasdaq Small Cap Market
for January 6, 1997.

(2) Includes 175,000 Class A Common Shares and 50,000 Series A Preferred
Shares issued by the Company in April 1996 in a private placement of these
securities. This filing is for the purpose of registering these shares
with the Securities and Exchange Commission.

(3) Includes 50,000 Class A Common Shares issued to a former executive of the
Company in July 1996 pursuant to the settlement of certain litigation
involving the former executive's employment contract.

(4) Includes 150,000 Class A Common Shares issued to the uncle of the
Company's President and Chief Executive Officer in April 1996 in
consideration for past consulting services provided to the Company.

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such an offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any State.

SUBJECT TO COMPLETION DATED JANUARY 14, 1997

PROSPECTUS

INTERIORS, INC.

375,000 Shares of Class A Common Stock, and 50,000 Shares Series A, 10%
Cumulative Convertible Preferred Stock

----------

This Prospectus (the "Prospectus") and the registration statement of which this
Prospectus forms a part (the "Registration Statement") relates to the sale of
375,000 shares of Class A Common Stock (the "Common Stock") and 50,000 Shares of
Series A, 10% Cumulative Convertible Preferred Stock (the "Preferred Stock") by
certain selling securityholders ("Selling Securityholders").

The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.

At the time a particular offer of securities is made by or on behalf of the
Selling Securityholders, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.

Prior to the Company's initial public offering (the "Initial Public Offering")
of 517,500 Class A Shares, 460,000 Class WA Warrants and 258,750 Class WB
Warrants (including securities issued upon exercise of the over-allotment option
granted to J. Gregory & Company, Inc., the Representative of the Underwriters
(the "Representative") in connection with the Initial Public Offering) in June
1994, there was no established trading market for the Class A Shares or the
Warrants. In September 1995, the Company completed a secondary public offering
460,000 shares of Series A 10% Convertible Preferred Stock (the "Series A
Preferred Shares") and 230,000 Redeemable Class WC Warrants (the "Class WC
Warrants"). The Company's Series A Preferred Shares, Class A Shares, Class WA
Warrants, Class WB Warrants and Class WC Warrants are currently listed for
quotation on The Nasdaq SmallCap Market ("Nasdaq") under the symbols "INTXP",
"INTXA, "INTXL", "INTXW," and "INTXZ," respectively. As of the date of this
prospectus, the last reported bid and ask prices of the Company's Series A
Preferred

<PAGE>

Shares, Class A Shares, Class WA Warrants , Class WB Warrants and Class WC
Warrants as reported by Nasdaq on such date were $____, $____, respectively, for
Series A Preferred Shares, $____, $____, respectively, for Class A Shares,
$____, $____, respectively, for Class WA Warrants, $____ and $____, respectively
for Class WB Warrants $ and $ , respectively, for Class WC Warrants. No
assurances may be given that any public market for the foregoing securities that
has developed since completion of the Initial Public Offering will continue or
be sustained. See "Market for the Company's Securities and Related Stockholder
Matters" and "Risk Factors."

----------

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE
OF THE COMMON STOCK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO
CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" and
"RISK FACTORS", WHICH BEGINS ON PAGE 11.

----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is ________, 1997

2
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith, files reports, proxy statements and other information including
annual and quarterly reports on Forms 10-KSB and 10-QSB (File No. 0-24352) (the
"1934 Act Filings") with the Securities and Exchange Commission (the
"Commission"). The Company filed with the Commission in Washington, D.C. a
Registration Statement on Form SB-2 under the Securities Act of 1933, as amended
(the "Securities Act), with respect to the securities described herein. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. This Prospectus also does not contain all of
the information set forth in the Company's Form 10-KSB and Form 10-QSB filed for
the periods ended June 30, 1996, and September 30, 1996 respectively. For
further information about the Company and the securities described herein,
reference is made to the Registration Statement and to the exhibits filed
therewith, and to the Company's Form 10-KSB and Form 10-QSB filed for the
periods ended June 30, 1996, and September 30, 1996 respectively. The statements
contained in this Prospectus with respect to the contents of any agreement or
other document referred to herein are not necessarily complete and, in each
instance, reference is made to a copy of such agreement or document as filed as
an exhibit to the Registration Statement, each such statement being qualified in
all respects by reference to the provisions of the relevant documents. The
Registration Statement, including the exhibits thereto, and the Company's 1934
Act Filings may be inspected at: (i) the public reference facilities of the
Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549; and (ii) the offices of the Commission located at
Citicorp Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661,
and the offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may also be obtained upon
request and payment of the appropriate fee from the Public Reference Section of
the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site on the Internet
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the Commission
through the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR).

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to and
should be read in conjunction with the detailed information and financial
statements and notes thereto included elsewhere in this Prospectus. Unless
otherwise indicated, all share and per share amounts set forth herein have been
adjusted to reflect a 4,464.286 :1 stock exchange which occurred in connection

with the merger of A.P.F. (as defined below) with and into the Company (as
previously defined) in March, 1994. Each prospective investor is urged to read
this Prospectus in its entirety.

The Company

General

The Company was incorporated in October 1990 under the name A.P.F.
Holdings, Inc., a New York corporation ("A.P.F.") and merged with and into
Interiors, Inc., a Delaware corporation in March 1994. It has been engaged since
1990, through its A.P.F. Master Framemakers and Conservators Division ("A.P.F.
Master Framemakers"), in the manufacturing and marketing of museum quality
traditional and contemporary picture and mirror frames to museums, art
galleries, decorators, collectors and frame retailers. The Company is qualified
to do business in New York under the name A.P.F. Master Framemakers. See
"Business" and "Recent developments."

The Company operates three showrooms, one at 75th Street in Manhattan, one
in "Old City" in Philadelphia and one at the Company's Mt. Vernon location. The
sales generated from the Manhattan showroom were approximately $821,000 and
$474,000 for the quarters ended September 30, 1996 and 1995, respectively. The
Philadelphia showroom generated sales of approximately $33,000 and $57,000 for
the quarters ended September 30, 1996 and 1995, respectively. The Company's
showroom in Mt. Vernon, New York, conducts business with upscale custom picture
frame shops located throughout the country. Sales generated from the Mt. Vernon
showroom were approximately $211,000 and $370,000 for the quarters ending
September 30, 1996 and September 30, 1995, respectively.

A.P.F. Master Framemakers

The Company's custom picture frames are marketed primarily to museums,
better art galleries, upscale frame shops and decorators, as well as collectors
of important works of art under the trade name "A.P.F. Master Framemakers and
Conservators" (previously defined and hereinafter referred to as "A.P.F. Master
Framemakers"). A.P.F. Master Framemakers' customers have included nationally
known museums, art institutes and galleries. See "Business."

Italia Collection

On October 21, 1994 (the "Closing Date") the Company, through its
wholly-owned subsidiary, Italia, acquired all of the issued and outstanding
stock of Murano Crystal Corp. ("Murano"), a Florida corporation doing business
under the name "Italia Collection," pursuant to the terms of a certain stock
purchase agreement dated October 21, 1994 (the "Murano Purchase Agreement")
between Italia and Murano and Stephen M. Tucker, the sole stockholder and
acquired all of the issued and outstanding capital stock of Ceramic Productions
Corp., a Florida corporation ("Ceramic") pursuant to the terms of a certain
stock purchase agreement dated as of such date (the "Ceramic Purchase
Agreement") between Italia and Ceramic and Stephen M. Tucker and Michael D.
Tucker, the sole stockholders.

During April 1996, the Company moved the operations of Italia Collection
to The Lance Acquisition Corporation (Lance), a Massachusetts manufacturer and

distributor of various products to the giftware and collectibles market.
Subsequent to this move, the ownership of Lance and its business operations
changed. Because of this, Company management believes that the operations of
Italia Collection will be best served by a lower cost, independent manufacturer.
The Company

4
<PAGE>

is accordingly conducting discussions with a Mexican company to finalize terms
under which this entity will manufacture and support select items in the product
line of Italia Collection, which largely consists of ceramic and porcelain
collectibles, mirrors, and other decorative accessories for the home. See
"Business."

Discontinuation of operations of Interiors Catalog

On March 31, 1996, the Company's Board of Directors decided to discontinue
the Company's catalog operations because of declining revenues and high
operating costs. For the quarters ended September 30, 1996 and 1995, losses from
discontinuing catalog operations totaled $0 and $42,293, respectively. The
Company plans to fully carry out the discontinuation of the catalog operation by
March 31, 1997. The Company plans to wind down operations by filling existing
orders and possibly mailing one final catalog as a "close-out sale" to liquidate
inventory. No catalog related assets or liabilities are expected to remain on
the Company's balance sheet by March 31, 1997. The financial statements included
with this filing have reclassified the results of operations for the quarters
ended September 30, 1996 and September 30, 1995 as if the Company's catalog
operations had been discontinued in the beginning of the quarters ended
September 30, 1996 and September 30, 1995.

Acquisitions and Strategic Alliances

Company approximately 86% of the voting stock of Decor. On November 12, 1996
(the "Effective Date"), a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission. The Company's
interest in Decor will be recorded on the Company's financial statements under
the equity method of accounting until such time the Company obtains
unconditional and effective control of Decor, which is expected to occur upon
the expiration of the Voting Agreement. See "Business." Further, in connection
with Decor's public offering, the Company will recognize any gains in accordance
with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No.
51.

During the quarter ended September 30, 1996, the Company has also provided
$824,000 in cash as part of the capitalization of Decor. At September 30, 1996,
the Company was unable to make a valuation of either the securities issued or
received in the capitalization of Decor. This valuation will take place
subsequent to the Effective Date of the Decor public offering. At September 30,
1996, the Company's investment in Decor is based on its cash investment only.
The basis may substantially change if the ultimate valuation of the securities
exchanged warrants such change.

5
<PAGE>

Other

For disclosure about the Company's manufacturing activities, products,
organization, marketing, suppliers, competition, backlogs, patents and
trademarks, research and development, government regulation, employees, and
description of property. See "Business."

Recent Developments

In November 1996, the Company announced that it has entered into an
exclusive three year contract with a major "direct-in-home" marketer of
customized "photo to canvas" computer-enhanced enlargements. This process
enables a customer to have photographs digitally enhanced, scanned, enlarged and
printed at considerably less cost than traditional photographic enlargement
processes. Under the agreement, the Company will finish, pack, frame, and
fulfill all of the marketer's products. Although the Company expects significant
revenue growth from this new arrangement, no assurances can be given that such
an outcome will actually occur.

On October 24, 1996, the Company received notification from The Nasdaq
Stock Market, Inc. ("Nasdaq") that the Company's capital and surplus 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 received notification from Nasdaq that the Company currently
meets Nasdaq SmallCap Market listing criteria.

In October 1996, the Company filed its June 30, 1996 Form 10-KSB. The
Company's independent auditors have modified their report on the Company's
financial statements for the year ended June 30, 1996. The Company's ability to
continue as a going concern is dependent upon the successful achievement of
certain initiatives currently in progress.

In March 1996, Decor Group, Inc., an affiliate of the Company, issued to
the Company 250,000 shares of its Series A Convertible Preferred Stock and an
option to purchase 10,000,000 shares of its Series B Non-Convertible Voting
Preferred Stock (the "Option Shares"). The Company exercised its option to
purchase the Option Shares in September 1996, for total cash consideration of
$2,000. On June 7, 1996, Decor filed a registration statement with the
Securities and Exchange Commission in connection with its initial public
offering. On November 12, 1996 said registration statement was declared
effective. None of the securities of Decor held by the Company were registered
for sale under such registration statement.

The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400.

6
<PAGE>

THE OFFERING

Securities Offered............. No new securities are being offered by the
Company pursuant to this filing. The purpose of
this filing is to register (a) 175,000 shares of
the Company's Class A Common Stock, and 50,000
shares of the Company's Series A Preferred Stock
issued by the Company in an April 1996 private
placement of these shares to certain independent
investors (b) 50,000 shares of the Company's
Class A Common Stock issued by the Company in
July 1996 pursuant to the settlement of a former
executive's employment contract and (c) 150,000
shares of the Company in April 1996 pursuant to
consulting services provided by the uncle of the
Company's President and Chief Executive Officer.
See "Selling Securityholders".

Securities Outstanding prior
to this Offering:

Class A Common Stock........... 4,312,671 Shares
Class B Common Stock........... 2,039,500 Shares
Series A Preferred Stock....... 1,140,000 Shares
Class WA Warrants ............. 3,055,580 Warrants
Class WB Warrants.............. 845,150 Warrants
Class WC Warrants.............. 2,270,000 Warrants

<PAGE>

Use of Proceeds ............... The Company will not realize any proceeds
pursuant to this filing.

Risk Factors .................. An investment in the Securities involve a high
degree of risk. See "Risk Factors."

Transfer Agent................ American Stock Transfer & Trust Company, 40
Wall Street, New York, NY 10005.

Nasdaq Symbols(1)............. Class A Common Stock - INTXA
Series A Preferred Stock - INTXP
Class WA Warrants- INTXW
Class WB Warrants- INTXZ
Class WC Warrants- INTXL

- ----------
(1) No assurance can be given that a trading market will be sustained
for all, or any of, the Company's securities. See "Risk Factors - No
Assurance of Public Trading Market and Nasdaq Inclusion."

8
<PAGE>

Summary Financial Information

The following summary financial data has been summarized from the
financial statements included elsewhere herein and should be read in conjunction
with such financial statements and related notes thereto and "Management's
Discussion and Analysis" included elsewhere in the Prospectus.

Summary Balance Sheet Data

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
At June 30, 1996 At September 30,
1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Working capital $(2,512,319) $(1,585,888)
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,721,201 $5,733,039
- -----------------------------------------------------------------------------------------------------------------------
Total current $5,335,630 $4,696,062
liabilities
- -----------------------------------------------------------------------------------------------------------------------
Total long-term $30,652 $30,652
debt
- -----------------------------------------------------------------------------------------------------------------------
Stockholder's $(645,081) $1,006,325
equity
- -----------------------------------------------------------------------------------------------------------------------

Summary Statement of Income Data

Year ended June 30 Quarter ended September 30
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $5,378,761 (1) $5,155,275 (1) $1,179,170 (1) $1,293,258 (1)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) $(1,791,784) $257,780 $69,646 $(61,668)
from continuing
operations before
interest and taxes
- -----------------------------------------------------------------------------------------------------------------------
(Loss) from $(2,935,633) (2) $(938,546) (2) $0 (2) $(42,293) (2)
discontinued
operations
- -----------------------------------------------------------------------------------------------------------------------
Net (loss) $(5,283,773) $(817,754) $(7,594) $(199,309)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per $(0.83) $0.06 $0.00 $(0.08)
share of Common
Stock from
continuing
operations
- -----------------------------------------------------------------------------------------------------------------------
(Loss) per share $(1.03) $(0.47) $0.00 $(0.02)
from discontinued
operations
- -----------------------------------------------------------------------------------------------------------------------

Net (loss) per $(1.86) $(0.41) $0.00 $(0.10)
share
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

9
<PAGE>

<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average 2,837,293 1,977,158 3,927,116 1,977,158
number of shares
used in
computation
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------
(1) Does not include revenues from operations discontinued during the quarter
ending September 30, 1996 and the year ending June 30, 1996. Prior period
revenues have been restated as if the discontinuation of operations had
taken place during the quarter ended September 30, 1995 and the year ended
June 30, 1995. Revenues from discontinued operations totaled $66,093 and
$255,000 respectively for the quarters ended September 30, 1996 and
September 30, 1995. Revenues from discontinued operations totaled $870,885
and $1,895,011 respectively for the years ended June 30, 1996 and June 30,
1995.
(2) Includes, in addition to loss from operations of discontinued operations
(see Note (1) above) non-operating charges of $2,420 and $13,720
respectively for the quarters ended September 30, 1996 and September 30,
1995. Non-operating charges for the years ended June 30, 1996 and 1995
were $480,605 and $74,326 respectively.

10
<PAGE>

RISK FACTORS

The purchase of the securities offered hereby involves a high degree of
risk. Prospective purchasers should carefully consider the following risk
factors, as well as other matters set forth elsewhere in this Prospectus, before
deciding whether to invest in the Company's securities

Modified Auditor's Report; Working Capital Deficit:. The Company's
independent auditors have modified their report on the Company's financial
statements for the year ended June 30, 1996. The Company's ability to continue
as a going concern is dependent upon the successful achievement of certain
initiatives currently in progress. Most importantly, the Company has made a
major investment in Decor Group, Inc. ("Decor"). Effective November 19, 1996,
Decor has acquired substantially all of the operating assets and assumed certain
liabilities of a California based manufacturer of metal wall-art and related

accessories. To finance this acquisition, Decor offered for sale to the public
certain of its equity shares. Such Offering was declared effective by the
Securities and Exchange Commission on November 12, 1996. (See "Business") As of
September 30, 1996, the Company had a working capital deficit of approximately
$1,586,000 and negative cash flow from operations for the quarter ending
September 30, 1996 totaling approximately $779,000. See "Business" and the
Company's Form 10-KSB for the period ended June 30, 1996 which is incorporated
by reference. Further, in connection with Decor's public offering, the Company
will recognize any gains in accordance with Securities and Exchange Commission
("SEC") Staff Accounting Bulletin No. 51.

Cash Flow Constraints: The Company has been experiencing a shortage of
working capital since commencement of its catalog operations in February 1992.
Initially, this shortage was due substantially to the fact that the unexpected
response to catalog mailings and therefore the demand for the products offered
exceeded the Company's ability to finance the cost of inventory levels adequate
for such demand, thus leading to delays in fulfilling orders. Ultimately, the
working capital shortages became more a function of the difficulty in sustaining
revenue levels from the catalog business and the high costs associated with the
conduct of such business, particularly with respect to recent substantial
increases in paper, printing, and postage costs. Although management has decided
to discontinue the catalog business as of March 31, 1996, there can be no
assurance that such action will eliminate current cash restraints. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and "Financial Statements and Notes."

Financing costs of doing business. Currently, the Company incurs
significant costs incurred in the financing of its business operations. Two
principal sources of financing are currently available to the Company. On
February 15, 1996, the Company entered into a financing agreement with a New
York based secured lender whereby its Italia Collection subsidiary may borrow
pursuant to an asset-related formula. Under this agreement, upon confirmation of
shipments, the lender will advance 70% of the receivable to the Company. Upon
collection of the receivable, the lender remits the balance of 30%. Interest is
calculated on the daily cash balance at the rate of prime plus 9% per annum
(17.25% as of the date of this filing) or a minimum of 18% per annum against a
minimum monthly defined compensation of $3,000. As of the date of this filing,
the amount due to the lender was approximately $813,000. The Company is
currently pursuing alternative financing arrangements, but as of the date of
this Prospectus, no such arrangements have been made. No assurances can be given
that alternative arrangements, whether or not at more favorable terms, can be
made. As of the date of this Prospectus, interest charges for the quarter ended
September 30, 1996 pursuant to this arrangement total approximately $38,000. The
Company currently maintains a line of credit with a New York bank based on
receivables and inventories, bearing interest at a rate of prime plus 1% (9.25%
as of the date of this Prospectus.) As of the date of this Prospectus, the
balance of the line of credit is $815,000. Interest charges for the quarter
ended September 30, 1996 pursuant to this line of credit total approximately
$21,000. The Company and the bank have agreed that the line of credit will be
reduced by $20,000 per month. Accordingly, the Company is seeking alternative
arrangements. No such arrangements have been made as of the date of this
Prospectus, nor can any assurances be given that alternative arrangements can be
made at more-favorable or even comparable terms. See "Management's Discussion
and Analysis."

Liquidity of Current Business Operations. Management believes that cash

flow from operations as they currently exist are not sufficient to support such
operations. For the quarter ended September 30, 1996, approximately $779,000 of
cash was used in the Company's operating

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activities. Accordingly, Company management is now identifying and implementing
the corrective changes deemed necessary. The Company has taken certain specific
steps for this purpose. As of March 31, 1996, the Company has decided to
discontinue its catalog operation. The difficulty associated with the
maintenance of such revenues, together with relatively high costs of operations
have led to this decision. Also, during the months of March and April 1996, the
Company has moved its Italia Collections subsidiary to The Lance Corporation
(Lance), a Massachusetts manufacturer and distributor of various products to the
giftware and collectibles market. Subsequently, the Company has determined that
this facility is not suitable to its operating needs. As a result, the Company
has fully removed its operating assets from Lance and is seeking alternative
sources for the production of its Italia product line. During the quarter ended
December 31, 1996, the Company entered into an exclusive three-year contract to
provide certain services to a major "direct-in-home" marketer of computer
enhanced photographic enlargements. The Company expects that this arrangement
will provide significant incremental revenues. Finally, the Company is currently
reviewing its staffing needs and has already made certain staff reductions. No
assurances can be given that the actions described above, or any subsequent
actions will fully meet management expectations or offset the current operating
cash shortfall. See "Management Discussion and Analysis" and "Business - Italia
Collection".

Dilution. Dilution may result to holders of the Company's Series A
Preferred Shares in the event of exercise of outstanding Warrants at exercise
prices that are less than the prices paid by purchasers of Series A Preferred
Shares. Additional dilution may result to holders of the Company's Class A
Common Shares in the event of the conversion of outstanding Class B Shares,
Series A Preferred Shares, or the exercise of outstanding Warrants, or options
at exercise prices that are less than the prices paid by purchasers of Class A
Shares. See "Description of Securities," and "Recent Developments."

Dependence on Management. The Company is highly dependent on the services
of Max Munn, President, Chief Executive Officer and Treasurer. The loss of the
services of this executive could have a material adverse effect upon the
business and prospects of the Company. In the event that the Company's financial
condition stabilizes, the Company will investigate securing "key person" life
insurance in the amount of one million dollars on the life of Max Munn. See
"Management" and "Executive Compensation"

Voting Control by a related party, a former Director, and an escrow agent.
Laurie Munn, wife of the Company's President and Chief Executive Officer owns
approximately 25.5% (519,750), Theodore Stevens, a former director of the
Company owns approximately 13.2% (269,750), and Michael Levine, as escrow agent
owns approximately 61.3% (1,250,000) of the Company's 2,039,500 issued and
outstanding Class B Shares, each such Class B Share entitled to five votes or
approximately 70.4% of the votes to which the Class A and Class B Shares taken

as a single class are entitled and assuming that none of the outstanding
Warrants is exercised. Accordingly, these three individuals are in a position to
influence the election of the Company's directors and the Company's business
affairs. See "Description of Securities" and "Certain Transactions." Also see
subsequent risk factor "Terms of Settlement of Litigation Involving Related
Parties."

Potential Conflicts of Interest. The Company has from time to time entered
into certain transactions with its officers, directors and/or associates and
relatives of such persons. Although two independent directors currently serve on
the Company's Board of Directors, the likelihood of such transactions to
continue in the future is highly probable. See "Certain Transactions."

Dependence on Skilled Craftsmen and Salespersons. The Company's A.P.F.
Master Framemakers division, a provider of fine picture frames for art
galleries, upscale retail picture framers, museums, collectors and decorators in
the U.S., relies on its skilled craftsmen with specialized skills in the design
and crafting of its frames and the manufacture of other of its products.
Although the Company attempts to hire and train skilled craftsmen, the inability
of the Company to retain skilled craftsmen and creative designers may adversely
affect the division's operations. Furthermore, the Company is dependent on the
showroom salespersons who have relationships with museum curators, art
collectors, architects and other purchasers of "museum" quality picture frames.

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<PAGE>

The loss of such persons could have a material adverse impact on the Company.
See "Business - Personnel."

Possible Change of Control. Various legal proceedings have been in
progress between and among the Company's President and Chief Executive Officer,
his wife, other members of the Company's Board of Directors, a former member of
the Company's Board of Directors, and such former member's wife who was also a
Company executive. The proceedings involved various issues, but primarily
involved the composition of the Company's Board of Directors, the status of a
sale of 269,500 of the Company's Class B Common shares by Theodore Stevens to
Laurie Munn, an alleged breach of an employment agreement between the Company
and Ann Stevens, wife of Theodore Stevens (a former Director), the status of a
sale of 250,000 shares of the Company's Class B Common shares to Laurie Munn,
and the sustainability of any election at a shareholder's meeting should the
Company hold such a meeting during the pendency of certain legal proceedings.
The parties to these various actions have entered into various agreements in
settlement of all differences. Under the terms of settlement, the Company must,
among other things, provide over seven years bi-weekly payments to Ann Stevens
in settlement of her employment agreement with the Company. Ms. Stevens'
attorney, Michael Levine, Esq. has been appointed escrow agent and issued
1,250,000 shares of the Company's Class B Common Stock (the "Escrow Shares").
Mr. Levine is empowered to vote these shares, which represent voting control of
the Company, to replace the Company's Board of Directors in the event of the
Company's default of its obligations under the settlement agreements. After the
Company fully performs under the settlement agreements, which will take place
after seven years, the Escrow Shares will be returned to the Company. See

"Business - Legal Proceedings."

Possibility of Litigation Involving Works of Art. Although the Company
endeavors to buy products which it believes the supplier has the right to
distribute, in the event an artist claims that his copyright has been violated,
the Company may be joined in any action against the supplier for infringement.
Each of the Company's vendors is required to execute and return to the Company a
certificate that the merchandise conforms to all federal and state laws as to
labeling, brands, etc. and agreeing to indemnify the Company against claims
arising from violation of trademark, patent or similar laws; however, there can
be no assurance that the Company would be successful in enforcing any such
agreement. The Company knows of no such claims which have been asserted nor
lawsuits which have been threatened other than as disclosed herein. There can be
no assurance that claims and/or lawsuits will not arise in the future or that
the cost of defending such actions will not be material. See "Business - Legal
Proceedings" and " - Patents and Trademarks."

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

Competition. The custom framing industry in the United States is highly
fragmented and consists primarily of small, local framing retailers. Only a few
companies are basic manufacturers of higher priced picture frames, which frames
are selected for valuable works of art owned by museums, galleries and
collectors. Custom framing of this type is not in competition with local retail
frame stores. Management of the Company believes that its A.P.F. Master
Framemakers division is one of the largest custom framers of its type in the
country. However, there can be no assurance that the Company will be able to
maintain its position in this industry.

Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors. Management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Italia.

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<PAGE>

Reliance on Outside Suppliers. All picture and mirror frame manufacturing
is performed by the Company in its facility in Mt. Vernon, New York. The Company
purchases wood, gold leaf, plexiglass, matboards, composite resins, and other
materials from a wide variety of sources, and has at least two, and often more,
suppliers for each item used in its manufacturing process, and is not dependent

upon any sole supplier. See "Business - Suppliers."

Convertibility of Class B Common Stock and Super Voting Rights. The
Company's Certificate of Incorporation authorizes the issuance of up to
2,500,000 Class B Shares, 269,750 of which are currently owned by Theodore
Stevens, a former director of the Company, 519,750 of which are currently owned
by Laurie Munn, wife of the Company's President and Chief Executive Officer, and
1,250,000 of which are held in escrow by Michael Levine as escrow agent and
designated as "Escrow Shares." (See preceding risk factor - Terms of Settlement
of Litigation Involving Related Parties). Each Class B Share entitles the holder
thereof to five non-cumulative votes per share on all matters on which
stockholders may vote at meetings of stockholders. The Escrow Shares shall only
vote in the event of the Company's default under the terms of settlement
agreements under which the Escrow Shares were issued. The Class A Shares and
Class B Shares shall generally vote together as a single class. The Class B
Shares are convertible on a one-for-one basis at any time after issuance at the
option of the holder into Class A Shares; however, there can be no assurance
that the holder thereof will convert such Class B Shares. The Escrow Shares
however are not subject to conversion. In addition, such conversion could result
in a charge to earnings to the extent that the fair market value of the Class A
Shares exceeds the fair market value of the Class B Shares at the date of
conversion. In addition, while the issue is not entirely clear, the issuance of
additional Class B Shares could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Class A Shares. See
"Description of Securities."

Reliance on Tradename Reputation. The Company's custom frame operation is
conducted under the tradename "A.P.F. Master Framemakers," which tradename has
been used in the custom frame business since 1955 and which tradename the
Company acquired in 1990. See "The Company." The Company believes that its
ability to market its high-end custom picture and mirror frames has been based
largely upon its reputation as a reliable source of high-quality frames suitable
for use by nationally known museums, art galleries, decorators, fine frame
retailers and collectors. As a result of this reliance on its reputation, if the
Company's custom frame products and service were to be deemed unreliable, the
Company could experience a significant adverse impact.

Absence of Dividends. The Company has not paid and does not anticipate
paying any cash dividends on its Class A Shares or Class B Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations and in the
expansion of its business. In February 1996, the Company did, however, declare 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. See "Dividend Policy" and
"Description of Securities."

Significant retained deficits and negative equity. At September 30, 1996,

the Company has recognized retained deficits totaling approximately $8,800,000.
Of this amount, approximately $2,200,000 was incurred as a provision for the
discontinuation of the Company's catalog operation in the fiscal year ended June
30,1996. At June 30, 1996, the Company had recorded negative net worth totaling
approximately $645,000, primarily because of its retained deficits. During the
first quarter ended September 30, 1996, the Company raised additional capital of
$1,700,000 and improved the results of operations to produce a virtual
break-even from such operations. Such actions resulted in the restoration of net
worth to $1,006,000. However, no assurances can be given that the Company's net
worth will continue to grow in subsequent periods. See "Business." and risk
factor "No Assurance of Public Trading Market or Continued Nasdaq Inclusion"
below.

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<PAGE>

No Assurance of Public Trading Market or Continued Nasdaq Inclusion. Prior
to the Company's Initial Public Offering, which took place on June 23, 1994,
there was no established trading market for the Company's securities. In
connection with the Initial Public Offering, the Company applied for, and was
granted, inclusion of the Class A Shares, the Class WA Warrants and the Class WB
Warrants on Nasdaq and the Class A Shares and Class WA Warrants commenced
quotation on Nasdaq on June 23, 1994 under the symbols INTXA and INTXW,
respectively. The Class WB Warrants commenced quotation on Nasdaq on June 24,
1994 under the symbol INTXZ. Further, on September 18, 1995, the Company
registered and issued 460,000 shares of Series A, 10% Cumulative Convertible
Preferred Stock and 230,000 Redeemable Class WC Warrants. The Series A, 10%
Cumulative Convertible Preferred Stock, and the Redeemable Class WC Warrants
commenced quotation on Nasdaq on September 19, 1995 under the symbols INTXP and
INTXL respectively. See "Market for the Company's Securities and Related
Stockholder Matters." However, there can be no assurance given that the Company
will be able to satisfy the requirements for continued quotation, that such
quotation will otherwise continue or that any market for the Company's
securities that has developed since completion of the Initial Public Offering or
the Preferred Stock Offering will continue or be sustained. If for any reason,
however, any of the Company's securities are not eligible for continued listing
or a public trading market does not develop, purchasers of the Class A Shares,
Series A, 10% Cumulative Convertible Preferred Shares and/or Warrants may have
difficulty selling their securities should they desire to do so. Under the
current rules adopted by the NASD for continued listing, a company, among other
things, must have $2,000,000 in total assets, $1,000,000 in total capital and
surplus, $1,000,000 in market value of public float and a minimum bid price of
$1.00 per share. If the Company is unable to satisfy the requirements for
continued quotation on Nasdaq, trading, if any, in the securities would be
conducted in the over-the-counter market in what are commonly referred to as the
"pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities.

"Penny Stock" Regulations. The Commission has adopted regulations under
the Exchange Act which generally define a "penny stock" to be any equity
security that has a market price (as defined) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. If

the securities offered hereby are removed from Nasdaq, the Company's securities
may be deemed to be "penny stocks" and become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities, information on
the limited market in penny stocks and, if the broker-dealer is the sole
marketmaker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. In addition, the broker-dealer must obtain a
written acknowledgment from the customer that such disclosure information was
provided and must retain such acknowledgment for at least three years. Further,
monthly statements must be sent disclosing current price information for the
penny stock held in the account. While many Nasdaq-listed securities would
otherwise be covered by the definition of penny stock, transactions in a
non-Nasdaq-listed security would be exempt from all but the sole marketmaker
provision for (i) issuers who have $2,000,000 in tangible assets, (ii)
transactions in which the customer is an institutional accredited investor and
(iii) transactions that are not recommended by the broker-dealer. In addition,
transactions in a Nasdaq-listed security directly with a Nasdaq marketmaker for
such securities would be subject only to the sole marketmaker disclosure, and
the disclosure with respect to commissions to be paid to the broker-dealer and
the registered representative.

The above-described rules may materially adversely affect the liquidity
for the market for the Company's securities. Such rules may also affect the
ability of broker-dealers to sell the Company's securities and may impede the
ability of subsequent holders of the Class A Common Shares, Series A Preferred
Shares, or Warrants to sell such securities in the secondary market.

Future Issuances of Stock by the Company. The Company has authorized
capital stock of 32,500,000 shares of $.001 par value Common Stock, of which
30,000,000 have been designated

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<PAGE>

as Class A Shares and 2,500,000 have been designated as Class B Shares; and
5,300,000 shares of Preferred Stock, $.01 par value per share (the "Preferred
Stock"). As of the date hereof, there are 4,312,671 Class A Shares, 2,039,500
Class B Shares and 1,140,000 Preferred Shares issued and outstanding. In
addition, the Company has issued and outstanding 3,055,588 Class WA Warrants,
845,150 Class WB Warrants, 2,270,000 Class WC Warrants and Representative's
Warrants to purchase 14,985 Class A Shares, for which it has reserved for
issuance an aggregate of 9,673,407 Class A Shares. Although there are no present
plans, agreements or undertakings, written or oral, with respect to the
Company's issuance of any shares of stock or related convertible securities,
other than as disclosed herein, the issuance of any of such securities by the
Company could have anti-takeover effects insofar as they could be used as a
method of discouraging, delaying or preventing a change in control of the
Company. Such issuance could also dilute the public ownership of the Company.
Inasmuch as the Company may, in the future, issue authorized shares of Common

Stock or Preferred Stock without prior stockholder approval, there may be
substantial dilution to the interests of the Company's stockholders. Given that
the Company is authorized to issue additional securities, there can be no
assurance that the Company will not do so. In addition, a stockholder's pro rata
ownership interest in the Company may be reduced to the extent of the issuance
and/or exercise of any options or warrants relating to the Common Stock or
Preferred Stock.

Future Sales of Stock by Stockholders. All of the Company's outstanding
Class B Shares are "restricted securities" as that term is defined under the
Securities Act and in the future may only be sold in compliance with an
exemption from registration, including Rule 144, under the Securities Act or
pursuant to an effective registration statement. Rule 144 provides, in essence,
that a person (including a group of persons whose shares are aggregated) who has
satisfied a two-year holding period for such restricted securities may sell
within any three-month period, under certain circumstances, an amount of
restricted securities which does not exceed the greater of one percent of that
class of the Company's outstanding securities (43,127 Class A Shares as of the
date hereof) or the average weekly trading volume of that class of securities
during the four calendar weeks prior to such sale. Persons who are not
affiliated with the Company and who have held their restricted securities for at
least three years are not subject to the quantity limitations or the manner of
sale restrictions of the rule. As of the date of this prospectus, Laurie Munn,
wife of the Company's President and Chief Executive Officer owns 519,750 shares
of the Company's Class B Common shares, Ted Stevens, a former Director, owns
269,750 of such Class B shares, and Michael Levine, as escrow agent, holds
1,250,000 of such Class B Shares, designated Escrow Shares.(See preceding risk
factor - "Terms of Settlement of Litigation Involving Related Parties.") These
holdings comprise all of the Company's outstanding Class B Common shares as of
the date of this filing. Pursuant to agreements with the Company's investment
banking firm, and in connection with the Company's September 18, 1995 offering
of preferred stock and warrants, the outstanding Class B shares may not be sold
or otherwise disposed before March 17, 1997 without the prior consent of the
Company's investment banking firm. As of the date of this Prospectus, the
Company's stockholders own an aggregate of 1,140,000 Preferred Shares and
4,312,671 Class A Shares. Of these shares, 3,092,671 Common A Shares and 890,000
Series A Preferred Shares are freely saleable in the public market. A sale of
shares by current stockholders, whether pursuant to Rule 144 or otherwise, may
have a depressing effect upon the market price of the Company's securities in
any market that continues to exist. To the extent that such shares enter the
market, there may be a negative effect on the market price of the Company's
securities and on the ability of the Company to obtain additional equity
financing. See "Principal and Selling Securityholders," "Description of
Securities," "Certain Transactions" and "Concurrent Sales."

Representative's Warrants. In connection with the Initial Public Offering,
the Company sold to the Representative's designees, for nominal consideration,
Representative's Warrants to purchase an aggregate of 45,000 Class A Shares,
40,000 Class WA Warrants and 22,500 Class WB Warrants. In October 1994
Representative's Warrants to purchase 30,015 Class A Shares, 40,000 Class WA
Warrants and 22,500 Class WB Warrants were repurchased by the Company. The
Representative's Warrants are exercisable until June 22, 1999, at an exercise
price equal to $1.50 per Class A Share, subject to certain adjustments. In
connection with the Preferred Stock Offering, the Company sold to VTR Capital,

Inc. a Warrant to purchase 40,000 shares of Series A Preferred Stock and 20,000
Class WC Warrants for an aggregate price of $20.00, (the "VTR Warrants"). The
holders of outstanding Representative's Warrants and VTR Warrants have the
opportunity to profit from a rise

16
<PAGE>

in the market price of the Company's securities, if any, without assuming the
risk of ownership, with a resulting dilution in the interest of other
shareholders. The Company may find it more difficult to raise additional equity
capital if it should be needed for the business of the Company while the
Representative's Warrants and VTR Warrants are outstanding. At any time when the
holders thereof might be expected to exercise such Warrants, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by the Representative's Warrants and VTR Warrants. The holders of the
Representative's Warrants and VTR Warrants have the right to require
registration under the Securities Act of the securities issuable upon exercise
of such Warrants and have certain "piggy-back" registration rights. The cost to
the Company of effecting a demand registration may be substantial. See
"Description of Securities" and for a description of the termination agreement
with the Representative.

Certain Provisions of Certificate of Incorporation and By-Laws; Potential
Anti-Takeover Effect. The Company's Board of Directors may designate the terms
of and issue up to 2,500,000 shares of Preferred Stock without further action by
the stockholders, of which 1,140,000 are issued and outstanding as of the date
of this filing. Voting rights that may be granted in the future to holders of
Preferred Stock could adversely affect the voting power of holders of Class A
Shares. The Company's By-Laws contain provisions which may discourage certain
transactions which involve an actual or threatened change in control of the
Company. The By-Laws provide that certain vacancies on the Board of Directors
shall be filled by a majority of the remaining directors then in office, limit
the ability to call a special meeting of shareholders, and require that no
proposal by a shareholder be presented for vote at a special or annual meeting
of shareholders unless the shareholder provides the Board of Directors or the
secretary of the Company with written notice of intention to present a proposal
for action at the meeting in accordance with the By-Laws. See "Description of
Securities."

As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of the fiduciary duty of care as a director, except under certain
circumstances including breach of the director's duty of loyalty to the Company
or its stockholders or any transaction from which the director derived an
improper personal benefit. See "Management - Indemnification of Directors and
Officers."

The Company has expressly not opted out of, and is therefore subject to,
Section 203 of the Delaware General Corporation Law regulating "business
combinations" between Delaware corporations and "interested stockholders." Under
this provision, a corporation subject to Section 203 may not engage in any

business combination with any interested stockholder for a period of three years
from the date such person became an interested stockholder unless certain
conditions are satisfied. This provision may also have the effect of delaying or
preventing a change in control of the Company. See "Description of Securities."

Possible Redemption of the Class WA Class WB and Class WC Warrants.
Commencing at any time after June 22, 1995, in the event the closing bid price
per share of the Class A Shares as quoted in the over-the-counter market (as
reported by Nasdaq) or on an exchange on which the Company's securities are then
listed has equaled or exceeded 120% or more of the then effective exercise price
of the Class WA and Class WB Warrants, respectively, for 20 consecutive trading
days, the Warrants may be redeemed by the Company at a redemption price of $.01
per warrant prior to exercise or expiration upon 30 days prior written notice
thereof. Commencing at any time after September 17, 2000, in the event the
closing bid price per share of the Preferred Stock as quoted in the
over-the-counter market (as reported by Nasdaq) or on an exchange on which the
Company's securities are then listed has equaled or exceeded 110% or more of the
then effective exercise price of the Class WC Warrants for 20 consecutive
trading days, the Warrants may be redeemed by the Company at a redemption price
of $.01 per WC warrant prior to exercise or expiration upon 30 days prior
written notice thereof. Although holders of the Warrants will have the right to
exercise their Warrants through the date of redemption, they may be unable to do
so because they lack sufficient funds at the time of redemption, or they may
simply not wish to invest any more money in the Company's Class A Shares, Series
A Preferred Shares, Class WB Warrants, or Class WC Warrants at that time. Should
holders of the Warrants fail to exercise such Warrants or to sell such Warrants

17
<PAGE>

on or prior to the redemption date, such Warrants will have no value beyond
their redemption value. As noted above, the Company may not redeem the Warrants
unless the Company has available a current prospectus with respect to the
Warrants. See "Description of Securities - Redeemable Warrants."

Delinquent Payment of Payroll Taxes. 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 requires that the Company pay approximately $9,000 per month for
approximately 14 months in order to satisfy its federal payroll tax
responsibilities. As of the date of this filing, the Company has complied with
its agreement with the Service.

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PUBLIC OFFERINGS

The Company completed its Initial Public Offering on June 30, 1994, at
which time the Company issued 517,500 Class A Shares at $5.00 per share, 460,000
Class WA Warrants at $0.10 per Warrant, and 258,750 Class WB Warrants at $0.10
per Warrant (including 67,500 Class A Shares, 60,000 Class WA Warrants and

33,570 Class WB Warrants upon exercise of the Representative's Over-Allotment
Option). The Class A Shares, Class WA Warrants and Class WB Warrants were
purchasable and transferable separately upon issuance. Such securities were sold
by the Company pursuant to a "firm commitment" underwritten public offering
(previously defined as the "Initial Public Offering"). The Company received
approximately $1,600,000 in net proceeds (including the proceeds from the
exercise of the Over-Allotment Option) after payment of certain offering
expenses, commissions and non-accountable expenses including approximately
$100,000 in expenses paid by the Company prior to the receipt of the net
proceeds. The Initial Public Offering was underwritten by certain underwriters,
including J. Gregory & Company, Inc., which acted as the Representative of the
Underwriters. In accordance with the Underwriting Agreement between the Company
and the Representative, the Company issued to the Representative's designees
Representative's Warrants to purchase up to 45,000 Class A Shares, 40,000 Class
WA Warrants and 22,500 Class WB Warrants, exercisable through June 22, 1999. In
October 1994 the Company entered into a termination agreement with the
Representative and with Vincent Mongno for the repurchase of Representative's
Warrants to purchase 30,015 Class A Shares, 40,000 Class WA Warrants and 22,500
Class WB Warrants and the mutual termination of certain rights and obligations.
See "Risk Factors," "Description of Securities" and "Management's Discussion and
Analysis."

In September 1995, the Company's registration statement (the "Preferred
Stock Registration Statement") with respect to 460,000 shares of Series A, 10%
Cumulative Convertible Preferred Stock ("Preferred Stock"), and 230,000
Redeemable Class WC Warrants ("WC Warrants") to purchase Preferred Stock at the
exercise price of $5.50 per share was completed and was declared effective by
the Securities and Exchange Commission. 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. On May 5, 1995, the
former President was reappointed as President, Chief Executive Officer and
Treasurer of the Company in connection with this offering. In September 1995,
upon completion of the Preferred Offering, the President resigned. The net
proceeds from this offering were approximately $1,633,000, including
over-allotments.

USE OF PROCEEDS

No new securities are being offered by the Company pursuant to this filing. The
Company will not realize any proceeds pursuant to this filing as a result of the
sale of securities by the Selling Securityholders.

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<PAGE>

DIVIDEND POLICY

The Company has not paid and does not anticipate paying any cash dividends
on its Class A Shares or Class B Shares in the foreseeable future, but instead
intends to retain all working capital and earnings, if any, for use in the
Company's business operations, and in the expansion of its business. The
Company's Series A Preferred Stock is entitled to a 10% cumulative dividend,
payable semi-annually in the months of March and September. This dividend is

payable either in cash or Class A Common shares at the option of the Company. In
March 1996, and in satisfaction of the first semi-annual dividend obligation
with respect to the Preferred Stock, the Company issued 55,247 Common A shares
to the Preferred Stock holders of record as of February 23, 1996. 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. On December 17, 1996, the Company issued a press release
announcing its intention to declare a dividend on its Series A Preferred Shares,
cumulative to March 1997, with a record date in February 1997, and a payment
date in March 1997. See "Description of Securities."

20
<PAGE>

SELECTED FINANCIAL INFORMATION

Summary Balance Sheet Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
At June 30, 1996 At September 30,
1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Working capital $(2,512,319) $(1,585,888)
- -----------------------------------------------------------------------------------------------------------------------
Total assets $4,721,201 $5,733,039
- -----------------------------------------------------------------------------------------------------------------------
Total current $5,335,630 $4,696,062
liabilities
- -----------------------------------------------------------------------------------------------------------------------
Total long-term $30,652 $30,652
debt
- -----------------------------------------------------------------------------------------------------------------------
Stockholder's $(645,081) $1,006,325
equity
- -----------------------------------------------------------------------------------------------------------------------

<CAPTION>
Summary Statement of Income Data

Year ended June 30 Quarter ended September 30
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $5,378,761 (1) $5,155,275 (1) $1,179,170 (1) $1,293,258 (1)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) $(1,791,784) $257,780 $69,646 $(61,668)
from continuing
operations before
interest and taxes
- -----------------------------------------------------------------------------------------------------------------------
(Loss) from $(2,935,633) (2) $(938,546) (2) $0 (2) $(42,293) (2)
discontinued
operations
- -----------------------------------------------------------------------------------------------------------------------
Net (loss) $(5,283,773) $(817,754) $(7,594) $(199,309)
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per $(0.83) $0.06 $0.00 $(0.08)
share of Common
Stock from
continuing
operations
- -----------------------------------------------------------------------------------------------------------------------
(Loss) per share $(1.03) $(0.47) $0.00 $(0.02)
from discontinued
operations
- -----------------------------------------------------------------------------------------------------------------------
Net (loss) per $(1.86) $(0.41) $0.00 $(0.10)
share
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

21
<PAGE>

- ----------
(1) Does not include revenues from operations discontinued during the quarter
ending September 30, 1996 and the year ending June 30, 1996. Prior
revenues have been restated as if the discontinuation of operations had

taken place during the quarter ended September 30, 1995 and the year ended
June 30, 1995. Revenues from discontinued operations totaled $66,093 and
$255,000 respectively for the quarters ended September 30, 1996 and
September 30, 1995. Revenues from discontinued operations totaled $870,885
and $1,895,011 respectively for the years ended June 30, 1996 and June 30,
1995.
(2) Includes, in addition to loss from operations of discontinued operations
(see Note (1) above) non-operating charges of $2,420 and $13,720
respectively for the quarters ended September 30, 1996 and September 30,
1995. Non-operating charges for the years ended June 30, 1996 and 1995
were $480,605 and $74,326 respectively.

22
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

General

The following discussion should be read in conjunction with (a) the
information contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the "Notes") thereto appearing elsewhere herein, and
b) the Company's Form 10-KSB and Form 10-QSB filed for the periods ended June
30,1996, and September 30, 1996, which are incorporated herein by reference. The
financial statements have been prepared in conformity with generally accepted
accounting principles, but have not been audited, except that financial balances
at June 30, 1996 disclosed herein are based on the Company's financial
statements for the fiscal year ended June 30, 1996, which have been audited by
the Company's independent auditors ("Auditors".) The auditors have issued a
modified opinion on the Company's financial statements at June 30, 1996 (See
Risk Factors - Modified Auditor's Report.) Due to $5,283,773 net losses during
the year ended June 30, 1996, and negative net worth at that date, substantial
doubt existed as to the Company's ability to continue as a going concern. During
the period subsequent to June 30, 1996, certain events led to improvement of the
Company's financial position.

Results of Operations

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

As disclosed in the "Description of Business", during the year ended June
30, 1996, the Company decided to discontinue its catalog operations. Prior
quarter financial statements were reclassified to disclose the results of
catalog operations as if they were discontinued at the beginning of the quarter
ending September 30, 1995.

The Company's net sales from continuing operations for the quarter ended
September 30, 1996, decreased by $114,000 or 9% to $1,179,000 from $1,293,000
for the quarter ended September 30, 1995.

Net sales for the A.P.F. Master Framemakers division for the quarter ended
September 30, 1996 increased by $405,000 or 61% to $1,065,000 from $660,000 for
the quarter ended September 30, 1995. Net sales for the Italia Collection

subsidiary for the quarter ended September 30, 1996 decreased $519,000 or 82% to
$114,000 from $633,000 for the quarter ended September 30, 1995. The Company has
significantly curtailed the conduct of Italia's business and is currently
arranging alternative means by which the products marketed by Italia will be
sourced and distributed in the future.

The Company's cost of goods sold from continuing operations as a
percentage of net sales decreased to 53% for the quarter ended September 30,
1996, from 55% for the quarter ended September 30, 1995. The margins generated
during the three months ended September 30, 1996 are largely consistent with
those of the three months ended September 30, 1995. The Company used during the
three months ended September 30, 1996 and 1995 the gross profit method to value
inventory. The Company plans to begin the implementation of a perpetual
inventory system. The Company believes that such a system will enable it to
determine product costing and margins more precisely. Although the Company
expects this

23
<PAGE>

system to be fully operational during the quarter ended March 31, 1997, no
assurances can be given that this will occur.

The Company's selling, general and administrative expenses as a percentage
of net sales decreased to 41% for the three months ended September 30, 1996,
from 50% for the three months ended September 30, 1995.The Company has taken
certain measures to reduce expenses, leading to this improved ratio of
expenses-to-sales. For example, reductions of administrative personnel have led
to reduced salaries, benefits, and travel expenses. Also discretionary spending
for such items as stationery and supplies, advertising, and consulting fees has
been curtailed. Finally, due to the overall reduction of revenues, sales
commission expenses are reduced in the current period versus the prior period.
Interest expense as a percentage of sales remained at approximately 7% for the
quarter ended September 30, 1996, and the quarter ended September 30, 1995. In
absolute dollars however, interest expense is $18,000 lower in the quarter ended
September 30, 1996 versus the prior quarter because of reduced balances in
interest-bearing debt. Interest as a percent of sales is largely unchanged
because of the reduced sales of the current quarter versus the prior quarter.

Liquidity and Capital Resources

For the quarter ended September 30, 1996, the Company realized a net loss
of $8,000, which constitutes largely break-even performance, versus a net loss
from continuing operations of $157,000 ($0.08 per share), and a loss from
discontinued operations of $42,000 ($0.02 per share) for the quarter ended
September 30, 1995.

At September 30, 1996, there were no cash balances on the Company's
balance sheet as compared to approximately $519,000 at September 30, 1995. Net
cash used in operating activities during the quarter ended September 30, 1996
totaled approximately $779,000 compared with net cash used in operating
activities of approximately $922,000 during the quarter ended September 30,
1995. The current period reduction in the use of cash from operations is largely

due to the current period's net loss of approximately $8,000 versus a net loss
of approximately $199,000 for the quarter ended September 30, 1995. The decrease
in accounts payable and accrued expenses during the quarter ended September 30,
1996 was largely due to equity raised during the period. (see below.)

Net cash used in investing activities during the quarter ended September
30, 1996 totaled approximately $884,000 versus approximately $181,000 for the
quarter ended September 30, 1995. During the current period, the Company
invested $824,000 of cash to acquire 54,934 shares of Series C non-voting
convertible preferred stock of Decor Group, Inc. (See "Acquisitions and
Strategic Alliances.") During the same current period, an additional amount of
approximately $60,000 was used to acquire equipment, versus approximately
$181,000 for the quarter ended September 30, 1995.

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

24
<PAGE>

the quarter ended September 30, 1995, the funding was the result of the sale by
the Company of 460,000 shares of Series A Preferred Stock registered by the
Company in September 1995.

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

The Company's management is currently seeking to increase revenues as part
of its efforts to improve the Company's financial position. Two specific
initiatives are currently in progress. The Company is seeking alternative means
by which products marketed by Italia will be sourced and distributed in the
future. Also, the Company has entered into an exclusive three year contract to
provide certain services to a major "direct-in-home" marketer of
computer-enhanced enlargements of photographs. Although the Company believes
that these initiatives will provide significant revenue growth, no assurances
can be given that this outcome will occur.

Year Ended June 30, 1996 as Compared to Year Ended June 30, 1995

As disclosed in the "Description of Business", during the year ended June 30,
1996, the Company decided to discontinue its catalog operations. Prior year

financial statements were reclassified to disclose the results of catalog
operations as if they were discontinued at the beginning of the year ending June
30, 1996.

The Company's net sales from continuing operations for the fiscal year
ended June 30, 1996, increased by $224,000 or 4.4% to $5,379,000 from $5,155,000
for the fiscal year ended June 30, 1995.

Net sales for the A.P.F. Master Framemakers division for the fiscal year
ended June 30, 1996 decreased by $154,000 or 4.4% to 3,369,000 from $3,523,000
for the fiscal year ended June 30, 1995. The average selling price per order for
the A.P.F. Master Framemakers division remained relatively unchanged for the
fiscal years ended June 30, 1996 and 1995.

With the acquisition by the Company of Italia Collections Inc. ("Italia")
in October 1994 (See "Description of Business"), the Company began to conduct
its wholesale business through Italia. During the transition from the Company's
prior wholesale business to Italia, the Company generated revenues of $528,000
from this wholesale business during the year ended June 30, 1995. Italia
revenues for this same period totaled $1,104,000. Thus, for the year ended June
30, 1995, the Company's wholesale based revenues totaled $1,632,000. Net sales
for Italia for the fiscal year ended June 30, 1996 totaled $2,010,000, which is
an increase of $378,000 or 23.2% over total wholesale business for the prior
year. During the year ended June 30, 1996, as disclosed in the "Description of
Business", Italia has been undergoing disruption due to efforts to relocate
Italia operations to a suitable location.

25
<PAGE>

Because of this disruption, the revenues for the year ended June 30, 1996 have
been negatively affected. Also, additional expenses pursuant to relocation
efforts totaling some $235,000 have been incurred.

The Company's cost of goods sold from continuing operations as a
percentage of net sales increased to 66.1% for the fiscal year ended June 30,
1996, from 59.7% for the fiscal year ended June 30, 1995. This increase is due
to larger fourth quarter book-to-physical adjustments as compared to the prior
year recorded by the Company during the year ended June 30, 1996. Gross margins
for the year ended June 30, 1996 are largely consistent with those of the prior
year.

Selling, general and administrative expenses from continuing operations
increased $1,791,000 or approximately 98% over the comparable amount in the
prior year. Such increase included additional costs relating to the relocation
of Italia in the amount of approximately $763,000, additional reserves for
certain assets of $310,000, additional facilities charges of approximately
$120,000, with the balance relating to various other costs associated with the
implementation of the Company's strategic plan.

Liquidity and Capital Resources

Interest expense for the year ended June 30, 1996 increased approximately

$302,000 to $538,000 versus the year ended June 30, 1995. Italia's revenues are
financed with a New York based secured lender pursuant to an asset-related
formula. (See Liquidity and Capital Resources.) Italia's revenues have increased
$906,000 during the year ended June 30, 1996 versus the June 30, 1995. This is
the basis for approximately $122,000 of the current year increase. The balance
relates to financing costs related to certain third-party loans obtained during
the prior year.

Because of the Company's decision to discontinue its catalog operations,
it incurred charges during the year ended June 30, 1996 for such discontinuation
totaling $2,935,633. These charges relate primarily to a loss for the current
year's operations of approximately $789,000, inventory reserves of approximately
$954,000, reserves for other assets of approximately $354,000, charges for the
settlement of related party lawsuits of approximately $519,000, with the balance
primarily relating to estimated charges for operating losses.

The Company believes that the charges recorded during the year ended June
30, 1996 are sufficient. The Company will wind down its catalog business by
March 31, 1997, and may possibly mail one final clearance catalog. The Company's
management believes that no additional charges will be necessary from such
efforts.

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,

26
<PAGE>

has been declared effective by the Securities and Exchange Commission on
November 12, 1996 (the "Effective Date".) On November 19, 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) The Company is
currently restructuring the operations of its Italia Collections subsidiary in
an effort to generate greater revenues and operating margins, accordingly the
Company is seeking alternative sources through which to manufacture and sell the
Italia product line (See "Acquisitions and Strategic Alliances"), and e) The
Company is seeking additional sources or 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 13, 1996, the Company

announced that it has entered into an exclusive three year agreement with a
major "direct-in-home" marketer of customized computer-enhanced photograph
enlargements. No assurances can be given that these, or any subsequent
initiatives by the Company will produce the desired positive cash flow from
operations.

Cash balances of approximately $4,000 were recorded as of June 30, 1996,
as compared to approximately $2,000 at June 30, 1995, representing an increase
of approximately $2,000. Net cash used in operating activities was $1,144,000 at
June 30, 1996, as compared to net cash used in operating activities of
approximately $2,287,000 at June 30, 1995. The decrease in net cash used in
operating activities was primarily due to the net loss of $5,284,000 offset by a
non-cash provision for discontinued operation totaling $2,236,000, and also
offset by the following changes from continuing operations: non-cash charges for
depreciation of $680,000, and for stock issuances of $141,000, increases in
accounts payable and accrued expenses of $1,113,000, inventories of $346,000,
and a decrease in accounts receivable of $179,000. The decrease in accounts
receivable was primarily due to the Company's adherence to established credit
policies while at the same time successfully pursuing the collection of past due
balances. Although total inventories decreased during the current period,
inventories from continuing operations increased due largely to support the
Italia business. The increase in accounts payable and accrued expenses was due
largely to increased operating expenses incurred during the current year. (See
"Results of Operations".)

Net cash used in investing activities was $543,000 for the year ended June
30, 1996, versus $591,000 for the year ended June 30, 1995.

Net cash provided by financing activities was $1,689,000 for the year
ended June 30, 1996, compared to $1,839,000 for the year ended June 30, 1995.
The primary source of the current year's financing was the Company's Preferred
Stock Offering in September 1995 generating proceeds of $1,633,000. During
fiscal 1995, the Company sold 3,000,000 Class WA Warrants to raise net proceeds
of approximately $372,000 in additional working capital in part to support the
acquired operations, sale of 500,000 registered Class A Common shares

27
<PAGE>

to raise net proceeds of approximately $438,000, and the sale of 235,000 Class A
Common shares pursuant to Regulation S under the Securities Act of 1933
("Regulation S") to raise net proceeds of approximately $283,000.

As of June 30, 1996, working capital was ($2,512,000), as compared to
($15,000) as of June 30, 1995. As of June 30, 1996, trade accounts receivable
decreased $179,000 and inventories decreased $346,000 versus the prior period.
Notes payable and current maturities of long-term debt reduced $369,000 during
this same period. The changes from these specific accounts produce a reduction
to working capital of $536,000. Additionally, in connection with plans to
discontinue its catalog operations, the Company recorded reserves totaling
approximately $2,200,000, which is the substantial cause of the decrease of
working capital during the year ended June 30, 1996. The Company's Management
believes that this working capital reduction will be isolated to the year ended

June 30, 1996, and that positive working capital will be generated during
subsequent periods. As disclosed at the beginning of "Results of Operations" the
negative working capital changes during the year ended June 30, 1996 are
consistent with the Company's intentions to reposition itself for growth and
profitability in subsequent periods. No assurances can be given, however, that
the Company's expectations of improved results in subsequent periods will occur.

In July 1994, The Company replaced its existing financing agreement with a line
of credit of up to $950,000 with a New York Bank following the Company's Initial
Public Offering in June 1994. Such borrowings are based on trade receivables and
inventory. The borrowings under such line of credit are secured by a lien on all
personal property and fixtures of the Company and personally guaranteed by the
President and Chief Executive Officer of the Company. In March 1996, the Company
agreed with the bank to reduce the line of credit by increasing the amount of
payments starting with $10,000 per month. Currently the required payment amount
is $20,000 per month. As of the date of this filing, the line of credit has been
reduced to $815,000. This line of credit bears interest at a rate of prime plus
1% (9.25% as of the date of this filing.) The Company is also seeking
alternative sources of financing to ultimately replace the current line of
credit, but there can be no assurance it will be able to do so.

In connection with the Company's plan to restructure its wholesale
business, the Company, through its wholly owned subsidiary, Italia Collection,
Inc. ("Italia"), acquired the businesses of two privately held Florida-based
companies, Murano Crystal Corp. ("Murano") and Ceramic Productions, Corp.
("CPC"), which manufacture and market upscale decorative ceramic accessories to
the home furnishings industry through a showroom in High Point, North Carolina
and a network of sales representatives. Closing on such acquisitions occurred on
October 21, 1994. These acquisitions were accounted for under the purchase
method of accounting. In connection therewith, the Company agreed to pay the
seller on the basis of a formula purchase price computed as a factor of future
earnings from continuing operations, subject to certain adjustments and offsets
in cash and/or Class A Shares. As of the date of this filing, based on the
results of operations of these acquisitions, management believes that no
liabilities are due to the seller, nor have any liabilities for such payment
been recorded on the Company's financial statements. The parties are currently
in dispute regarding the nature and amount, if any, of the consideration
necessary. The parties are discussing a resolution to this matter and in the
opinion of management, there will not be any material adjustment

28
<PAGE>

to the Company's financial position or results of operations as a result of the
outcome of such discussions. Upon resolution of these discussions, appropriate
payments, if any, will be made and recorded on the Company's books.

On February 15, 1995, Italia Collection entered into a Financing Agreement
with a New York based secured lender whereby Italia Collection may borrow
pursuant to an asset-related formula. The agreement remains in effect as of the
date of this filing, and may be terminated by either party upon notice to the
other and payment of the commitment fee for the unexpired term of this
agreement. Although the Company is currently pursuing alternative financing

agreements, as of the date of this filing, no such arrangements have been
finalized. According to the current agreement, the lender, upon confirmation of
shipments, will advance Italia Collection 70% of the receivable. Upon collection
of the receivable, the lender remits the balance of 30%. Interest is calculated
on the daily cash balance at the rate of prime plus 9% per annum (17.25% as of
the date of this filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. As of the date of this filing, the amount due to
the lender was approximately $813,000. In addition, the secured lender received
personal guarantees from Max Munn, President and Chief Executive Officer of the
Company, and his spouse. During February 1996, the Company's President and Chief
Executive Officer arranged for $160,000 additional financing from this lender at
the rates in effect for existing loans. The President and Chief Executive
Officer, and his spouse, have provided personal guarantees for this additional
funding, in addition to a security interest in certain real estate and Company
stock owned by his spouse. Of these proceeds, approximately $121,000 was used to
pay outstanding tax liabilities. The balance of the proceeds was loaned by the
Company to the President and Chief Executive Officer. A $38,000 demand loan
dated February 8, 1996, bearing an annual rate of interest of 18% was executed
by the President and Chief Executive Officer, and countersigned by the Chief
Financial Officer. On May 13, 1996, the Company's Board of Directors affirmed by
majority vote the loan by the Company to its President and Chief Executive
Officer. The principal balance of the loan will be partially offset by
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 for approximately 14 months for this purpose. As
of the date of this filing, all such tax liabilities are being paid on a timely
basis.

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

29
<PAGE>

WC Warrants were registered in a Registration Statement declared effective
September 18, 1995.

with a consulting firm dated January 4, 1994. The Company's Board of Directors
approved the issuance of such shares in November 1995. In conjunction with the
issuance of these shares, approximately $105,000 of charges against earnings
were recorded during the year ended June 30, 1996.

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

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

In September 1995, the Company lowered the exercise price of the Company's
Class WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A Shares which were previously sold pursuant to a "Regulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed below. On July 16, 1996, the Company
filed a Registration Statement with the Securities and Exchange Commission to
register the Class WA Warrants and underlying Common A Shares. The Commission
declared this Registration Statement effective on July 19, 1996. Through the
date of this filing, 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 Series C Non-Voting, Convertible, Preferred Stock. The balance of the
proceeds was retained by the Company for working capital needs, and for the
provision of loans to Decor Group, Inc.

On 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

30
<PAGE>

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

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

In January 1996, the Company's Board of Directors elected to lower
the exercise price of the Company's Class WB Warrant to $2.00 per Class
A Common share, subject to the filing and effectiveness of a
Registration Statement with the Securities and Exchange Commission. Such
Registration Statement was filed with the Commission on July 16, 1996
and declared effective on July 19, 1996. As of the date of this filing,
118,012 of the Company's Class WB Warrants were exercised generating
proceeds of $236,024. These proceeds were retained by the Company to
support working capital needs, and for the provision of loans to Decor
Group, Inc. Further, in connection with Decor's public offering, the
Company will recognize any gains in accordance with Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 51.

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.

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In February 1996, the Company's Board of Directors approved the issuance
to Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for past consulting services provided. The Company is planning to
register these securities with the Securities and Exchange Commission during the
quarter ended March 31, 1997. These shares, which bear a restrictive legend,
were issued on April 12, 1996. In conjunction with the issuance of these shares,
approximately $54,000 of charges were recorded against earnings during the year
ended June 30, 1996. This filing is meant, among other things, for the purpose
of registering these 150,000 Class A Common Shares with the Securities and
Exchange Commission. The 150,000 Class A Common Shares are subject to a
"lock-up" agreement with VTR Capital Corporation, the Company's investment
bankers.

On March 3, 1996, the Company acquired 250,000 shares of Series A
Convertible Preferred Stock and an option to purchase 10,000,000 shares (the
"Option Shares") of Series B Non-Convertible Voting Preferred Stock of Decor
Group, Inc., ("Decor") in exchange for issuance to Decor by the Company of
200,000 shares of its Class A Common stock and 200,000 shares of its Series A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. The 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 the current Board of Directors of Decor. The Voting Agreement will
expire on December 31, 1997. The Board of Directors of Decor is currently
comprised of three individuals one of whom is Max Munn, the Company's President
and Chief Executive Officer (and also the Chairman of the Board of Decor), and
two of whom are otherwise unrelated to the Company. Conversion of the 200,000
shares of Series A Convertible Preferred stock into Common Stock would give the
Company approximately 86.0% of the voting stock of Decor immediately prior to a
public offering of certain securities by Decor. On November 12, 1996 (the
"Effective Date"), a public offering by Decor of certain of its securities was
declared effective by the Securities and Exchange Commission. The Company's
interest in Decor will be recorded on the Company's financial statements under
the equity method of accounting until such time the Company obtains
unconditional and effective control of Decor, which is expected to occur upon
the expiration of the Voting Agreement. Any gains realized by the Company in
connection with the Decor public offering will be recognized in accordance with
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 51.

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, the Investors had the right to demand in writing (the

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"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. This filing is
meant, among other things, to register these 175,000 Class A Common Shares and
50,000 Series A Preferred Shares with the Securities and Exchange Commission.

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.

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 $12,500 was used to purchase 1,667 shares of
Decor Group, Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The
balance of proceeds was retained by the Company for 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. This filing is
meant, among other things, for the purpose of registering these 50,000 Class A
Common Shares with the Securities and Exchange Commission. The 50,000 Class A
Common Shares are subject to a "lock-up" agreement with VTR Capital Corporation,
the Company's investment bankers. These shares are being registered as part of
this registration statement. 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.

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<PAGE>

During September 1996, pursuant to the Company's Director Stock Option
Plan, the Company issued: 10,000 shares of its Class A Common shares to Roger
Lourie, an outside director of the Company, and 10,000 shares of its Class A
Common shares to various individuals named by Richard Josephberg, also an
outside director of the Company. These shares bear a restrictive legend.

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

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

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.

<PAGE>

BUSINESS

General

The Company's management believes that its highest priority is to set the
stage for growth and profitability in current and subsequent periods. The
Company is now identifying and finalizing new business ventures to achieve this
goal. Three important activities currently in progress are summarized below:

o The Company has made a major investment in Decor Group, Inc. ("Decor") as
fully disclosed below.

o 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.

o On November 12, 1996, the Company announced that it has entered into an
exclusive three year contract with a major "direct-in-home" marketer of
customized computer-enhanced photograph enlargements. This unique
computerized process produces enlargements on canvas from ordinary
photographs, yielding exceptional clarity and color at affordable prices.
The agreement calls for the Company to finish, pack, frame and fulfill all
of the client's products.

Although the Company believes that these initiatives will lead to improved
financial results, no assurances can be provided that this will be the case.

The Company believes that the decorative accessory supply industry will
consolidate as major retailers attempt to increase their "single-sourcing" in
order to reduce distribution and related expenses. The Company intends to
capitalize on the fragmented nature of the supply side of the home decorative

accessory industry and the consolidation of such industry through either
strategic alliances or the acquisition of manufacturers and distributors of
art-related decorative accessories.

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Through such means, the Company intends to increase the number and nature of
products manufactured by the Company, thereby expanding its presence in the
decorative accessories market. Such products will be offered for sale by the
Company through its existing segments or other newly created units. Management
believes that increasing the number and kinds of products it manufactures will
enhance its ability to expand its wholesale operations as the Company develops
the ability to market "whole room" packages of accessories to furniture and
department stores.

A.P.F. Master Framemakers

There are approximately 15,000 picture frame retailers in the United
States alone. In management's opinion, approximately 3,000 of these serve
markets which the Company believes may be sufficiently affluent to support the
Company's product line. The A.P.F. Master Framemakers division now conducts
business with only approximately 300 of these retailers, or about 10% of this
market segment. The Company plans to expand its sales to the "high-end" of this
industry.

Prices on individual custom-made frames range from $100 to well over
$10,000 with the majority under $5,000. The Company has crafted several single
frames in excess of $20,000 each during the last three years. The Company
utilizes varying discount and pricing structures for its different market
segments, with frame retailers receiving the largest price discount and art
collectors receiving minimal price reductions depending on the level of
aggregate annual purchases and the degree of customization requested.
Historically, The A.P.F. Master Framemakers division has not experienced
significant returns since its business is generated from orders for custom-made
products.

Italia Collection

On October 21, 1994 (the "Closing Date") the Company, through its
newly-formed wholly-owned subsidiary, Italia, acquired all of the issued and
outstanding stock of Murano Crystal Corp. ("Murano"), a Florida corporation
doing business under the name "Italia Collection," pursuant to the terms of a
certain stock purchase agreement dated October 21, 1994 (the "Murano Purchase
Agreement") between Italia and Murano and Stephen M. Tucker, the sole
stockholder and acquired all of the issued and outstanding capital stock of

Ceramic Productions Corp., a Florida corporation ("Ceramic") pursuant to the
terms of a certain stock purchase agreement dated as of such date (the "Ceramic
Purchase Agreement") between Italia and Ceramic and Stephen M. Tucker and
Michael D. Tucker, the sole stockholders. The Company agreed to pay such
respective stockholders an "allocated portion" of three times the combined
"after-tax earnings" of Murano and Ceramic, net of intercompany transactions for
the third fiscal year following the Closing date. One-third of the purchase
price is payable on or before each of September 28, 1997, 1998, and 1999 and, at
the sole election of Italia, up to two-thirds of the purchase price is payable
by the delivery of Class A Common Stock of the Company but in no event shall
more than an aggregate of 300,000 shares of Class A Common Stock be issuable in
payment of the purchase price under the Murano and Ceramic Purchase Agreements.
Italia further agreed that in the event that it elects to pay a portion of the

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<PAGE>

purchase price in shares of Class A Common Stock, that it will grant to the
stockholders a one-time "piggy-back" registration right for the inclusion for
registration of such securities in a registration statement filed under the
Securities Act at such time as other securities are registered following the
fifth anniversary of the Closing Date provided that the respective stockholder
is at the time of such registration an employee of the Purchaser. As of the date
of this filing, no payments have been made to the seller for this acquisition,
nor have any liabilities for such payment been recorded on the Company's
financial statements. The parties are currently in dispute regarding the nature
and amount, if any, of the consideration necessary. Discussions are currently in
progress. In the opinion of management, there will not be any material
adjustment to the Company's financial position or results of operations as a
result of the outcome of such discussion. In connection with the Italia
transaction, the Company entered into an employment agreement with one of such
stockholders and a consulting agreement with a relative of such stockholders. In
July 1995, both the employment and consulting agreements were terminated by the
Company.

During the months of March and April 1996, the Company has moved its
Italia Collections subsidiary to The Lance Corporation (Lance), a Massachusetts
manufacturer and distributor of various products to the giftware and
collectibles market. Subsequently, the Company has determined that this facility
is not suitable to its operating needs. As a result, the Company has fully
removed its operating assets from Lance and is seeking alternative sources for
the production of its Italia product line.

Discontinuation of operations of Interiors Catalog

On March 31, 1996, the Company's Board of Directors decided to discontinue
the Company's catalog operations because of declining revenues and high
operating costs. As a result, a charge against earnings of approximately
$2,100,000 was recorded at June 30, 1996. For the twelve months ended June 30,
1996, losses from continuing catalog operations totaled $789,332. The Company
plans to fully carry out the discontinuation of the catalog operation by March
31, 1997. The Company plans to wind down operations by filling existing orders
and possibly mailing one final catalog as a "close-out sale" to liquidate

inventory. The financial statements included with this filing have reclassified
the results of operations for the quarter ended September 30, 1995 as if the
Company's catalog operations had been discontinued in the quarter ended
September 30, 1995.

Manufacturing

The Company's manufacturing operations include specialized woodworking
systems using unique and customized proprietary equipment, tools, dies and molds
especially created for the Company. Production also includes frame finishing,
which involves gold leaf application, antiquing and painting.

The Company maintains an inventory of metal and wood molding, composite
resins and other materials for use in its manufacturing processes. The Company's
mold and steel die inventory allows reproduction of frames from the 14th Century
(gothic) to the present day. These tools can be used to produce over 1,500
styles of picture and mirror frames. The Company has an extensive collection of
tools, molds and dies and has been unable to locate any other manufacturer of
picture

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frames which casts glass and urethane composite reproductions of decorative
frames to the extent and type that the Company does.

No single outside manufacturer supplies five percent or more of the
Company's products, and the Company's management is not aware at this time of
any product or manufacturer that the Company cannot replace with a comparable
product from an alternative manufacturer.

Products

Custom Frames. Each frame manufactured by the Company's A.P.F Master
Framemakers Division is individually made to the customer's size and finish
"coloration" specifications. In approximately 40% of the orders received by this
division, the customer also specifies a customized decorative element or carving
change to the basic design of the frame. The A.P.F. Master Framemakers Division
uses primarily fine domestic hardwoods and other traditional materials to hand
carve a "museum" quality frame. The Company's custom frames include styles as
follows: (a) Gothic through the Renaissance and various Italian styles; (b) a
product range of 15th through 17th Century Spanish designs; (c) a variety of
French "Empire" styles; (d) Dutch and Northern European designs, generally 17th
Century styles; (e) various English designs, including Queen Anne and Georgian;
(f) a broad range of American styles, including Colonial, Federal, Empire, Late
19th Century Hudson River School type frames, turn-of-the-century designs,
including designs by the artists Whistler, Prendergast, and others; and (g)
contemporary designs utilizing hardwoods and welded brass and aluminum. The
Company has selected the most popular segments of some of these periods, and has
incorporated them into brochures which picture the actual designs.

Ceramic accessories and collectibles. The Company's Italia Collections

Inc. subsidiary ("Italia") manufactures and markets ceramic and hydrocal
sculptures, resin framed mirrors, and other decorative accessories for the home.

Organization

Interiors, Inc. (the "Company" or "Interiors" known formally as A.P.F.
Holdings, Inc. or "A.P.F.") was incorporated pursuant to the laws of Delaware in
February 1994. A.P.F. was incorporated pursuant to the laws of New York in
October 1990. A.P.F. was incorporated in order to reincorporate in the State of
Delaware. Effective March 1994, A.P.F. merged with and into the Company. In
October 1994, the Company purchased "Ceramic Production Corp." and "Murano
Crystal" to form a wholly-owned subsidiary, "Italia Collections, Inc."

After giving effect to the discontinuance of the Catalog operations, the
Company has two operating divisions: 1) the Custom Framing Division which is
engaged in the manufacture of antique and contemporary picture frames for
museums, art galleries, designers, collectors and frame retailers; and 2) the
Wholesale Division, which manufactures and markets a line of high-end
traditional and contemporary mirrors through upscale retail furniture and
department stores. The wholesale division's wholly owned subsidiary manufactures
and markets ceramic vases and bowls, sculpture and lamps to upscale furniture
stores, furniture galleries, department stores, catalog and other decorative
accessory retailers. The majority of the Company's sales are domestic. Sales to
the largest customer totaled $390,000, or 30% for the quarter ended September
30, 1996.

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Pursuant to a March 3, 1996 agreement relating to the capitalization of
Decor Group, Inc., ("Decor"), an affiliate of the Company, Decor issued to the
Company 250,000 shares of its Series A 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 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 the current Board of Directors of Decor The Voting Agreement will
expire on December 31, 1997. The Board of Directors of Decor is currently
comprised of three individuals, one of whom is Max Munn, the Company's President
and Chief Executive Officer (and also the Chairman of the Board of Decor), and
two of whom are otherwise unrelated to the Company. Conversion of the 250,000
shares of Series A Convertible Preferred stock into Common Stock would give the
Company approximately 86% of the voting stock of Decor. On November 12, 1996
(the "Effective Date"), a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission. The Company's
interest in Decor will be recorded on the Company's financial statements under
the equity method of accounting until such time the Company obtains
unconditional and effective control of Decor, which is expected to occur upon
the expiration of the Voting Agreement. In connection with Decor's public
offering, the Company will recognize any gains in accordance with Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 51.

Marketing

The Company currently markets its custom picture frames to art galleries,
museums, custom frame retailers, art consultants, artists, corporations and
private collectors.

Typically, sales for the picture frame division are generated through the
following activities:

o Sales of "high-end" custom-made picture and mirror frames through the
Company's three showrooms.

o Sales to retail picture framers. These sales generally require that the
Company supply samples or "corners," consisting of two short sides of the
frame, to the retailers who use the "corners" to promote the sales of the
Company's frames.

The Company has established an unwritten arrangement with an art gallery
in Manhattan at 231 E. 60th Street to allow one of the Company's employees to
work from that location to assist the gallery in the sale of custom picture
frames to gallery clients and other customers. The Company operates from such
location without a lease or any cost or obligation of any kind and has done so
since the Company's inception.. Less than 4% of the Company's revenues are
generated through that location. While the Company believes that the
relationship is mutually beneficial to both the Company and such gallery, there
can be no assurance that the art gallery will allow the relationship to
continue.

The Company markets its corners to the retail framer through direct mail
brochures and through advertising in trade publications. The Company believes
these corners aid the retail framer in the sale of custom framing to the
consumer. The retail framers' investment in new corners is made significantly
easier by both the Company's extended payment terms for corners and its coupon

39
<PAGE>

redemption program. The Company offers the retailer the opportunity to extend
payments for corners over several months. The coupon redemption program
encourages utilization of the corners by affording the retail framer credit on
his first order of that particular style of frame from the Company. The Company
intends to expand its distribution of such corners through the increase in its
advertising expenditures and by offering more liberal payment terms. To the
extent retail framers accept such extended payment terms, the Company expects
that its levels of accounts receivable will increase.

The Company plans to add an additional showroom in a key market on the
West Coast of the United States during the next fiscal year. The Company has not
identified the exact location of such showroom facility and there can be no
assurance that the Company will be able to select locations which are suitable
or be able to lease showroom space on acceptable terms or be able to attract and
hire qualified personnel for such facility. The possibility exists that the

Company will not adequately forecast the time, costs, management and capital
needed to expand its A.P.F. Master Framemakers Division.

Suppliers

Substantially all of the picture and mirror frames sold by the Company are
manufactured by the Company in its facility in Mt. Vernon, New York. The Company
purchases wood, composite resins, gold leaf, plexiglas, matboards and other
materials from a wide variety of sources, and has at least two, and often more,
suppliers for each item used in its manufacturing process, and is not dependent
upon any one supplier. The Company currently purchases from a vendor base of
more than 300 suppliers. While there are many suppliers of most materials, the
Company has chosen to limit the majority of its purchases to the one or two
vendors with whom it has developed long-term relationships. The Company
generally does not need to enter into contracts with its suppliers as most
merchandise is readily available from multiple sources.

Competition

The custom framing industry in the United States is highly fragmented and
consists primarily of small, local framing retailers. Only a few companies are
basic manufacturers of higher priced picture frames, which frames are selected
for valuable works of art owned by museums, galleries and collectors. Custom
framing of the type produced by the Company is not in competition with local
frame stores. Management of the Company believes that its A.P.F. Master
Framemakers division is one of the largest custom framers of its type in the
country. However, there can be no assurance that the Company's position in this
industry will continue.

Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors and management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Italia.

The Company believes that its competitive advantage lies in its ownership
of a substantial number of models, tools, dies and molds developed from
museum-quality antiques and its continuing ability to manufacture quality
reproductions of those antiques. Management also believes that the Company is
further protected by what the Company considers to be its excellent reputation
with its customer base and management's estimation that the cost today (i.e. -
the difficulty) of obtaining

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antiques to reproduce, as well as the costs to build tools, dies and molds, make
the entry of meaningful competition extremely difficult. Management believes
that it would be difficult to build such a collection of tools, dies and molds
because of the cost of acquiring antiques and the reluctance of museums and
collectors to loan or dispose of irreplaceable antiques and the difficulty in
establishing a trained work force of skilled crafts people.

However, there can be no assurance that such assets will continue to

afford the Company any competitive advantage. See "Manufacturing."

Backlog and Backorders

The Company has no backlog in its A.P.F. Master Framemakers division since
the nature of custom framemaking requires that frames be constructed only after
receipt of an order. Such custom orders are generally filled approximately
thirty days after receipt of the order. At September 30, 1996, open orders total
$666,000.

As of September 30, 1996, the Company's Italia Collections, Inc.
("Italia") subsidiary has a backlog of approximately $103,000. During the month
of April 1996, the Company moved Italia's operations from Florida to
Massachusetts. Soon thereafter, it became apparent that operational restrictions
at this new location would prevent Italia from providing a reliable and ongoing
supply of merchandise. Accordingly, the Company has temporarily halted the
acceptance of new orders for Italia products and is arranging for product
sourcing from an established, third-party manufacturer.

Patents and Trademarks

The Company believes that its future success does not depend upon patents.
Instead, the Company depends, to a large extent, upon the technical competence
and creative skills of its personnel and on its unpatented proprietary
technology as well as its collection of tools, dies and molds. The Company
believes that it owns or has the right to use all proprietary technology
necessary to manufacture and market its existing and planned products. The
Company has no knowledge that it is infringing on any existing patent such that
it would be liable for material damages or be prevented from manufacturing or
marketing its products. In fact, most of the Company's technology is
process-related and may not be patentable. The decorative accessory
manufacturing industry is generally not technology driven, but is more design
and marketing driven; consequently there are few applicable patents in this
industry. In the event the Company's right to market any of its products were to
be successfully challenged, the Company may be required to discontinue certain
products and the Company's business and prospects may be adversely affected if
acceptable alternative products were not available.

The Company owns the registered trademarks: "Interiors" and "A.P.F." The
name "Italia Collection" was registered by the former owner of this business
with the Secretary of State of Florida. Pursuant to the acquisition of this
business by the Company, it also owns this trademark.

The Company does not own any other patents, copyrights, or other
intellectual property. The Company relies upon trade secrets, a substantial
quantity of tools, dies and molds and continuing design and marketing innovation
to maintain its competitive position.

Research and Development

<PAGE>

The Company continually seeks to develop additional design and related
molds for picture and mirror frames and capitalizes the cost thereof over a
five-year period. The Company estimates that it has expended approximately $ 0
and $3,600 on such activities during the quarters ended September 30, 1996 and
1995, respectively. There can be no assurance that such product development
activity will yield profitable growth.

Government Regulation

The Company must comply with federal, state and local laws affecting
companies in the manufacturing and catalog business. To date, such government
regulations have not had a material adverse effect on the Company. Prior to the
date of this filing, the New York Environment Conservation Department has
requested the Company to provide operation plans with regard to the management
of chemical and waste material currently stored on the Company's premises. The
Company has complied with this request. No other requirements or requests are
currently pending from any agency or representative or any governmental
authority.

Employees

As of the date of this filing, the Company had a total of 82 full-time
employees. Effective April 1, 1991, the Company signed a three-year collective
bargaining agreement with the Production, Merchandising and Distribution
Employees Union, Local 210, Affiliated with The International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America, AFL-CIO (the
"Union") covering its manufacturing employees. The agreement contains a
provision for an automatic two-year renewal through April 1, 1996. As of the
date of this filing, the Company is currently negotiating the renewal of its
Union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and the Company believes its
relationship with all of its personnel is satisfactory.

Acquisitions and Strategic Alliances

and Chief Executive Officer (and also the Chairman of the Board of Decor), and
two of whom are otherwise unrelated to the Company. Conversion of the 250,000
shares of Series A Convertible Preferred stock into Common Stock would give the
Company approximately 86% of the voting stock of Decor. On November 12, 1996
(the "Effective Date"), a public offering by Decor of certain

42
<PAGE>

of its securities was declared effective by the Securities and Exchange
Commission. The Company's interest in Decor will be recorded on the Company's
financial statements under the equity method of accounting until such time the
Company obtains unconditional and effective control of Decor, which is expected
to occur upon the expiration of the Voting Agreement.

Decor 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 $3,626,400, subject to certain adjustments. Decor
and Artisan House closed the transaction effective close of business 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.

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.

Pursuant to a March 31, 1996 agreement relating to the capitalization of
Decor, Laurie Munn, wife of the Company's President and Chief Executive Officer
purchased and was issued certain shares of the Common Stock of Decor. As of the
date of this filing, Ms. Munn was issued 200,000 shares of the outstanding
2,625,000 common shares of Decor. Also, the Company has executed a management
agreement with Decor, whereby the Company will provide management and
administrative support to Decor. At September 30, 1996, approximately $19,000 of
fees were accrued by the Company for such services.

("Lance") a Massachusetts manufacturer and distributor of various products for
the giftware and collectibles marketplace. The Company and LAC entered into an
agreement whereby each entity will guarantee certain liabilities of the other.
Subsequently, LAC disposed of its interest in Lance, and has finalized the terms
of transition with the new owners and existing secured creditors.

Description of Property

The Company has its principal offices at 320 Washington Street, Mt.
Vernon, New York, where it has sub-leased approximately 56,000 square feet of
administrative offices, manufacturing and warehousing facilities and a factory
showroom. The Company's sublease with Stern Metals expires

43
<PAGE>

31, 1996. The Company's monthly base rent payments under the sublease are
approximately $20,000 per month. As of the date of this filing, the Company and
Stern Metals agree that rent of approximately $199,000 is accrued at September
30, 1996. The Company and Stern Metals are currently negotiating terms of the
payment of this liability. The Company is also negotiating an extension its
lease with the new owners of the building. The Company has determined that there
is substantial manufacturing and warehousing space available in its present
vicinity if the Company were required to expand or relocate some or all of its
current facilities. However, there can be no assurances that when the current
sublease for the Company's principal facility expires that the Company will be
able to negotiate a renewal thereof on acceptable terms or obtain alternative
manufacturing and warehousing space on terms acceptable to the Company.

The Company also operates three specialty custom frame showrooms, which
are in Mt. Vernon, New York City, and Philadelphia. The Company occupies
approximately 1,800 square feet of showroom and office space at 172 East 75th
Street in New York City pursuant to a lease expiring January 31, 2003 between
the Company and Francesco Saggese. The lease requires the Company to pay rent at
rates which escalate 4% per year on February 1 and which rental is currently
approximately $6,200 per month. In addition, pursuant to a five-year lease
agreement dated August 31, 1995 between I.R.A.L., Inc., a subsidiary of the
Company and Hoopskirts Factory Partners, the Company occupies approximately
5,740 square feet of showroom, warehouse and office space in "Old Town"
Philadelphia, PA. The agreement provides for minimum rent of $2,500 per month.
Under the current lease agreement, the lease term will expire on August 31,
2000. The Company believes alternate space is available if the Company is
required to relocate and that any such relocation would not have a material
adverse effect on the Company. However, there can be no assurance that the
Company will be able to obtain such alternate space on terms acceptable to the
Company.

During April 1996, Italia moved its operations to the premises of The
Lance Acquisition Corporation ("Lance"), a Massachusetts manufacturer and
distributor of various products to the giftware and collectibles market. Lance
operates in a 48,000 square foot facility located at 321 Central Street, Hudson
Massachusetts 01748. Italia had occupied approximately 10,000 square feet of

this space on a temporary basis. The Company is arranging for the sourcing of
Italia products from an established, third-party manufacturer. As of the date of
this filing, the Company has fully vacated Lance's facilities. Italia had
occupied approximately 1,750 square feet of space at International Home
Furnishings Center ("IHFC") in High Point, North Carolina, pursuant to a lease
dated May 1, 1993. The term of the lease was five years and required rent
payments of approximately $2,200 per month. The Company and the IHFC terminated
the Italia lease effective November 1996.

The Company believes all of such facilities are adequate for its current
needs; however, the Company will require approximately 1,500 to 2,000 square
feet of space for its contemplated showroom location. Inasmuch as the Company
has not selected the city in which it plans to establish such showroom, it has
no arrangements for such lease and there can be no assurance that the Company
will be able to obtain appropriate facilities on terms acceptable to the
Company.

Legal Proceedings

During April and May of 1995, Hide Tashiro commenced two lawsuits totaling
$225,000 (plus interest and attorney's fees) against the Company and others. The
complaint demands payment by

44
<PAGE>

the Company for loans made by the plaintiff. The Company believes it has
meritorious defenses against these claims since it believes that it is owed
commissions in excess of the loan payment. In April 1996 the plaintiff's motions
for summary judgement were denied and the court held that there was an issue of
fact to be tried. As of the date of this filing, there has been no further
action.

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

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

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, or that an agreement in writing exists with Gear, or that any sum of
money is owed. The complaint demands sums Gear allegedly would have received
under an agreement in a sum to be determined, but not less than $250,000.

In July 1996, certain litigation brought against the Company and its
principals and Directors by Ted Stevens, Ann Stevens and Morris Munn, as listed
below, 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. Although such Court approval has not been received as of the date of
this filing, the Company anticipates receiving such approval since to the
Company's knowledge, there have been no objections to the terms of the
settlement.

(a) 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.

(b) 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 recision 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 recision 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.

(c) 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.

45
<PAGE>

(d) 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 recision of a certain stock
sale agreement between the Company and Laurie Munn.

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 for 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 purpose of this filing, among other things, is to
register these 50,000 Class A Common Shares with the Securities and Exchange
Commission. The 50,000 Class A Common Shares are subject to a "lock-up"
agreement with VTR Capital Corporation, the Company's investment bankers. As of
June 30, 1996, the Company placed into escrow 1,250,000 shares of its Class B
Common Shares (the "Escrow Shares") with Michael Levine, Esq., attorney of Ms.
Stevens, as escrow agent (the "Escrow Agent"). The Escrow Agent shall abstain
from voting the Escrow Shares for any purpose, except in the event of either the
failure by the Company to adhere to the payment provisions noted above or the
financial insolvency of the Company. If either event occurs, Ms. Stevens will be
in a position to elect replacement Directors. Once the payment provisions in the
severance and non-compete agreements are satisfied, the Escrow Agent shall
return the Escrow Shares to the Company.

The 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 for non-payment of $150,000
plus interest. The Company claims that any obligation that it had pursuant to
this matter has been satisfied by the Company in the prior fiscal year and that
any amounts that may be unpaid are due solely by Mr. and Mrs. Munn. The Company
has not guaranteed such liabilities.

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

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

In September 1991, without admitting or denying the allegations, Max Munn,
the Company's President and Chief Executive Officer agreed with the Federal
Trade Commission ("FTC") to the

46
<PAGE>

entry of a Consent Order in an action brought against Mr. Munn and others; which
action arose out of the advertising of certain lithographs of original works of
art as regards to whether or not the artist had played a substantial role in the
production of the lithographs. The case was settled before trial or discovery
solely with entry of the above Consent Order; which enjoins Mr. Munn from making
certain representations in connection with the sale of any works of art. The
Consent Order also requires Mr. Munn for a period of five years (which expired
as of September 1996) as to the maintenance of certain records as they concern

the sale of certain lithographs.

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

47
<PAGE>

MANAGEMENT

The names and ages of the Directors, executive officers and key personnel
of the Company are as follows:

Name Age Position(s) Held with the Company
- ---- --- ---------------------------------
Max Munn 53 President, Chief Executive Officer,
Treasurer and Director

Michael Amore 49 Vice President, Chief Financial Officer and
Director

Roger Lourie 52 Director

Richard Josephberg 50 Director

Donald Feldman 58 Vice President, Sales and Marketing and
Director

Management Biographies

Brief biographies of the Directors, executive officers, and key personnel
of the Company are set forth below. All Directors hold office until their
resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining Directors. Officers of
the Company serve at the will of the Board of Directors.

Max Munn has been President and Chief Executive Officer since September
1995. In June 1996 Mr. Munn was named Chairman of the Board of Decor Group, Inc.
(See "Recent Developments.") He served as Executive Vice President, Operations
and Secretary of the Company between February 1994 and September 1995, and a
Director thereof since March 1994. He served as Vice President of A.P.F. from
May 1993 until the A.P.F. merger with the Company. From November 1990 to May
1993, he was a consultant to the Company, as well as a consultant directly and
indirectly to Imperial Enterprises, Inc., a catalog company in Japan, and the
IEI Corporation, a direct marketer, in Princeton, New Jersey. From 1981 to
February 1990 he was Chairman, President and Chief Executive Officer of
Collectors' Guild International Inc. In June 1990 Collectors' Guild filed a
petition for relief under the U.S. Bankruptcy Code and was subsequently
liquidated. Mr. Munn is subject to a Consent Order entered by the FTC in
September 1991. See "Management - Consent Order." Mr. Munn holds a Bachelor of
Architecture degree from The Massachusetts Institute of Technology and

subsequently did graduate level study in Art History at Columbia University.

Michael J. Amore has been Vice President and Chief Financial Officer since
November 1995. He was appointed to the Company's Board of Directors in January
1996. Prior to joining the Company, Mr. Amore served as Director,
Administration; Director, Corporate Finance, and as Controller from 1979 to 1995
at Olympus USA, Inc., a wholly-owned subsidiary of Olympus Optical

48
<PAGE>

Co., Ltd., a multinational manufacturer and distributor of photographic,
medical, optical and precision instruments. Mr. Amore is a certified public
accountant in the State of New York. He earned a B.S. degree in Accounting from
St. John's University in New York, and an M.B.A. degree in Investments, Banking,
and Finance from Hofstra University in New York.

Roger Lourie was named as a Director on May 4, 1995. He is an engineer and
book publisher. He has over twenty years of experience with Procter and Gamble,
Time Inc., Mead Paper, and Grolier Inc. He was Senior Vice President of
Marketing of Grolier Inc. Currently, he is a General Partner of Tremon
Associates and President of Misty Ridge Associates, which are equity investment
firms. He is also Chairman of the Board of two Connecticut-based manufacturing
concerns. He has a B.S. degree in Engineering from Rensselaer Polytechnic
Institute and M.B.A. and M.I.A. degrees from Columbia University in New York.

Richard Josephberg was named as a Director in October 1995. Since 1986, he
has been the Chairman of Josephberg Grosz & Co., Inc., a New York based
investment banking firm. Josephberg Grosz specializes in providing private
institutional capital to emerging growth companies. Mr. Josephberg has a B.B.A.
degree from the University of Cincinnati, and attended Bernard Baruch Graduate
School of Business in New York.

Donald Feldman became Vice President of Sales and Marketing on June 1,
1995, and was named a Director in February 1996. In June 1996, Mr Feldman was
named President of Decor Group, Inc. ("Decor") (See "Recent Developments".) From
April 1990 to May 1995 he served as Vice President of Sales and Marketing of
Toyo Trading Co., a major importer and marketer of decorative accessories based
in Los Angeles, California. He also has a strong merchandising background
working with Sears Roebuck as Corporate Merchandise Manager for Decorative
Accessories. Mr. Feldman expects to resign from the Company's Board of
Directors, but only after his replacement on the Company's Board of Directors is
selected and appointed, which has not yet been done.

Consent Order

In September 1991 Mr. Munn, without admitting or denying the allegations,
agreed with the FTC to the entry of a Consent Order for Permanent Injunction for
Defendant Max Munn (previously defined as the "Consent Order") in an action
brought in the U.S. District Court for the Southern District of New York (90
CIV. 2554 (LMM)) against Collectors' Guild Ltd, Inc., Collectors' Guild, Mr.
Munn and J. Robert Leshufy which action arose out of the sale of certain
lithographs of original works of art. The Consent Order arose out of a complaint

alleging that Collectors Guild, and its officer, Mr. Munn, had made advertising
representations implying that the artist had played a substantial role in the
creation and production of the lithographs. Collectors Guild and Mr. Munn denied
the allegations. The case was settled before trial or discovery, solely with
entry of the above Consent Order. The Consent Order permanently enjoins Mr. Munn
from making certain false representations in connection with the promotion, sale
or offering for sale of any art works, from removing certain mandated
disclosures on certain art, and, for a period of five years, from destroying,
mutilating, altering, or disposing of any books, records, tapes, checks, and
other business records enumerated in the Consent Order in his possession or the
possession of any business entities directly or indirectly under Mr. Munn's
control for a period of three years after creation or receipt of such documents.
Mr. Munn is also required for a period of five years to notify the FTC of any
change in his residence or

49
<PAGE>

employment within 30 days of any change and must permit FTC officials access to
his office upon five days notice for inspection purposes. The Consent Order
extends to Mr. Munn, his successors, assigns, agents, servants and employees,
and all persons or entities in active concert or participation with him who
receive actual notice of the Consent Order and, in part, to any business
entities directly or indirectly under his control or in which he owns a
controlling interest, directly or indirectly.

There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission and
Nasdaq. Officers, directors and greater-than-ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.

Based solely upon a review of Forms 3, Forms 4, and Form 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, the Company believes
that all such forms required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed, as necessary, by the officers, directors and
securityholders required to file the same.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the aggregate cash compensation paid for

services rendered to the Company during the last three fiscal years by the
Company's Executive Officers.

<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation (1) Awards Payouts
--------------------------------------------------- ---------------------- ---------
Name and Other Restricted All Other
Principal Fiscal Annual Stock Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) Compensation Awards SARs () Payouts() sation ($)
--------- ---- ---------- --------- ------------ ------ ------- --------- ----------
($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max Munn 1996 144,230
President, 1995 151,127
Chief 1994 147,126 7,000 25,000
Executive
Officer
</TABLE>

50
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. 1996 58,558
Amore 1995 --0--
Vice President, 1994 --0--
Chief Financial
Officer
Donald 1996 117,500
Feldman 1995 5,423
Vice President, 1994 --0--
Sales and
Marketing
Theodore 1996 78,115 16,000
Stevens 1995 81,000
Director (to 1994 74,800
June 21, 1996)

Ann Stevens 1996 80,769
Executive Vice 1995
President (to 1994 144,230
Sept 1995)
</TABLE>

- ----------
(1) Does not include certain automobile expenses and other perquisites which in
the aggregate do not exceed the lesser of $50,000 or 10% of the named executive
officer's compensation.

See "Executive Compensation - Employment Arrangements" for a description
of the Company's employment agreements with Messrs. Munn and Feldman.

The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named in
the above Summary Compensation Table.

Option/SAR Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Number of Securities
Underlying Percent of Total Options/SARS Exercise or
Options/SARS Granted Granted to Employees in Base Price
Name (#)(1) Fiscal Year ($/Sh) Expiration Date
- ---- ------ ----------- ------ ---------------
<S> <C> <C> <C> <C>
None.
</TABLE>

- ----------

Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values

51
<PAGE>

The following table sets forth certain information with respect to options
exercised during the fiscal year ended June 30, 1995, by the Company's Executive
Officers named in the Summary Compensation Table, and with respect to
unexercised options held by such person at the end of the fiscal year ended June
30, 1995.

<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired on Value Realized Underlying Unexercised Money Options/SARs at
Name Exercise (#)(1) $ Options/SARS at FY-End (#) FY-End ($) (2)
---- --------------- -------------- -------------------------- ---------------
<S> <C> <C> <C> <C>
None.
</TABLE>

- ----------

Directors' Compensation

Directors receive no cash compensation for their services to the Company
as directors, but are reimbursed for any expenses actually incurred in
connection with attending meetings of the Board of Directors In addition, each
outside Director is entitled to receive 10,000 Shares per year of Common Stock
of the Company pursuant to the Directors Stock Option Plan. See "Stock Option

Plans".

52
<PAGE>

Employment Arrangements

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

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

September 16, 1994; options to purchase 25,000 shares at a price of $4.00 per
share to be granted on the second anniversary; and options to purchase 25,000
shares at a price of $5.00 per share to be granted on the third anniversary. The
Agreement also provided for a bonus program based on the Company meeting certain
minimum profit goals. In April 1996, the employment of the Vice President,
Operations was terminated. The Company settled its obligations to the employee
during the subsequent quarter. This settlement took the form of severance
payments totaling approximately $27,000. No securities have been issued to the
employee as part of the settlement.

53
<PAGE>

public offering (See "Acquisitions and Strategic Alliances."), the Company and
Mr. Feldman plan to terminate Mr. Feldman's Employment Agreement. Mr. Feldman
will enter into a three (3) year employment agreement with Decor at such
Effective Date. Mr. Feldman, who is President of Decor, will receive a salary of
$117,500 per annum and an annual bonus equal to two percent (2%) of the amount
by which Decor's net sales exceed the sales recorded by Decor for the year
ending June 30, 1997. In addition, Mr. Feldman will be granted options to
purchase 10,000 shares of Common Stock of Decor at an exercise price of $2.50
per share for each full year of employment under the agreement. Decor will also
reimburse Mr. Feldman for bona fide business expenses including up to $400 per
month for the use of an automobile and $200 per month for insurance. As of the
date of this filing, Mr. Feldman has not yet resigned from the Company's Board
of Directors. He has agreed to continue to serve as a Director of the Company
until the Company selects a replacement, at which time Mr. Feldman will resign
from the Company's Board of Directors. The Company is actively seeking an
acceptable replacement as of the date of this filing.

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

Consulting Arrangements

Effective as of January 4, 1994, the Company entered into a two year
Marketing and Organizational Agreement (the "Marketing Agreement") with Robert

M. Leopold. Pursuant to the Marketing Agreement, Mr. Leopold will consult with
and advise the Company concerning its marketing plans, business operations,
organization, management, strategic planning, products and services,
acquisitions, mergers, and other matters. Mr. Leopold will be paid $9,375 each
quarter in advance together with reimbursement for expenses incurred not to
exceed $200 per month. In August 1995, the Company agreed to issue, at a future
date, 60,000 Class A Common Shares to Mr. Leopold in settlement of all current
and future liabilities, under this agreement. These shares, which bear a
restrictive legend, were approved by the Company's Board of Directors in
November 1995. In conjunction with the issuance of these shares, approximately
$55,000 was charged against earnings during the year ending June 30, 1996.

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.

From time-to-time during prior periods, Sol Munn, uncle of Max Munn,
President and Chief Executive Officer of the Company has provided various
consulting services to the Company with respect to the marketing of custom
picture frames. 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 these services. The shares, which bear a restrictive legend,
were issued on April 12, 1996. In conjunction with

54
<PAGE>

the issuance of these shares, approximately $54,000 of charges against earnings
were recorded during the year ended June 30, 1996. This filing is meant, among
other things, to register these 150,000 Class A Common Shares with the
Securities and Exchange Commission. The 150,000 Class A Common Shares are
subject to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers.

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.

Stock Option Plans

The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc.
1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides
for the granting of options to officers, employees and consultants to purchase
not more than an aggregate of 250,000 Class A Shares. Directors of the Company
are not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.

Pursuant to the 1994 Plan, the Board of Directors or a stock option
committee established by the Board to administer the 1994 Plan determines the
persons to whom options are granted, the number of Class A Shares subject to
option, the period during which the options may be exercised and the option
exercise price. With respect to incentive stock options, no option may be
granted more than ten years after the effective date of the 1994 Plan or
exercised more than ten years after the date of grant (five years if the
optionee owns more than ten percent of the Class A Shares of the Company at the
time of grant). Additionally, with respect to incentive stock options, the
option price may not be less than 100% of the fair market value of the Class A
Shares on the date of the grant (110% if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). The fair market
value of the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the Class A Shares are not listed
and traded upon a recognized securities exchange, on the basis of recent
purchases and sales of Class A Shares in arms-length transactions or based on
the last reported sale or transaction price for such stock on the date of grant
or, if the shares are traded on a recognized securities exchange or quoted on
the Nasdaq National Market System upon the basis of the last reported sale or
transaction price on the date of grant or, if the shares were not traded on such
date, on the date nearest preceding that date. Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company.

The Board of Directors or the Committee may, in its discretion, at any
time prior to the exercise of any option, grant in connection with such option
the right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise price
of the option or portion thereof surrendered.

On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase

75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice President
of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.

55
<PAGE>

The Director Plan. On June 20, 1994 the Board of Directors approved the
1994 Director Stock Option and Appreciation Rights Plan (the "Director Plan").
The Director Plan was adopted to provide an incentive to Directors through
automatic and discretionary grants of stock options. The Director Plan provides
for the grant of options intended to qualify as "incentive stock options" under
the Code as well as options which do not so qualify.

The Director Plan may be administered by a committee appointed by the
Board of Directors of the Company (the "Committee"). Options under the Director
Plan may be granted to each person who is a Director of the Company on the date
of grant. All Directors of the Company are eligible to receive options under the
Director Plan.

The Director Plan provides for the granting of options to Directors in
such amount and, subject to the terms of the Director Plan, upon such terms as
the Board or Committee determines in its discretion in order to reward the
recipient director for extraordinary service to the Company. In addition, on the
second Monday of May of each year each person who is then a director of the
Company shall be automatically granted an option to purchase 10,000 of the
Company's Class A Shares, subject to adjustment as provided for in the Director
Plan. The aggregate number of shares for which options may be issued pursuant to
the Director Plan is 250,000 shares. The exercise price for options granted
under the Director Plan must be equal to the fair market value per Class A Share
on the date of grant. The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the Director Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the Nasdaq National
Market System upon the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Each option granted under the Director Plan expires ten
years after the date of grant, unless a lesser period is specified by the
Committee.

In the event an optionee ceases to be a Director of the Company for any
reason at a time when he holds an option, he may exercise only such options as
are exercisable at the time he ceases to be a Director, within the original term
of the option. Options which are not exercisable at the time an optionee ceases
to be a Director shall terminate. In the event an optionee dies, the Director
Plan provides for the exercise of an option on behalf of the deceased Director.

On September 16, 1994, the Board of Directors granted Incentive Options to
purchase 25,000 Class A Shares to each of Theodore Stevens, then President and
Max Munn, President and Chief Executive Officer and then Executive Vice
President-Operations under the Director Plan at an exercise price equal to 110%
of the fair market value of the shares on the date of grant, or $3.85 per share,
all of which options immediately vested. As of the date of this filing, with Mr.
Stevens no longer an officer or Director of the Company, the Company does not
plan to issue to Mr. Stevens any additional shares pursuant to any agreement
currently in effect, except that Mr. Stevens currently holds 269,750 shares of
the Company's Class B Common shares each of which are convertible into one Class
A Common share at Mr. Stevens option.

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<PAGE>

Profit Sharing and Deferred Compensation Plans

In July 1991 the Company adopted a Qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.

Principal Stockholders

Each Class A Share is entitled to one vote and each Class B Share is
entitled to five votes. The Company has no other voting securities outstanding.
It does, however, have certain securities outstanding that are convertible into
Class A Common Shares. As of the date of this filing, such securities are: (1)
1,140,000 shares of Series A Preferred Stock, each convertible into 3 shares of
Class A Common stock commencing September 18, 1996 (subject to the filing with
the Securities and Exchange Commission of a post-effective amendment to the
Company's September 18, 1995 Registration Statement whereby such Preferred
Shares were registered with the Commission), (2) 3,055,588 Class WA Warrants,
each exercisable into one Class A Common share and one Class WB Warrant, and (3)
845,150 Class WB Warrants, each exercisable into one Common A share, and (4)
2,270,000 Class WC Warrants, each exercisable into one share of Series A
Preferred Stock (subject to the filing with the Securities and Exchange
Commission of a post-effective amendment to the Company's September 18, 1995
Registration Statement whereby such Class WC Warrants were registered with the
Commission.)

The following table sets forth certain information as of the date hereof
with respect to: (1) each executive officer and director; (2) all executive
officers and directors of the Company as a group; and (3) all persons known by
the Company to be the beneficial owners of five percent or more of the Company's
Class A or Class B Shares of Common Stock. The table below also sets forth as to
each holder the percent of voting power represented by the Class A Shares (with
one vote per share) and the Class B Shares (with five votes per share) voting as
a single class prior to conversion of the Class B Shares to Class A Shares and
after giving effect to the conversion of such Class B Shares and assuming no
exercise of outstanding Warrants.

<TABLE>
<CAPTION>
Percent of Votes (2)
------------------------------
After
Prior to Conversion
Conversion of of all
Name and Address of Number of Percent of all Class B Class B
Beneficial Owner (1) Title of Class Shares Class (2) Shares (3) Shares(4)
- -------------------- -------------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Theodore Stevens Class A Shares 319,250(5) 5.5% 10.0% 5.5%
Class B Shares 269,750(6) 13.2%

Max Munn Class A Shares 45,000(7)(8) 0.8% * *
Class B Shares -0- (8) -0-

Laurie Munn Class A Shares 519,750(9) 9.0% 18.6% 9.0%

Class B Shares 519,750(9) 25.5%

Michael Levine Class A Shares -0- -0- 44.8% 21.6%
as escrow agent Class B Shares 1,250,000(10) 61.3%
</TABLE>

57
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C>
Decor Group, Inc. Class A Shares 200,000 3.4% 1.4%(11) 3.4%(11)
320 Washington St. Class B Shares -0- -0- 0%(11) 0%(11)
Mt. Vernon, NY 10553 Series A Preferred 200,000 17.6% 8.7%(11)

All Executive Officers Class A Shares 614,750(12) 10.6% 19.3% 10.6%
and Directors as a Group Class B Shares 519,750(13) 25.5%
(5 persons)
</TABLE>

* Less than 1%.

(1) Mr. Munn is the President and Chief Executive Officer and a Director
of the Company and can be contacted at the Company's principal
executive offices at 320 Washington Street, Mt. Vernon, NY 10553.
Mr. Stevens is married to Mr. Munn's sister, Ann Stevens; and Max
Munn and Laurie Munn are husband and wife. Such person's percentage
ownership is determined by assuming that the options or convertible
securities that are held by such person which are exercisable within
60 days from the date hereof have been exercised or converted, as
the case may be.

(2) Does not give effect to the exercise of the Warrants, the

Underwriters or prior underwriters Warrants or stock options granted
under the Plans other than as noted.

(3) Reflects the percentage of the votes to which the voting Common
Stock owned is entitled to vote if the Class A Shares and Class B
Shares vote as one class. Assumes that the 2,039,500 Class B Shares
have not been converted to Class A Shares and, consequently, have
five votes per share (aggregating 10,197,500 votes).

(4) Reflects the percentage of the votes to which the voting Common
Stock owned is entitled to vote if the Class A Shares and Class B
Shares vote as one class. Assumes the 2,039,500 Class B Shares have
been converted to 2,039,500 Class A Shares and, consequently, have
one vote per share rather than five votes per share.

(5) Includes 269,750 Class A Shares into which the 269,750 Class B
Shares are convertible. Does not include 50,000 Class A Shares
issued to Ann Stevens, wife of Mr. Stevens, pursuant to her
settlement agreement with the Company, such 50,000 Class A Common
Shares being registered with the Securities and Exchange Commission
as part of this filing. (See Legal Proceedings.)

(6) Each Class B Share entitles the holder to five votes per share and
is convertible at any time into one Class A Share with one vote per
Class A Share.

(7) Represents Class A Shares issuable to Mr. Munn upon exercise of an
Incentive Stock Option issued pursuant to the Director Plan
established on June 20, 1994, and a grant provided on Sept. 16,
1994.

(8) Does not include 519,750 Class B Shares (convertible into 519,750
Class A Shares) held by Mr. Munn's wife. Mr. Munn disclaims
ownership of any such shares.

(9) Includes 519,750 shares of Class B Shares (convertible into 519,750
Class A Shares).

(10) Includes 1,250,000 Class B Shares issued to Mr. Levine as escrow
agent pursuant to the settlement reached by the Company and Ann
Stevens with respect to a prior employment agreement. (See Legal
Proceedings.)

(11) Includes 200,000 shares of Class A Common Shares and 200,000 Shares
of Series A Preferred shares issued pursuant to the Company's
investment in Decor Group, Inc. (See Acquisitions and Strategic
Alliances.) Each Series A Preferred share is convertible into three
shares of Class A Common Stock. If Decor Group, Inc. were to convert
its Series A Preferred Shares into Class A Common Shares, it would
have potential voting rights of 8.7%, assuming conversion of the
Class B shares into Common A Shares.

(12) Includes 519,750 Class B Shares owned by Laurie Munn, wife of Max
Munn, President and Chief Executive Officer, which are convertible

into 519,750 Class A Shares, and 85,000 Shares of Class A Common
Stock issuable upon the exercise of options pursuant to existing
stock option plans.

(13) Represents 519,750 Class B Shares owned by Laurie Munn, wife of Max
Munn, President and Chief Executive Officer.

There are no agreements or other arrangements or understandings known to
the Company concerning the voting of the Common Stock of the Company or
otherwise concerning control of the Company which are not disclosed herein.
There are no pre-emptive rights applicable to the Company's securities.

CERTAIN TRANSACTIONS

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<PAGE>

In October 1990 A.P.F. issued 100 shares of its Common Stock, no par
value, to Theodore Stevens, then President and a former Director of the Company,
for aggregate consideration of $225,000 and in October 1990 A.P.F. issued 165
shares of its Preferred Stock, $1,000 par value per share, to Theodore Stevens
in consideration for the payment of $165,000. On June 30, 1992, A.P.F. converted
certain indebtedness arising from services rendered and loans provided by Decor
Holdings, Inc, a company controlled by Theodore Stevens, to A.P.F. in the amount
of $114,000 to 114 shares of Preferred Stock of A.P.F. In March 1994 such shares
were transferred by Decor to Theodore Stevens and all of such 279 shares of
Preferred Stock were converted by Mr. Stevens into 124 shares of A.P.F. Common
Stock. As a result of the Company's recapitalization, the Company issued
1,000,000 Class B Shares (constituting all of the then issued and outstanding
Class B Shares of the Company) to Theodore Stevens in exchange for all of the
issued and outstanding Common Stock of A.P.F., the predecessor to the Company.

In August 1995, Theodore Stevens, a Director of the Company, and Laurie
Munn, wife of Max Munn, President and Chief Executive Officer and a Director of
the Company, entered into an agreement whereby an existing option granted by Mr.
Stevens to Mrs. Munn to purchase 500,000 shares of Class B Common Stock at $3.50
per share was canceled and Mr. Stevens sold to Mrs. Munn 269,750 shares of Class
B Common Stock for $150,000 payable by an initial installment of $15,000 and a
promissory note for the balance of the purchase price payable in 15 years with
interest at the rate of 6.6% per annum. On December 1, 1995, Mr. Stevens filed a
complaint in United States District Court, Southern District of New York against
Ms. Munn seeking, among other things, the recession of this stock sale. In June
1996, the parties agreed to a settlement without either the recession of the
stock sale or the need for additional payments by any party to the transaction.
(See "Legal Proceedings.")

term for an additional one year period upon 60 days notice. In March 1994 the
bearer of the note agreed to purchase certain works of art at 58% above the
Company's cost in full satisfaction of the above note. The Company recorded
approximately $87,000 credit to earnings pursuant to this transaction. On August
13, 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn, co-trustees,
commenced action in the Supreme Court of the State of New York, County of
Suffolk against Laurie Munn, Max Munn, and the Company pursuant to this
transaction, seeking monetary damages for the sum of $111,000. (See "Legal
Proceedings.")

On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then
respectively President, Executive Vice President and Executive Vice President of
the Company, personally guaranteed the obligations of the Company under a
Promissory Note dated July 7, 1994 in the amount of $950,000 at an interest rate
of prime plus one percent (9.25% as of the date of this filing) to a New York
bank. Pursuant to terms of settlement involving various issues (See "Legal
Proceedings"), in the event that the Company's debt to the Bank is not repaid in
full prior to March 31, 1997, the Company will pay Ann Stevens, who is married
to Mr. Stevens, .2083% of the outstanding balance per month as compensation for
her personal guarantee. As of the date of this filing, the outstanding balance
of this note totals $815,000.

On February 15, 1996, the Company's Italia Collection subsidiary entered
into a Financing Arrangement with a New York corporation 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. Interest is calculated on the daily cash
balance at the rate of prime plus 9% per annum (18% 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 $813,000. (See "Liquidity and Capital

59
<PAGE>

Resources.") This Financing Arrangement has been personally guaranteed by Max
Munn, the Company's President and Chief Executive Officer and his wife.

For the years ended June 30, 1996 and June 30, 1995, the Company paid
approximately $30,000 and $46,000, respectively, to the father of the President,
and Chief Executive Officer for consulting services. See "Executive Compensation
- - Consulting Arrangements."

In October 1994, the Company borrowed the sum of $33,000 from the Vice
President and Chief Financial Officer of the Company. The amount due is
evidenced by two promissory notes dated October 27, 1994 and October 28, 1994
for $8,000 and $25,000, respectively, which bore interest rates of 18% and 12%
per annum, respectively. The principal and interest were initially due November
17, 1994 and November 18, 1994, respectively, and have been extended to February
15, 1995. Unpaid sums bear interest at the rate of 18% per annum plus $160. In
April, 1995, the Company paid all principal and interest due on both promissory
notes.

In October 1994, the Company borrowed the sum of $8,000 from the President
of the Company. The amount due was evidenced by a promissory note dated October
27, 1994, which bore interest at a rate of 12% per annum. The principal and
interest were due November 17, 1994. In November 1994, the Company repaid the
loan. In addition, in November and December 1994, the Company advanced an
aggregate amount of $13,000 to the then Executive Vice President-Operations of
the Company, and now its President and Chief Executive Officer. This amount will
be repaid by the President and Chief Executive Officer to the Company during the
twelve months ended October 1997 at an 18% annual rate of interest.

On February 8, 1996, the Company entered into a demand loan for
approximately $38,000, bearing 18% interest, with the President and Chief
Executive Officer of the Company. This note will be repaid by the President and
Chief Executive Officer to the Company during the twelve months ended October
1997, with interest as specified above.

In February 1996, the Company's Board of Directors approved the issuance
to Sol Munn, uncle of the President and Chief Executive Officer of the Company,
of 150,000 shares of the Company's Class A Common Stock, in consideration for
past consulting services provided. These shares, which bear a restrictive
legend, were issued on April 12, 1996. In conjunction with the issuance of these
shares, approximately $54,000 of charges were recorded against earnings during
the year ended June 30, 1996. This filing is meant, among other things, to
register these 150,000 Class A Common Shares with the Securities and Exchange
Commission. The 150,000 Class A Common Shares are subject to a "lock-up"
agreement with VTR Capital Corporation, the Company's investment bankers.

60
<PAGE>

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 value of this transaction.

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. This filing is
meant, among other things, to register these 50,000 Class A Common Shares with
the Securities and Exchange Commission. The 50,000 Class A Common Shares are
subject to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers. 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.

The Company will not permit loans or other transactions among the Company
and the officers, directors, principal shareholders, or affiliates of any of
them for other than bona fide business purposes or on terms less favorable than
could be obtained from third parties, unless approved by a majority of the
disinterested directors and the independent directors, if any, of the Company.

See "Executive Compensation - Employment Arrangements" and "Executive
Compensation - Consulting Arrangements" for descriptions of the present
employment agreement and previous consulting arrangement with Max Munn,
President and Chief Executive Officer of the Company and certain other related
and unrelated parties.

Max Munn may be deemed to be a "parent" or "promoter" of the Company, as
that term is defined in the Securities Act.

DESCRIPTION OF SECURITIES

Common Stock

The Certificate of Incorporation of the Company authorizes the issuance of
up to (i) 30,000,000 shares of Class A Common Stock, par value $.001 per share,
(previously defined as "Class A Shares") of which 4,312,671 Class A Shares are
issued and outstanding as of the date hereof and (ii) 2,500,000 shares of Class
B Common Stock, par value $.001 per share (previously defined as "Class B
Shares") of which 2,039,500 Class B Shares are issued and outstanding as of the
date hereof. The holders of shares of Common Stock: (i) have equal ratable
rights to dividends from funds legally available therefor, when, as and if

declared by the Board of Directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock, upon liquidation, dissolution or winding up of the
affairs of the Company; and (iii) do not have preemptive or subscription rights
and there are no redemption or sinking fund provisions applicable thereto. All
shares of Common Stock issued and outstanding are duly authorized, fully paid
and nonassessable.

Class A Shares. Each Class A Share is entitled to one non-cumulative vote
per share on all matters on which stockholders may vote at meetings of
stockholders. The Class A Shares are not convertible into any other securities
of the Company.

61
<PAGE>

Class B Shares. Each Class B Share is entitled to five non-cumulative
votes per share on all matters on which stockholders may vote at all meetings of
stockholders. The Class B Shares are convertible on a one-for-one basis at any
time after issuance at the option of the holder into Class A Shares. Issuance of
additional Class B Shares could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Class A Shares.

Except as otherwise required by law, the holders of the Common Stock shall
vote together as a single class on all matters.

Preferred Stock

The Certificate of Incorporation of the Company authorizes the issuance of
up to 5,300,000 shares of Preferred Stock, $.01 par value per share. Prior to
September 18, 1995, none of such Preferred Stock had been designated or issued.
On September 18, 1995, the Company's "Registration Statement" with respect to
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 was declared
effective by the Securities and Exchange Commission. 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. The Board
of Directors is authorized to issue shares of Preferred Stock from time to time
in one or more series and, subject to the limitations contained in the
Certificate of Incorporation and any limitations prescribed by law, to establish
and designate any such series and to fix the number of shares and the relative
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. If shares of Preferred Stock are issued
with voting rights, such issuance could affect the voting rights of the holders
of the Company's Class A Shares and Class B Shares by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights. Shares of Preferred Stock with conversion rights could
potentially increase the number of shares of Common Stock outstanding. Issuance
of Preferred Stock could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Class A Shares. Also, Preferred Stock could have

preferences over the Class A Shares (and other series of stock) with respect to
dividends and liquidation rights. As of the date of this filing, the Company has
issued 1,140,000 shares of Series A Preferred Stock, all of which are
convertible into three shares of Common A shares beginning September 17, 1996.

Series A 10% Cumulative Convertible Preferred Stock

The Series A Preferred Stock consists of 2,870,000 shares of which
1,140,000 shares are currently issued and outstanding. Each share of Series A
Preferred Stock is convertible commencing one year from the date this Prospectus
into 3 shares of Class A Common Stock. After September 17, 2000, it is
redeemable by the Company in whole or in part at $5.50 per share upon 30 days
prior written notice. The Series A Preferred Stock is entitled to a dividend,
prior to any payment of dividends on the Class A or Class B Common Stock, of
$0.50 per share per annum payable in semi-annual installments of $0.25 per
share. If the Series A Preferred stock dividend is not paid, it accumulates
until paid in full to date. The Company may elect to pay the Series A Preferred
Stock dividend either in cash or in shares of Class A Common Stock shall be
issued for such purposes on the basis of the average closing prices of the Class
A Common Stock for the ten business days prior to the date of declaration of the
Series A Preferred Stock dividend. The Series A Preferred Stock shall not have
any right to vote except to the extent, if any, required by Delaware Law. Upon
liquidation of the Company, the Series A Preferred Stock is entitled to receive
$5.00 per share plus accrued and unpaid dividends before any payment is made to
the holders of Class A and Class B Common Stock.

Redeemable Warrants

Class WA Warrants. Each Class WA Warrant entitles the registered holder
thereof to purchase one Class A Share and one Class WB Warrant at a combined
exercise price of $1.50 until June 23, 1997. The combined exercise price of the
Class WA Warrants as originally issued was $6.00. On March 29, 1995 the Company
announced that because of certain sales of Class A Shares by the Company, the
combined exercise price of each Class WA Warrant had been reduced to $5.17 and
each Class WA Warrant now entitled the holder to purchase 1.1 Class A Shares and
1.1 WB Warrants; and that the exercise price of each WB Warrant had been reduced
from $7.00 to $6.03 (subsequently reduced to $2.00 - see below) and each Class
WB Warrant now entitles the holder

62
<PAGE>

to purchase 1.1 Class A Shares. On April 13, 1995 the Board of Directors, as
permitted by the terms of the Warrant Agreements, reduced the combined exercise
price of each of the Class WA Warrants to $1.50 for one share of Class A Stock
and for one Class WB Warrant in order to facilitate the sale of 300,000 shares
of Class A Stock by the Company. The exercise price of the Class WA Warrants is
subject to adjustment under certain circumstances. Fractional Class A Shares
will not be issued upon exercise of the Class WA Warrants and, in lieu thereof,
a cash adjustment based on the market value of the Class A Shares immediately
prior to the date of exercise will be made.

The Class WA Warrants are redeemable by the Company at any time after June

22, 1995, and prior to their exercise upon notice of redemption in writing to
the Class WA Warrant holders of record, giving a 30-day notice of such
redemption. The redemption price of the Class WA Warrants is $0.01 per Warrant
if the closing bid price per Class A Share has equaled or exceeded 120% of the
then exercise price of the Class WA Warrants for 20 consecutive trading days
prior to any such call for redemption. Any Class WA Warrants so redeemed, and
not exercised by the end of the date specified in the notice of redemption, will
expire on the books of the Company and cannot be exercised.

Class WB Warrants. Each Class WB Warrant entitles the registered holder
thereof to purchase one Class A Share at a purchase price of $2.00 until June
22, 1999. The exercise price of the Class WB Warrant was previously $6.03. In
January 1996, the Company announced that the exercise price of the Class WB
Warrant is reduced to $2.00 per Class A Common share. The exercise price of the
Class WB Warrants is subject to adjustment under certain circumstances.
Fractional Class A Shares will not be issued upon exercise of the Class WB
Warrants and, in lieu thereof, a cash adjustment based on the market value of
the Class A Shares immediately prior to the date of exercise will be made.

The Class WB Warrants are redeemable by the Company at any time prior to
their exercise after June 22, 1995, and upon notice of redemption in writing to
the Warrant holders of record, giving a 30-day notice of such redemption. The
redemption price of the Class WB Warrants is $0.01 per Warrant if the closing
bid price per Class A Share has equaled or exceeded 120% of the then exercise
price of the Class WB Warrants for 20 consecutive trading days prior to any such
call for redemption. Any Class WB Warrants so redeemed, and not exercised by the
end of the date specified in the notice of redemption, will expire on the books
of the Company and cannot be exercised.

Class WC Warrants. Each Class WC Warrant entitles the holder to purchase
one share of Preferred Stock during the five year period commencing September
18, 1995 at a purchase price of $5.50, subject to the maintenance by the Company
of a current registration statement filed with the Securities and Exchange
Commission. Commencing one year from the date of issuance, each Class WC Warrant
shall be redeemable by the Company at a redemption price of $.05 per Warrant
upon thirty days prior written notice to holders; provided, however, that the
closing average bid price of the Preferred Stock in the over-the-counter market,
for a period of twenty consecutive trading days prior to such call for
redemption, shall have been 110% or more of the then effective exercise price of
the Class WC Warrants.

The Warrants are exercisable by tendering to American Stock Transfer &
Trust Company, New York (the "Warrant Agent") the appropriate exercise price
along with the Warrant certificate (with the election to purchase section on the
reverse side of the certificate properly filled out.) The Company shall then
issue and sell such fully paid and nonassessable Class A Shares, Class WB
Warrants, and Series A Preferred Shares, as applicable, to the Warrant holder as
specified on the certificate so tendered. Payment of the exercise price shall be
made in cash or by certified check or bank draft made payable to the order of
the Company. For further information, reference is made to the Warrant
Agreements which has been filed as exhibits to the Registration Statement of
which this Prospectus is a part.

The Warrants pursuant to their terms are subject to adjustment upon the

occurrence of certain events including subdivisions or combinations of the Class
A Shares or Preferred Stock, as the case may be. The Company may at any time,
and from time to time, extend the exercise period of the Warrants, provided that
written notice of such extension is given to the Warrant holders prior to the
expiration date then in effect. Also, the Company may reduce the exercise price
of the Warrants for limited periods or through the end of the exercise period if
deemed appropriate by the Board of Directors of the Company. Notice of any
reduction of the exercise price will be given to the Warrant holders. Prior to
any such extension or modification of the exercise price of

63
<PAGE>

such Warrants, the Company may be required to amend the Registration Statement
covering such securities or to file a new registration statement.

Representative's Warrants

In connection with the June 1994 Initial Public Offering, the Company sold
to the Representative's designees for nominal consideration, the
Representative's Warrants to purchase up to an aggregate of 45,000 Class A
Shares, 40,000 Class WA Warrants and 22,500 Class WB Warrants. The
Representative's Warrants are exercisable through June 22, 1999 at exercise
prices of $1.50, $0.12 and $0.12 as to the Class A Shares, Class WA Warrants and
Class WB Warrants, respectively, subject to certain adjustments. In October 1994
the Company repurchased Representative's Warrants to purchase 30,015 Class A
Shares, 40,000 Class WA Warrants and 22,500 Class WB Warrants from the holder
thereof. The holders of the remaining outstanding Representative's Warrants have
the opportunity to profit from a rise in the market price of the securities, if
any, without assuming the risk of ownership, with a resulting dilution in the
interest of other shareholders. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Representative's Warrants are outstanding. At any time at which the
holder thereof might be expected to exercise them, the Company would probably be
able to obtain additional capital on terms more favorable than those provided by
the Representative's Warrants. See "Risk Factors."

In connection with the Preferred Stock offering in September 1995, the
Company sold to VTR, Underwriters Warrants, for an aggregate purchase price of
$20.00, entitling the Holders to purchase 40,000 shares of Series A Preferred
Stock and 20,000 Class WC Warrants. These Warrants shall not be exercisable
until September 17, 1996. Such Warrants shall be exercisable for a period of
four years commencing September 17, 1996. The exercise price for each Warrant to
purchase Series A Preferred Stock shall be $6.00 per share, and the exercise
price to purchase WC Warrants is $.06 each. The Company has agreed that, while
the VTR Warrants are outstanding, it will not enter into any merger or
reorganize or to take any other action which would terminate the VTR Warrants.
The Warrants contain anti-dilution adjustment provisions.

Business Combination Provisions

The Company is subject to a Delaware statute ("Section 203") regulating
"business combinations," defined to include a broad range of transactions

between Delaware corporations and "interested stockholders," defined as persons
who have acquired at least 15% of a corporation's outstanding voting stock.
Under the law, a corporation which is subject to Section 203 may not engage in
any business combination with any interested stockholder for a period of three
years from the date such person became an interested stockholder unless certain
conditions are satisfied. Section 203 contains provisions enabling a corporation
to avoid the statute's restrictions.

Anti-Takeover Measures

The Company's Certificate of Incorporation and By-Laws contain provisions
that could discourage potential takeover attempts and prevent shareholders from
changing the Company's management. The existence of such anti-takeover
provisions could, among other things; (1) result in the Company being less
attractive to a potential acquirer and (2) result in shareholders receiving less
for their shares than otherwise might be available in the event of a take-over
attempt. The By-Laws provide that certain vacancies on the Board of Directors
shall be filled by a majority of the remaining Directors then in office.

In addition, the Company's By-Laws limit the ability to call a special
meeting of shareholders to the president or any executive vice president upon
the request in writing of two-thirds of the Board of Directors or upon the
written request of shareholders of the Company owning two-thirds of each class
of stock issued and outstanding and entitled to vote. The By-Laws also provide
that no proposal by a shareholder shall be presented for vote at a special or
annual meeting of shareholders unless such shareholder, not later than the close
of business on the fifth day following the date on which notice of the meeting
is first given to shareholders, shall provide the Board of Directors or the
secretary of the Company with written notice of intention to present a proposal
for action at the forthcoming meeting of shareholders, which notice shall
include the name and address of such shareholder, the number of voting
securities held of record and held beneficially, the text of the proposal to be
presented at the meeting and a statement in support of the proposal. Any
shareholder may make any other proper proposal at an annual or special meeting
of shareholders and the same may be discussed and considered, but unless stated
in

64
<PAGE>

writing and filed with the Board of Directors or the secretary prior to the date
set forth hereinabove, such proposal shall be laid over for action at an
adjourned, special or annual meeting of the shareholders taking place 60 days or
more thereafter. This provision shall not prevent the consideration and approval
or disapproval at the annual meeting of reports of officers, directors, and
committees; but in connection with such reports, no new business shall be acted
upon at such annual meeting unless stated and filed as described above.

Transfer and Warrant Agent

The Transfer Agent for the Class A and Class B Common Stock, the Series A
Preferred Stock, and the Warrant Agent for all classes of Warrants is American
Stock Transfer & Trust Company, New York, New York.

Registration Rights

The holders of the remaining Representative's Warrants and VTR Warrants
have demand and piggy-back registration rights with respect to the
Representative's Warrants and VTR Warrants and the securities underlying the
Representative's Warrants and VTR Warrants for a period of five years. Any
exercise of such registration rights may result in dilution in the interest of
the Company's shareholders, hinder efforts by the Company to arrange future
financings of the Company and/or have an adverse effect on the market price of
the Company's Class A Shares and/or Warrants.

65
<PAGE>

MARKET FOR THE COMPANY'S SECURITIES
AND RELATED STOCKHOLDER MATTERS

Prior to the Initial Public Offering, there existed no public trading
market for any of the Company's securities. In connection with the Initial
Public Offering, the Company applied for and was granted inclusion of its
securities for quotation on Nasdaq. The Class A Shares and the Class WA Warrants
commenced quotation on Nasdaq on June 23, 1994 under the symbols "INTXA and
INTXW", respectively, and the Class WB Warrants commenced quotation on June 24,
1994 under the symbol "INTXZ." On September 18, 1995, the Company's Series A
Preferred Shares and Class WC Warrants commenced quotation under the symbols
"INTXP" and "INTXL" respectively. While the Company's securities are currently
listed for quotation on Nasdaq, there can be no assurance given that the Company
will be able to satisfy the requirements for continued quotation on Nasdaq or
that such quotation will otherwise continue; nor can there be any assurance
given that any market for the Company's securities that has developed since
completion of the Initial Public Offering or the Preferred Stock Offering will
continue or be sustained. See "Risk Factors - No Assurance of Public Market or
Continued Nasdaq Listing."

The following table sets forth, for the periods indicated, the average
closing bid prices for the Class A Shares, the Class A Warrants the Class B
Warrants the Series A Preferred Shares, and the Class WC Warrants for the
periods such securities have been trading on Nasdaq.

<TABLE>
<CAPTION>
Class A Com Class WA Wt Class WB Wt Series A Pfd Cass WC Wt
----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Fiscal year - June 1995
Quarter ended - Sept 94 4.72 1.81 0.60 N/A N/A
Quarter ended - Dec 94 3.00 0.85 0.47 N/A N/A
Quarter ended - Mar 95 2.32 1.09 0.25 N/A N/A
Quarter ended - June 95 1.69 0.72 0.12 N/A N/A

Fiscal year - June 1996
Quarter ended - Sept 95 1.50 1.25 0.13 7.50 2.50

Quarter ended - Dec 95 1.25 1.12 0.20 7.13 3.00
Quarter ended - Mar 96 2.59 1.33 0.61 6.17 2.38
Quarter ended - June 96 3.55 1.39 0.83 6.00 1.93

Fiscal year - June 1997
Quarter ended - Sept 96 2.86 2.11 1.09 6.29 1.79
</TABLE>

(1) - For the period from June 23, 1994, through June 30, 1994.

As of the date of this filing, there were approximately 1,111 beneficial
owners of Class A Shares and three beneficial owners of Class B Shares. At this
date, there were 4,312,671 Class A Shares, 2,039,500 Class B Shares, 3,055,588
Class WA Warrants, 845,150 Class WB Warrants, 1,140,000 Series A Preferred
Shares and 2,270,000 Class WC Warrants outstanding. The closing bid and ask
prices of the Class A Shares, Class WA Warrants, Class WB Warrants, Series A
Preferred and WC Warrants on Nasdaq on January __, 1997, were $____ and $____
per Class A Share, respectively; $____ and $____ per Class WA Warrant,
respectively; $____ and $____ per Class WB Warrant, respectively, $____ and
$____ per Series A Preferred Share, respectively, and $____ and $____ per Class
WC Warrant, respectively.

The Company has never paid and does not anticipate paying any cash
dividends on its Class A or Class B Shares in the foreseeable future, but
instead intends to retain all working capital and earnings, if any, for use

66
<PAGE>

in the Company's business operations, and in the expansion of its business. 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. On September 17, 1996, the Company issued a press
release announcing that it will postpone for approximately one month the Record
Date for the dividend payable on its Series A 10% Cumulative Convertible
Preferred Stock. On December 17, 1996, the Company issued a press release
announcing that it expects to declare a dividend on its Series A 10% Cumulative
Convertible Preferred Stock, cumulative to March 1997, as of a record date in
the month of February 1997, with a payment date in the month of March 1997. See
"Risk Factors - Lack of Dividends."

<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

As of the date of this filing, there are 4,312,671 Class A Shares
outstanding, 2,039,500 Class B Shares outstanding, and 1,140,000 Series A
Preferred Shares outstanding. All except 1,270,000 of such Class A Shares are
presently fully tradeable without restriction or further registration under the
Securities Act, except that any such shares owned by affiliates of the Company
will be subject to the limitations of Rule 144 under the Securities Act. As of
the date of this filing, Laurie Munn, wife of the Company's President and Chief
Executive Officer owns 519,750 shares of the Company's Class B Common shares,
and Ted Stevens, a former Director, owns 269,750 of such Class B shares, and
Michael Levine, Esq. as Escrow Agent owns 1,250,000 of such Class B shares. (See
"Legal Proceedings".) These holdings comprise all of the Company's outstanding
Class B Common shares as of the date of this filing. Pursuant to agreements with
the Company's investment banking firm, and in connection with the Company's
September 18, 1995 offering of preferred stock and warrants, the outstanding
Class B shares may not be sold or otherwise disposed before March 17, 1997
without the prior consent of the Company's investment banking firm. See "Certain
Transactions." In the event any shares not currently salable become salable by
means of registration, exemption from registration or eligibility for sale under
Rule 144 and the holders of such shares elect to sell such shares in the public
market, there may be a negative effect on the market price of the Company's
securities and on the ability of the Company to obtain additional equity
financing.

In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act, is
entitled to sell within any three-month period a number of restricted shares
beneficially owned for at least two years that does not exceed the greater of
(i) one percent of the then outstanding Class A Shares (43,127 Class A Shares as
of the date hereof) or (ii) the average weekly trading volume in the Class A
Shares during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain requirements as to the manner of sale, notice and
the availability of current public information about the Company. However, a
person who is not an affiliate and who has beneficially owned such shares for at
least three years is entitled to sell such shares without regard to the volume
or other resale requirements.

The Company has granted to the holders of the Representative's Warrants
and VTR Warrants the right, subject to certain terms and conditions, to register
at the Company's expense at the holder's demand, all or any part of such
Representative's Warrants and VTR Warrants or any securities underlying such
Representative's Warrants and VTR Warrants under the Securities Act or in
connection with registrations of any securities by the Company.

The Company also has 3,055,588 Class WA Warrants 845,150 Class WB
Warrants, and 2,270,000 Class WC Warrants outstanding. The outstanding Class WA
Warrants are exercisable to purchase 3,055,588 Class A Shares and 3,055,588
Class WB Warrants which Class WB Warrants are exercisable to purchase an
additional 3,055,588 Class A Shares and the outstanding Class WB Warrants are
exercisable to purchase 845,150 Class A Shares. On July 19, 1996, the Company's

Registration Statement enabling the exercise of Class WA and Class WB Warrants
became effective.

No predictions can be made of the effect, if any, that sales of any class
of the Company's Shares or the availability thereof for sale will have on the
market price of such securities prevailing from time to time. Nevertheless, the
foregoing could adversely affect prevailing market prices.

68
<PAGE>

SELLING SECURITYHOLDERS

The Registration Statement of which this Prospectus is a part, relates to
375,000 shares of Class A Common Stock and 50,000 shares of Series A Preferred
Stock held by the Selling securityholders.

Certain Stockholders
Preferred Stock

The following chart summarizes the securities held by, the shares of
Preferred Stock registered on behalf of, and percentage of Preferred Stock held
beneficially before and after the offering by, certain Selling Securityholders:

<TABLE>
<CAPTION>
Number of Percentage Number of Number of Percentage
Shares of of Shares Shares of Beneficially of Shares
Name and Address of Preferred Stock Before Preferred Owned Shares After
Beneficial Owner Beneficially Owned Offering Stock Registered after Offering Offering
- ------------------- ------------------ -------- ---------------- -------------- --------
<S> <C> <C> <C> <C> <C>
John R. Koons 9,300 .82% 9,300 --- ---
1742 Ormond Road
Jacksonville, FL 32225

H. Ronald Levin and 17,400 1.53% 17,400 --- ---
Stuart M. Herman
Joint Tenants in Common
2315 Miller Oaks Drive, N.
Jacksonville, FL 32207

J.C. Pruitt 7,000 .61% 7,000 --- ---
2453 Ruth Mason Drive
Blairsville, GA 0512

Earl Trevithick 10,500 .92% 10,500 --- ---
5260 Broadmoor Bluffs Drive
Colorado Springs, CO 80906

Dale E. Woolsey 5,800 .51% 5,800 --- ---
344 Ardsley Place
Nashville, TN 37215

</TABLE>

- ----------

69
<PAGE>

The following chart summarizes the securities held by, the shares of
Common Stock registered on behalf of, and percentage of Common Stock held
beneficially before and after the offering by, certain Selling Securityholders:

<TABLE>
<CAPTION>
Number of Percentage Number of Number of Percentage
Shares of of Shares Shares of Beneficially of Shares
Name and Address of Common Stock Before Common Owned Shares After
Beneficial Owner Beneficially Owned Offering Stock Registered after Offering Offering
- ------------------- ------------------ -------- ---------------- -------------- --------
<S> <C> <C> <C> <C> <C>

Sharon B. Gaff Trust 15,100 .35% 15,100 --- ---
James E. Gaff Trustee
5470 Clifton Road
Jacksonville, FL 32211

David J. Hunter, Jr. 50,000 1.16% 50,000 --- ---
6150 Walnut Creek Court
Amherst, New York 14051

Howard L. Knight 14,315 .33% 14,315 --- ---
6718 Oakwood Drive
Jacksonville, FL 32211

John R. Koons (1) 10,250 .24% 10,250 --- ---
1742 Ormond Road
Jacksonville, FL 32225

H. Ronald Levin and (2) 18,000 .42% 18,000 --- ---
Stuart M. Herman
Joint Tenants in Common
2315 Miller Oaks Drive, N.
Jacksonville, FL 32207

F. Bartow McDonald IV 14,285 .33% 14,285 --- ---
1137 Miramar Avenue
Jacksonville, FL 32207

J.C. Pruitt (3) 7,000 .16% 7,000 --- ---
2453 Ruth Mason Drive
Blairsville, GA 0512

Earl Trevithick (4) 10,750 .25% 10,750 --- ---
5260 Broadmoor Bluffs Drive
Colorado Springs, CO 80906

G. Brian Wheeler 14,300 .33% 14,300 --- ---
25045 Marsh landing Pkwy.
Ponte Verda Beach, FL 32082

Karen and Michael 15,000 .35% 15,000 --- ---
Williamson
</TABLE>

70
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C>
8240 Planters Grove
Cordova, TN 38018

Dale E. Woolsey(5) 6,000 .14% 6,000 --- ---
344 Ardsley Place
Nashville, TN 37215

Ann Stevens(1) 50,000 1.16% 50,000 --- ---

Sol Munn(1) 150,000 3.48% 150,000 --- ---
</TABLE>
- ----------
(1) The address for Ms. Stevens and Mr. Munn is the address of the Company.

PLAN OF DISTRIBUTIONPLAN OF DISTRIBUTION

The securities offered hereby may be sold from time to time directly by
the Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In

effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.

At the time a particular offer of securities is made by or on behalf of
the Selling Securityholders, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.

LEGAL MATTERS

Certain legal matters in connection with the securities offered hereby are
being passed upon for the Company by Bernstein & Wasserman, LLP, New York.

71
<PAGE>

EXPERTS

The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. Reference is made to said report which includes
an explanatory paragraph that addresses a going concern issue discussed in Note
1 to the financial statements.

72
<PAGE>

FINANCIAL STATEMENT INDEX

Consolidated Balance Sheet as of September 30, 1996................ F-1

Consolidated Statements of Operations-
For the Three Months Ended September 30, 1996 and 1995........ F-2

Consolidated Statement Changes in Stockholders' Equity-
For the Three Months Ended September 30, 1996 and 1995........ F-3

Consolidated Statement of Cash Flows-
For the Three Months Ended September 30, 1996 and 1995........ F-4

Notes to Consolidated Financial Statements......................... F-5 - F-15

Report of Independent Public Accountants........................... F-16

Consolidated Balance Sheet as of June 30, 1996..................... F-17

Consolidated Statements of Operations-
For the Years Ended June 30, 1996 and 1995.................... F-18

Consolidated Statement Changes in Stockholders' Equity-
For the Years Ended June 30, 1996............................. F-19

Consolidated Statement of Cash Flows-
For the Years Ended June 30, 1996 and 1995.................... F-20

Notes to Consolidated Financial Statements......................... F-21 - F-41

73
<PAGE>

INTERIORS, INC.
CONSOLIDATED
BALANCE SHEET
(unaudited)

September 30,
ASSETS 1996
-----------
CURRENT ASSETS:
Cash $ 0
Accounts receivables
Trade, net of allowance of $40,000 811,044
Inventories 1,949,585
Prepaid expenses and other current assets 349,565
-----------
Total current assets 3,110,174

INVESTMENT IN AFFILIATE 824,000

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

Less-Accumulated depreciation and
amortization 1,152,616
-----------
Net property and equipment 1,199,249

OTHER ASSETS 599,616
-----------
Total assets $ 5,733,039
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

COMMITMENTS AND CONTINGENCIES

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

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

F-1
<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)

1996 1995
----------- -----------
NET SALES $ 1,179,170 $ 1,293,258

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

Gross profit from continuing operations 557,717 587,997

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 488,071 649,665
----------- -----------
Operating expenses 488,071 649,665

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

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

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

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

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

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

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

NET EARNINGS PER COMMON STOCK

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

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

the accompanying notes are an integral part of these financial statements

F-2

<PAGE>

INTERIORS, INC.
CONSOLIDATED STATEMENT CHANGES IN STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND 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, 1995 790,000 $ 7,900 3,470,247 $ 3,470 2,038,500 $2,040

Proceeds from the exercise of common stock warrants 556,000 $ 556
Proceeds from the exercise of pfd. stock options 350,000 $ 3,500
Net loss through September 30, 1996
-----------------------------------------------------------------
1,140,000 $11,400 4,026,247 $ 4,028 2,039,500 $2,040

Proceeds from the exercise of common stock warrants $ 833,444 $ 834,000
Proceeds from the exercise of prd. stock options $ 821,500 $ 825,000
Net loss through September 30, 1996 ($ 7,594) ($ 7,594)
------------------------------------------------------------------
$ 10,219,685 ($8,792,726) ($ 600) ($ 437,500) $ 1,006,325
</TABLE>

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

F-3

<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)

QUARTERS ENDED
SEPTEMBER 30
-----------------------
1996 1995
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($7,594) ($199,309)

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

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

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 507,000

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

CASH, beginning of period 4,142 2,114
---------- ----------
CASH, end of period $ 0 $ 519,320
========== ==========

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

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

F-4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

2. ACQUISITIONS AND STRATEGIC ALLIANCES

Part of the Company's long-term plan for growth includes either the acquisition
of or entering into strategic alliances with unrelated companies in the
decorative accessories industry to maximize market potential. For this purpose,
pursuant to a March 3, l996 agreement relating to the capitalization of Decor
Group, Inc., ("Decor"), an affiliate of the Company, Decor issued to the Company
250,000 shares of its Series A Non-Voting Convertible Preferred Stock and an
option to purchase 10,000,000 shares of its Series B Non-Convertible Voting
Preferred Stock (the "Option Shares") in exchange for issuance to Decor by the
Company of 200,000 shares of its Class A Common stock and 200,000 shares of its
Series A Convertible Preferred stock and a guarantee with respect to certain
indebtedness should such indebtedness become necessary. Also, the Company
exercised its option to purchase the Option Shares in September 1996, for total
cash consideration of $2,000. Concurrent with the exercise of this option, the
Company executed a Voting Agreement (the "Voting Agreement") to vest the power
to vote the Option Shares in the current Board of Directors of Decor. The Voting
Agreement will expire on December 31, 1997. The Board of Directors of Decor is
currently comprised of three individuals: one of whom is Max Munn, the Company's
President and Chief Executive Officer (and also the Chairman of the Board of
Decor), and two of whom are otherwise unrelated to the Company. Conversion of
the 250,000 shares of Series A Convertible Preferred stock into Common Stock
would give the Company approximately 86% of the voting stock of Decor. On
November 12, 1996, (the "Effective Date") a public offering by Decor of certain
of its securities was declared effective by the Securities and Exchange
Commission. Subsequent to this effective date, the Company will own
approximately 86.0% of the total voting stock of Decor. The Company's interest
in Decor will be recorded on the Company's financial statements under the equity
method of accounting until such time the Company obtains unconditional and
effective control of Decor, which is expected to occur upon the expiration of
the Voting Agreement.

F-5

<PAGE>

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

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 $3,626,400, subject to certain adjustments. Decor
and Artisan House closed the transaction effective close of business 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.

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

Pursuant to a March 31, 1996 agreement relating to the capitalization of
Decor, Laurie Munn, wife of the Company's President and Chief Executive Officer
purchased and was issued certain shares of the Common Stock of Decor. As of the
date of this filing, Ms. Munn was issued 100,000 shares of the outstanding
1,312,500 common shares of Decor, adjusted to reflect a 1-for-2 reverse split
effected by Decor in October 1996. Also, the Company has executed a management
agreement with Decor, whereby the Company will provide management and
administrative support to Decor. At September 30, 1996, approximately $19,000 of
fees were accrued by the Company for such services

F-6

<PAGE>

Laurie Munn, wife of the Company's President and Chief Executive Officer,
was issued 9 of the outstanding 100 Common shares of Lance Acquisition Corp.
("LAC") which on March 3, 1996 acquired the assets of The Lance Corporation
("Lance") a Massachusetts manufacturer and distributor of various products for
the giftware and collectibles marketplace. The Company and LAC entered into an
agreement whereby each entity will guarantee certain liabilities of the other.
Subsequently, LAC disposed of its interest in Lance, and finalized the terms of
transition with new owners and existing secured creditors. LAC will be dissolved
during the current period. During April 1996, the Company moved the operations
of Italia Collection to Lance. Subsequent to this move, the ownership of Lance
and its business operations changed. Because of this, Company management
believes that the operations of Italia Collection will be best served by a lower
cost, independent manufacturer. The Company is accordingly conducting
discussions with a Mexican company to finalize terms under which this entity
will manufacture and support select items in the product line of Italia
Collection, which largely consists of ceramic and porcelain collectibles,
mirrors, and other decorative accessories for the home. The Company has
significantly curtailed the conduct of Italia's business and is currently
arranging alternate means by which the products marketed by Italia will be
sourced and distributed in the future.

3. DISCONTINUATION OF CERTAIN OPERATIONS

On March 31, 1996, the Company's Board of Directors decided to discontinue the
Company's catalog operations because of declining revenues and high operating
costs. As a result, a charge against earnings of approximately $2,100,000 was
recorded at June 30, 1996. For the twelve months ended June 30, 1996, losses
from continuing catalog operations totaled $789,332. The Company plans to fully
carry out the discontinuation of the catalog operation within one year from

March 31, 1997. The Company plans to wind down operations by filling existing
orders and possibly mailing one final catalog as a "close-out sale" to liquidate
inventory. The financial statements included with this filing have reclassified
the results of operations for the quarters ended September 30, 1995 and
September 30, 1996 as if the Company's catalog operations had been discontinued
in the beginning of the quarters ended September 30, 1996 and September 30,
1995.

4. NOTES PAYABLE

On November 23, 1994, the Company borrowed the sum of $225,000 from Ekistics
Corp., a Bahamian corporation, pursuant to a promissory note due March 30, 1995,
together with interest at the rate of 14% per annum and a 5% financing charge.
In April 1995, the Company paid $25,000, plus interest on account of the
principal amount of said Note and entered into a revised note for the $200,000
balance with such revised note providing for payment of principal on October 20,
1995, having an interest rate of 14% per annum and being convertible into 80,000
shares of Preferred Stock and 40,000 Class WC Warrants. On December l5, 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.

F-7

<PAGE>

In June and July 1995, the Company delivered to unaffiliated parties promissory
notes in the aggregate amount of $300,000 with interest at the rate of 10% per
annum (the "10% Notes") and promissory notes in the principal amount of $l00,000
with interest at the rate of 6% per annum (the "6% Notes".) The 10% Notes and 6%
Notes were each payable in June and July 1996 or the closing of the sale by the
Company of an issue of Preferred Stock, whichever is earlier. The 6% Notes were
convertible, in whole or in part, at the option of the holder, into a maximum of
2,000,000 WC Warrants entitling the holders for a period of five years to
purchase one share of Preferred Stock per Class WC Warrant at a price of $5.50
per share. These Warrants are redeemable by the Company. The Notes were secured
by a lien on the Company's assets. In September 1995 the Company repaid all 10%
Notes in full, plus all accrued interest for both the 10% Notes and 6% Notes.
All holders of 6% Notes have converted in full, into a total of 2,000,000 Class
WC Warrants, which were registered in a Registration Statement declared
effective by the Securities and Exchange Commission on September 18, 1995.

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

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

5. COMMITMENTS AND CONTINGENCIES

The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution of an
employment severance

F-8

<PAGE>

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-weeky payments to Ms. Stevens to
total $25,000 per year for seven years, plus automobile and insurance costs for
five years. As of June 30, 1996, the Company issued to Ms. Stevens 50,000 shares
of the Company's Class A Common Shares, which were previously commited to Ms.
Stevens pursuant to her 1995 employment agreement. As of June 30, 1996, the
Company placed in escrow 1,250,000 shares of its Class B Common Shares (the
"Escrow Shares") with Michael Levine, Esq., attorney of Ms. Stevens, as escrow
agent (the "Escrow Agent"). The Escrow Agent shall abstain from voting the
Escrow Shares for any purpose, except in the event of either the failure by the
Company to adhere to the payment provisions noted above or the financial
insolvency of the Company. If either event occurs, Ms. Stevens will be in a
position to elect replacement Directors. Once the payment provisions in the
severance and non-compete agreements are satisfied, the Escrow Agent shall
return the Escrow Shares to the Company.

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 provide an annual base
salary of $150,000, with annual increases of 10%. Such increases will be subject
to the attainment of profitable results of operations by the Company. In
addition, the agreement will grant the President and Chief Executive Officer an
option to purchase at any time 150,000 shares of the Company's Series A, 10%
Cumulative Convertible Preferred Stock at a price of $2.50 per share. The
exercise of this option, as well as any subsequent conversion to the Company's
Class A Common Stock, will require the prior consent of the Company's investment
banking firm. The agreement will also contain a "non-compete" clause and provide
the President and Chief Executive Officer with the use of an automobile: As of
the date of this filing, the document for this agreement has not been finalized
or executed. This is expected to occur during the subsequent period. 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.

F-9

<PAGE>

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

On October 27, 1995 the Company entered into a one-year employment agreement
with Robert Schildkraut, then Vice President, Operations with an annual base
salary of $120,000. The Agreement may be terminated by the Company with a
payment of 50% of the employee's salary remaining under the agreement or a
payment of six week's salary in the event the employee resigned from the
Company. The Agreement also provided for the employee to be granted certain
stock options to purchase an aggregate of 100,000 Class A Shares, 50,000 of
which are to be granted and vested immediately at a price of $2.00 per share,
exercisable in six months from the date of grant, and any attempt to exercise
these options during the exercise period will terminate the options granted on
September 16, 1994; options to purchase 25,000 shares at a price of $4.00 per
share to be granted on the second anniversary; and options to purchase 25,000
shares at a price of $5.00 per share to be granted on the third anniversary. The
Agreement also provides for a bonus program based on the Company meeting certain
minimum profit goals. In April 1996, the employment of the Vice President,

Operations was terminated The Company settled its obligations to the employee
during the subsequent quarter. This settlement took the form of severance
payments totaling approximately $27,000. No securities have been issued to the
employee as part of the settlement.

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

F-10

<PAGE>

Stock of Decor at an exercise price of $2.50 per share for each full year of
employment under the agreement. Decor will also reimburse Mr. Feldman for bona
fide business expenses including up to $400 per month for the use of an
automobile and $200 per month for insurance. As of the date of this filing, Mr.
Feldman has not yet resigned from the Company's Board of Directors. He has
agreed to continue to serve as a Director of the Company until the Company
selects a replacement, at which time Mr. Feldman will resign from the Company's
Board of Directors. The Company is actively seeking an acceptable replacement as
of the date of this filing.

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

Munn's Consulting Agreement as 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 1, 1996 generating net proceeds to the Company totalling $787,500.
(See "Liquidity and Capital Resources."). In addition, the new agreement
provides for bi-weekly payments to Morris Munn totalling $54,000 per year for
five years. In exchange, Morris Munn has agreed to assist the Company with
marketing, acquisitions, divestitures. joint ventures and other strategic
initiatives. In conjunction with the issuance of the Option, the Company
recorded charges against earnings of $87,500 at June 30, 1996.

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

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

6. SHAREHOLDERS' EQUITY

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

F-11

<PAGE>

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 WC ("Warrants") to purchase Preferred Stock at the exercise price of
$5.50 per share. The net proceeds from this Offering were approximately
$1,633,000, including over-allotments. Each share of Preferred Stock is
convertible, commencing one year from the date of issue, subject to adjustment,
into three shares of Class A Common Stock of the Company.

In September 1995, the Company lowered the exercise price of the Company's Class
WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a "Regulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Cornpany
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 $l.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, and for the provision of
loans to Decor.

In December 1995, an consideration for certain services rendered 10,000 shares
of the Company's Class A Common Stock were issued to various individuals
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 December 1995, pursuant to the terms of a promissory note, the holder of such
note converted the note into 80,000 shares of Preferred Stock. Also in December
1995, and pursuant to the terms of another promissory note, 35,000 shares of the
Company's Class A Common Stock were issued to the lender. The Company plans to
register these securities with the Securities and Exchange Commission during the
quarter ended December 31, 1996. Approximately $25,000 was charged against
earnings during the quarter ended December 1995 in conjunction with the issuance
of these shares.

In January 1996, the Company's Board of Directors elected to lower the exercise
price of the Company's Class WB Warrant to $2.00 per Class A Common share,
subject to the filing and effectiveness of a Registration Statement with the
Securities and Exchange Commission. Such Registration Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996. Through
the date of this filing, 90,636 of the Company's Class WB Warrants were
exercised at an exercise price of $2.00 per option generating proceeds to the
Company of $181,272. These proceeds were used by the Company to support working
capital needs, and for the provision of loans to Decor Group, Inc.

F-12

<PAGE>

In February 1996, the Company's Board of Directors declared a stock dividend
equiva1ent 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.

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

the year ended June 30, 1996. This filing is meant, among other things, for the
purpose of registering these 150,000 Class A Common Shares with the Securities
and Exchange Commission.

On March 3,1996, the Company acquired 250,000 shares of Series A Convertible
Preferred Stock and an option to purchase 10,000,000 shares, (the "Option
Shares") of Series B Non-Convertible Voting Preferred Stock of Decor Group,
Inc., ("Decor") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common stock and 200,000 shares of its Series A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. (The Decor securities are adjusted to
reflect a 1-for-two reverse split effected by Decor in October 1996.) The
Company exercised its option to purchase the Option Shares in September l996,
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 the current Board of Directors of Decor.
The Voting Agreement will expire on December 31, 1997. The current Board of
Directors of Decor is comprised of three individuals: one of whom is Max Munn,
the Company's President and Chief Executive Officer (and also the Chairman of
the Board of Decor), and two of whom are otherwise unrelated to the Company.
Conversion of the 250,000 shares of Series A Convertible Preferred stock into
common stock would give the Company approximately 86% of the voting stock of
Decor immediately prior to a public offering of certain securities of Decor as
of the date of this filing. On November 12, 1996, (the "Effective Date") a
public offering by Decor of certain of its securities was declared effective by
the Securities and Exchange Commission. Subsequent to this effective date, the
Company will own approximately 86.0% of the total voting stock of Decor. The
Company's interest in Decor will be recorded on the Company's financial
statements under the equity method of accounting until such time the Company
obtains unconditional and effective control of Decor, which is expected to occur
upon the expiration of the Voting Agreement.

In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares, of the Company's Common A Stock and 50,000 shares
of the Company's Series A Preferred Stock. These shares, all of which bear a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251.

F-13

<PAGE>

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. This filing is
meant, among other things, to register 175,000 Class A Common Shares and 50,000
Series A Preferred Shares with the Securities and Exchange Commission.

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.

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 $12,500 was used to purchase 1,667 shares
(adjusted for a l-for-2 reverse split elected in October 1996) of Decor Group,
Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The balance of
proceeds was retained by the Company to support working capital needs. In
conjunction with the issuance of the options to Mr. Munn, the Company recorded
charges against earnings totaling $87,500 at June 30, 1996.

Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. The Company plans
to register these securities with the Securities and Exchange Commission during
the quarter ended December 31, 1996. Also pursuant to the Settlement, the
Company issued to Michael Levine as escrow agent (the "Escrow Agent") 1,250,000
unregistered shares of the Company's Class B Common shares (the "Escrow
Shares".) The Escrow Shares shall not be voted by the Escrow Agent, unless the
Company defaults on its obligations under the agreement. Upon satisfaction of
such obligations, the Escrow Shares shall he returned by the Escrow Agent to the
Company. (See "Legal Procedings"). In

F-14

<PAGE>

conjunction with the issuance of the Company's shares to Ms. Stevens, the
Company recorded charges against earnings totaling $7l,400 at June 30, 1996.

During September 1996, pursuant to the Company's Director Stock Option Plan, the
Company issued: 10,000 shares of its Class A Common shares to Roger Lourie, an
outside director of the Company, and 10,000 shares of its Class A Common shares
to various individuals named by Richard Josephberg, also an outside director of
the Company. These shares bear a restrictive legend.

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

7. 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 17, 1996 if the Company did not demonstrate that
it currently meets all Nasdaq SmallCap Market listing criteria. On November 13,
1996, the Company received notification from Nasdaq that the Company currently
meets all Nasdaq Small Cap listing criteria.

F-15

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Interiors, Inc.

We have audited the accompanying consolidated balance sheet of Interiors, Inc.
(a Delaware corporation) (known formerly as A.P.F. Holdings, Inc., a New York
corporation) and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. and subsidiary
as of June 30, 1996 and 1995, and the results of operations and cash flows for
each of the two years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital and a net capital deficiency that raises substantial doubt
about is ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

New York, New York
October 4, 1996

F-16
<PAGE>

INTERIORS, INC.
CONSOLIDATED
BALANCE SHEET

June 30,
ASSETS 1996
----------
CURRENT ASSETS:

Cash $ 4,142
Accounts receivables -
Trade, net of allowance of $40,000 784,600
Inventories 1,721,304
Prepaid expenses and other current assets 313,265
----------
Total current assets 2,823,311
----------

PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,808,915
Furniture and fixtures 156,179
Leasehold improvements 259,405
----------
Total property and equipment, at cost 2,224,499

Less Accumulated depreciation and
amortization 961,797
----------
Net property and equipment 1,262,702

OTHER ASSETS 635,188
----------
Total assets $4,721,201
==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Notes payable and current maturities of
long-term debt $2,516,573
Accounts payable and accrued liabilities 2,706,388
Net liabilities and accrued expenses
of discontinued operations 90,557
Capital lease obligations 22,112
----------
Total current liabilities 5,335,630
----------

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

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
590,000 issued and outstanding 7,900
Class A common stock, $.001 par value,
30,000,000 shares authorized,
3,470,247 shares issued and outstanding 3,470
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 8,564,741
Retained deficit (8,785,132)
Treasury Stock (600)
Note receivable (437,500)
----------
Total stockholders' equity (645,081)
----------
Total liabilities and stockholders' equity $4,721,201
==========

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

F-17

<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

1996 1995
----------- -----------
NET SALES $ 5,378,761 $ 5,155,275

COST OF GOODS SOLD 3,558,733 3,076,950
----------- -----------

Gross profit from continuing operations 1,820.028 2,078,325

SELLING, GENERAL AND ADMINlSTRATlVE EXPENSES 3,611,812 1,820,545
----------- -----------
Operating expenses 3,611,812 1,820,545

Income (loss) from continuing operations
before interest and provision for taxes (1,791,784) 257,780

INTEREST EXPENSE (including financing charges) 538,497 236,988
----------- -----------

Income (loss) from continuing operations
before provision for taxes (2,330,281) 20,792

PROVISION FOR INCOME TAXES 17,859 (100,000)
----------- -----------

Income (loss) from continuing operations (2,348,140) 120,792

DISCONTINUED OPERATIONS (Note 3)

Loss from operations of
discontinued operations 789,332 938,546
Provision for disposal of
discontinued operations 2,146,301
----------- -----------
Loss from discontinued operations 2,935,633 938,546
----------- -----------
NET INCOME (LOSS) ($5,283,773) ($817,754)
=========== ===========

NET EARNINGS PER COMMON STOCK

CONTINUING OPERATIONS ($0.83) $0.06
DISCONTINUED OPERATIONS ($1.03) ($0.47)
----------- -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($1.86) ($0.41)
=========== ===========

WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 2,837,293 1,977,158
=========== ===========

the accompanying notes are an integral part of these financial statements

F-18

<PAGE>

INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

<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, 1994 817,500 $ 818 1,000,000 $1,000
Proceeds from issuance of warrants
Conversion of Class B Shares 117,500 $ 118 (117,500) $ (117)
Purchase of warrants and related costs
Proceeds from sale of Class A Common Stock 835,000 $ 635
Treasury stock
Net loss
------- ------ --------- ------ --------- ------
Balance June 30, 1995 1,570,000 $1,570 882,500 $ 883
Proceeds from issuance of Series A Preferred 460,000 $4,600
Conversion of Class B Shares 330,000 $ 330 (330,000) $ (330)
Conversion of convertible debt into Class WC Warrants
Issuance of Series A Common Stock for services 360,000 $ 360
Conversion of Convertible Debt into Series A Preferred 80,000 $ 800
Issuance of shares to Italia - in Treasury 600,000 $ 600
Preferred stock dividend 55,247 $ 55
Issuance to Decor Group, Inc. 200,000 $2,000 200,000 $ 200
Issuance to Laurie Munn 250,000 $ 250
Private placement 50,000 $ 500 175,000 $ 175
Adjust prior period balance (13,000) $ (13)
Sale of treasury stock 180,000 $ 180
Escrow shares 1,250,000 $1,250
Net loss through June 30, 1996
------- ------ --------- ------ --------- ------
BALANCE, JUNE 30, 1996 790,000 $7,900 3,470,247 $3,470 2,038,500 $2,040
======= ====== ========= ====== ========= ======

<CAPTION>
Additional Retained
Paid-In Earnings Treasury Note
Capital (Deficit) Stock Receivable Total
------- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 $4,776,484 ($2,517,864) $ 2,252,437
Proceeds from issuance of warrants $ 372,211 $ 372,211
Conversion of Class B Shares $ 1
Purchase of warrants and related costs ($46,425) $ (46,425)
Proceeds from sale of Class A Common Stock $ 491,483 $ 482,128
Treasury stock ($270,257) $ (270,257)
Net loss (817,754) $ (817,754)
---------- ----------- ----- --------- -----------
Balance June 30, 1995 $5,595,763 ($3,335,618) ($270,257) $ 1,992,341
Proceeds from issuance of Series A Preferred $1,553,032 $ 1,557,632
Conversion of Class B Shares
Conversion of convertible debt into Class WC Warrants $ 100,000 $ 100,000
Issuance of Series A Common Stock for services $ 299,500 $ 299,880
Conversion of Convertible Debt into Series A Preferred $ 199,200 $ 200,000
Issuance of shares to Italia - in Treasury ($600)
Preferred stock dividend $ 165,688 ($185,741)
Issuance to Decor Group, Inc. (2,200)
Issuance to Laurie Munn $ 437,500 ($437,500) $ 250
Private placement $ 307,934 $ 308,609
Adjust prior period balance $ 13
Sale of treasury stock ($90,437) $270,257 $ 180,000
Escrow shares ($1,250)
Net loss through June 30, 1996 ($5,283,773) $(5,283,773)
---------- ----------- ----- --------- -----------
BALANCE, JUNE 30, 1996 $8,584,741 ($8,785,132) ($800) ($437,500) $ (845,081)
========== =========== ===== ========= ===========
</TABLE>

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

F-19
<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 31
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Lost ($5,283,773) ($ 817,754)

Adjustments to reconcile net Income (loss) to net cash used in operating
activities:
Depreciation and amortization 680,137 630,670
Provision for losses on accounts receivable 63,244 35,000
Deferred income taxes (100,000)
Restructuring costs (76,000)
Non-cash provision for discontinued catalog operations 2,235,835
Non-cash satisfaction of debt (63,000)
Provision for issuance of stock 140,960
Change in assets and liabilities:
Decrease (increase) in accounts receivable, trade 178,743 (545,599)
Decrease (increase) in inventories (346,275) (516,990}
Decrease (increase) in prepaid catalog cost, prepaid expenses
and other current assets (47,512) (176,439)
Decrease (increase) in other assets 162,891 (489,606)
Increase (decrease) in accounts payable and accrued expense 1,112,556 (169,600)
Increase (decrease) in prepaid sales & customer deposits (40,800) 1,996
----------- -----------
Net cash used in operating activities (1,143,994) (2,287,322)
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (543,272) (591,041)

Net cash used in investing activities (543,272) (591,041)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 3,852,100
Repayments of debt and capitalized lease obligations (357,197) (2,630,535)
Net proceeds from sale of Series A preferred stock, common stocks, and warrants 2,046,491 863,704
Purchase of warrants and related coats (46,425)
----------- -----------
Net cash provided by financing activities 1,689,294 1,838,844
----------- -----------
Net Increase (decrease) in cash 2,028 (1,039,519)
CASH, beginning of period 2,114 1,041,633
----------- -----------
CASH, end of period $ 4,142 $ 2,114
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest $ 355,119 $ 283,904
Taxes $ 8,344 $ 5,283
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debt into Class WC Warrants $ 100,000 $ 0
Conversion of convertible debt into Class A Preferred Stock $ 200,000 $ 0
Issuance of Common Stock for a note receivable $ 437,500
Other - non cash satisfaction of debt $ 2,200 $ 63,000
</TABLE>

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

F-20

<PAGE>

INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1995

1. DESCRIPTION OF BUSINESS AND ORGANIZATION

Business Activity

The Company has experienced continuing operating losses and has a working
capital and net capital deficiency as of and for the year ended June 30, 1996.
As a result, the Company has taken certain significant steps to reposition
itself for growth and profitability in subsequent periods. These steps, although
necessary, led to significant charges against earnings during the year ended
June 30, 1996. A summary of the major steps follows:

o The Company's discontinuation of its catalog operations (See "Description of
Business") led to charges against earnings totaling $2,936,000, including
losses from discontinued operations of $789,000, during the year ended June
30, 1996. Major items in this charge are settlement of significant related
party lawsuits requiring charges against earnings aggregating $431,000;
reserves against catalog inventory of $945,000 and reserves against other
catalog assets of $354,000.

o The Company has included in Selling, General and Administrative expenses
$140,000 for certain non-cash issuances of stock for services.

o The Company incurred increased financing charges aggregating $180,000 in
connection with extinguishment of certain debt.

The Company's management believes that these charges were necessary and will set
the stage for growth and profitability in subsequent periods. Management,
however, believes cash flows from operations may not be sufficient to support
future operations. Accordingly, the Company has identified action steps aimed at
improving cash flows and profitability. Such actions include a major investment
in Decor Group, Inc., an exclusive licensing agreement, staff reductions and
discontinuance of its catalog. (See Notes 3 & 4)

The Company is currently renegotiating its lease with the landlord for its
current facility. In addition the company is currently negotiating a collective
bargaining agreement covering substantially all its employees. Although
management believes that the outcome of these negotiations will not have a
material impact on its operation over the next year, there can be no assurance
that such deliberations will result in arrangements consistent with those
discussed elsewhere.

Although the Company believes that these initiatives will lead to improved
financial results, and positive cash flows no assurances can be provided that

this will be the case.

Organization

F-21

<PAGE>

Interiors, Inc. and subsidiary (the "Company" or "Interiors" known formally as
A.P.F. Holdings, Inc. or "A.P.F.") was incorporated pursuant to the laws of
Delaware in February 1994. A.P.F. was incorporated pursuant to the laws of New
York in October 1990. A.P.F. was incorporated in order to reincorporate in the
State of Delaware. Effective March 1994, A.P.F. merged with and into the
Company. In October 1994, the Company purchased "Ceramic Production Corp." and
"Murano Crystal" to form a wholly-owned subsidiary, "Italia Collection, Inc."
("Italia").

Alter giving effect to the discontinuance of the Catalog operation, the Company
has two operating divisions: 1) the Custom Framing Division which is engaged in
the manufacture of antique and contemporary picture frames for museums, art
galleries, designers, collectors, and frame retailers; and 2) the Wholesale
Division, which manufactures and markets a line of high-end traditional and
contemporary mirrors through upscale retail furniture and department stores. The
Wholesale Division is operated through a wholly owned subsidiary which
manufactures and markets ceramic vases and bowls, sculpture and lamps to upscale
furniture stores, furniture galleries, department stores, catalog and other
decorative accessory retailers. The majority of the Company's sales are
domestic. Sales to the largest customers totaled $801,000 and $652,000, or 15%
and 12% of net sales respectively, for the year ended tune 30, 1996. Accounts
receivable to these customers totaled $119,000 as of June 30, 1996.

The Company from time to time entered into transactions with related parties
(See Note II). To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiary, ("Italia Collection, Inc."). All intercompany
transactions have been eliminated.

Revenue Recognition

Revenue is recognized at the time custom work, wholesale, or catalog merchandise
is shipped or acceptance is acknowledged by the customer. Payments received for
merchandise not yet shipped or accepted are reflected within prepaid sales and
customer deposits, a current liability.

Prepaid Catalog Costs

Prepaid catalog costs consist primarily of production and mailing costs, which
are deferred and amortized over the period of expected revenue stream (estimated
based upon historical results for similar catalogs and circulation levels) of
the related catalog from the date the catalog is mailed, not exceeding one year.
The prepaid catalog asset was fully written off in the amount of $486,000, as
part of the discontinuance of the Catalog Division. Catalog costs expensed are
included in the loss from discontinued operations for the years ended June 30,
1996 and 1995 in the amount of $529,000 and $1,106,000, respectively.

Inventories

Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consist of those items available
for shipping through the Wholesale Division. Bartered

F-23

<PAGE>

inventory acquired is valued at the original cost of the inventory to the
Company, which is determined to be the lower of cost or market.

Property and Equipment

Property and equipment is stated at cost. The cost of additions and improvements
and the costs incurred in the construction of castings and the related master
molds are capitalized and expenditures for repairs and maintenance are expensed
in the period incurred. Depreciation and amortization of property and equipment
is provided utilizing straight-line and accelerated methods over the estimated
useful lives of the respective assets as follows:

Years
-----
Machinery and equipment 3 - 10
Furniture and fixtures 7 - 10

Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities (See Note 13).

Goodwill

In connection with the acquisition of Italia, amounts were paid in excess of the

fair market value of the assets acquired. These amounts have been recorded as
goodwill and are being amortized over 10 years. It is the Company's policy to
evaluate the life and amount of goodwill annually. Such evaluations are based on
current market conditions and expected future cash flows.

Use of Estimates in Preparation of the Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires of management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from changes in these estimates.

Net Loss Per Share of Common Stock

Net loss per share of common stock was computed based on the weighted average
number of Class A and Class B shares outstanding. For the two years in the
period ended June 30, 1996, no common stock equivalents were included in the
computation since the effect would be antidilutive.

F-23
<PAGE>

Fourth Quarter Adjustments

The Company recorded approximately $3,654,000 in losses during the fourth
quarter of fiscal 1996. The losses were primarily attributable to the
discontinuance of the Catalog Division ($2,935,633), the write down of inventory
based on the physical count ($1,093,000), and write-off of certain other assets
($79,200).

3. DISCONTINUATION OF OPERATIONS OF INTERIORS CATALOG DIVISION

On March 31, 1996, the Board of Directors, decided to discontinue the Company's
catalog operations because of declining revenues and high operating costs. As a
result, a charge against earnings of approximately $2,200,000, was recorded at
June 30, 1996. For the year ended June 30, 1996, losses from the discontinued
catalog operations totaled $789,000. The Company plans to fully carry out its
plan to discontinue the catalog operation within one year from March 31, 1996.
As of June 30, 1996, the Company has assets and accrued expenses totaling
$319,000 and $410,000 respectively. The Company plans to wind down operations by
filling existing orders and possibly mailing one final catalog as a "close-out
sale" to liquidate inventory. The statement of operations for the year ended
June 30, 1995 has been restated as if the Company's catalog operations had been
discontinued at the beginning of year ended June 30, 1995.

The following is a detail of income from discontinued operations for the years
ended June 30, 1996 and 1995:

June 30, 1996 June 30, 1995
------------- -------------
Revenue $ 742,640 $ 1,895,011

Cost of Goods Sold 408,452 703,458
---------- -----------
Gross Margin 334,188 $ 1,191,553

Selling, General & Admin. 1,078,642 2,055,773
Interest Expense 44,878 74,326
---------- -----------
Net Loss from Discontinued Operations $ (789,332) $ (938,546)
========== ===========

4. ACQUISITIONS, DISPOSITIONS AND STRATEGIC ALLIANCES

1996 Transactions

F-24
<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 500,000 shares of its Series
A Convertible Preferred Stock and an option to purchase 20,000,000 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. Decor has entered into an asset purchase agreement (the "Agreement")
with Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities, of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments. Decor
expects to close on the Agreement prior to, or contemporaneously with, its
public offering. Artisan House, located in Los Angeles, California and founded
in 1964, is engaged in the design, manufacturing, and marketing of metal wall,
table and freestanding sculptures. Management believes that Artisan House's
products bridge the gap between high priced gallery art and mass produced
decorative pieces. Artisan House products retail from approximately $100 to over
$400. The primary goal of Artisan House is to supply a broad spectrum of design
driven sculpture and decorative accessories at moderate prices. The measurement
date for the shares provided and received has not been determined at this time
because at the time of issuance there was no assurance that the transactions
contemplated by either Company (i.e., acquisition of Artisan by Decor, public
funding for Decor) could be executed. Accordingly, the shares issued and
received have been reflected in the accompanying financial statements at par
value. Upon completion of Decor's public offering and acquisition of Artisan,
the Company will establish its investment in Decor at the then fair market value
of the shares invested.

The Company exercised its option to purchase the Option Shares in September
1996, for total cash consideration of $2,000. Concurrent with the exercise of
this option, the Company executed a Voting Agreement (the "Voting Agreement") to
vest the power to vote the Option Shares in a Voting Trust (the "Voting Trust").
The Voting Agreement will expire on December 31, 1997. The Voting Trust shall

comprise three individuals; the Company's President and Chief Executive Officer
(and also the Chairman of the Board of Decor), and two Directors of Decor who
are otherwise unrelated to the Company. Conversion of the 500,000 shares of
Series A Convertible Preferred Stock into common stock would give the Company
approximately 88.6% of the voting stock of Decor as of the date of this filing.
Decor is planning a public offering of certain of its securities during October
1996. After this public offering is effective, the Company will own
approximately 86.6% of the total voting stock of Decor. The holding in Decor
will be recorded on the Company's financial statements under the equity method
of accounting until such time the Company obtains unconditional and effective
control of Decor, which is expected to occur upon the expiration of the Voting
Agreement.

As part of the Company's investment in Decor, during the months of August and
September 1996, the Company purchased 109,867 shares of Decor's Series C
Non-Voting, Convertible, Preferred Stock at a cost of $824,000. As of the date
of this filing, Decor has provided the Company with $50,000 of 8% demand loans.

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 for $8,000
representing less than 1% of outstanding stock after Decor's proposed public
offering. Ms. Munn was issued 200,000 common shares of Decor.

F-25
<PAGE>

The Company has executed a management agreement with Decor, whereby the Company
will provide management and administrative support for the companies acquired by
Decor. At June 30, 1996, approximately $19,000 of fees were accrued by the
Company for such services.

During March 1996, Laurie Munn, wife of the Company's President and Chief
Executive Officer, was issued 9 of the outstanding 100 Common shares of Lance
Acquisition Corp. ("LAC") which acquired the assets of The Lance Corporation
("Lance") a Massachusetts manufacturer and distributor of various products for
the giftware and collectibles marketplace. The Company and LAC entered into an
agreement whereby each entity will guarantee certain liabilities of the other.
As of June 30, 1996 the Company guaranteed $631,000 of LAC debt which was
collateralized by $971,000 of accounts receivable. Subsequently, LAC disposed of
its interest in Lance, and has finalized the terms of transition with the new
owners and existing secured creditors. LAC will be dissolved subsequent to June
30, 1996.

During April 1996, Italia moved its operations to the premises of The Lance
Acquisition Corporation (Lance). Italia occupied approximately 10,000 square
feet of space on a temporary basis. The Company is arranging for the sourcing of
Italia products from an established, third-party manufacturer. The Company
expects to fully complete such arrangements, and entirely vacate the premises of
The Lance Acquisition Corporation, during November 1996.

1995 Acquisition

In connection with the Company's plan to restructure its wholesale business, the
Company through its wholly owned subsidiary Italia acquired the business of two
privately held Florida-based companies. Murano and CPC, 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. The Company assumed
a deficit of approximately $200,000 for all of the outstanding stock of the
acquired companies. Accordingly, the excess of costs over fair value has been
recorded as goodwill and is being amortized over 10 years on a straight line
basis. The Company also 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. This additional consideration will result in an additional element of
cost of the acquisition of Murano and CPC which will be recorded at the time
such payment is calculated. To date, no additional payments have been made in
connection with this transaction, as no amounts are considered to be due by the
Company under the original terms of the purchase agreement. The parties are
currently discussing the situation, and in the opinion of management, there will
not be any material adjustment to the Company's financial position or results of
operations as a result of the outcome of such discussions.

The Company's consolidated net loss for the year ended June 30, 1995 includes
approximately $144,000 of net income from the operations of Murano and CPC for
the period October 21, 1994 to June 30, 1995.

Had the Company acquired Murano and CPC as of July 1, 1994, the Company's net
loss for the year ended June 30, 1995 would have not been materially effected.

New Agreements

In September 1996, the Company has entered into an exclusive and worldwide
three-year licensing agreement, expiring September 1999, to represent the
artwork of James Rizzi on ceramics, mirrors, and

F-26
<PAGE>

other decorative accessories manufactured by the Company. Mr. Rizzi is among the
world's best-selling living artists. The Company expects customer shipments to
begin during December 1996. The licensor will receive a license fee of 15% of
net sales proceeds, plus up to 5% of product manufactured for distribution to
certain art galleries and picture framers.

5. INVENTORIES

The components of inventory are as follows:

June 30, 1996
-------------
Raw materials $ 1,095,067
Work in process 395,958
Finished goods 230,279

-----------
$ 1,721,304
-----------

6. OTHER ASSETS

The components of other assets are as follows:

June 30, 1996
-------------
Showroom samples, net of accumulated amortization
of $73,158 $ 104,036

Frame mirror molds, net of accumulated amortization
of $142,714 69,964

Organizational costs, net of accumulated amortization
of $116,724 183,048

Goodwill, net of accumulated amortization of $66,707 167,016

Other 111,124
---------
$ 635,188
---------

Organizational costs incurred by the Company are being amortized over a five
year period. Frame mirror molds include costs related to the wholesale division
in order to construct prototypes and molds for a product line of antique
reproduction framed mirrors. These costs are amortized over the related product
life or five years, whichever is shorter.

7. ACCRUED LIABILITIES

June 30, 1996
-------------
Payroll and employee benefits $ 420,089
Rent 133,988
Deferred rent 56,472
Insurance 8,667

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<PAGE>

Union dues and benefits 98,000
Professional fees 190,760
Interest 118,222
Other 91,927
----------
$1,118,125
----------

In March 1996, the Company executed an agreement with the Internal Revenue

Service (the "Service") for the payment of then outstanding payroll tax
liabilities totalling approximately $100,000. The agreement will require the
Company to pay approximately $9,000 per month for approximately 14 months.

As of June 30, 1996, the Company has unpaid payroll taxes, including the amounts
pursuant to the Service Agreement in the amount of approximately $325,000,
including interest and penalties.

8. NOTES PAYABLE

Notes payable: June 30, 1996
-------------
Bank line of credit(a) $ 910,000
Notes payable, due July 1, 1995, to individuals bearing
interest at 16% payable quarterly (See Note 8 legal
matters) 300,000
Notes payable, due May 2016, to U.S. Small
Business Administration, bearing interest at 4%
payable monthly (b) 320,582

Notes payable due September 30, 1995 to
a Nevis, BWI Corporation, bearing interest at 18%,
payable monthly (c) 222,630

Financing Agreement with A Secured Lender (d) 763,361
----------
$2,516,573
----------

(a) In July 1994, The Company replaced its 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 has agreed with the bank to reduce the line of credit by
$10,000 per month. As of the date of this filing, the line of credit has been
reduced to $870,000. This line of credit bears interest at a rate of prime plus
1% (9.25% as of the date of this filing.) The Company is also seeking
alternative sources of financing to ultimately replace the current line of
credit, but there can be no assurance it will be able to do so.

(h) In May 1993, Murano and CPC secured Disaster loans from U.S. Small Business
Administration pursuant to promissory notes dated May 20, 1993 and May 21, 1993
in an aggregate amount of $ 339,300, which bears interest at a rate of 4% per
annum, were payable in equal monthly installments including principal and
interest and the balance of which would be due 23 years from the date of the
Notes. Such borrowings are secured by machinery and equipment and are personally
guaranteed by the former President and Vice President of Murano and CPC and
their spouses. On July 29, 1996 the Company received non-payment notification
from the U S. Small Business Administration requiring full payment

F-28

<PAGE>

with interest. As a result of the nonpayment notification, the balance of the
Note is classified as current. The Company currently is renegotiating the terms
of the loan with the U.S. Small Business Administration.

(c) 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. On October 16, 1995 the parties agreed the Company owed the lender,
including interest and monthly extension fees of approximately $155,000 through
December 15, 1995, an aggregate amount of approximately $805,000. Pursuant to
the new agreement, the Company paid $405,000 to the Nevis Corporation upon
acceptance of the agreement. The Company also delivered a Promissory Note in the
principal amount of approximately $400,000, in extension and replacement of the
remaining balance due and payable of $180,000 on or before December 15, 1995 and
$220,000 on July 31, 1996. The new agreement also stipulated 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. The stock sale took place 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 is currently renegotiating the
terms of the agreement with the lender to restructure payment terms of principal
and interest outstanding of $245,000. There can be no assurance that the Company
will successfully complete these discussions.

(d) On February 15, 1995, Italia Collection entered into a Financing Agreement
with a New York based secured lender whereby Italia Collection may borrow
pursuant to an asset-related formula. The agreement remains in effect as of the
date of this filing, and may be terminated by either party upon notice to the
other and payment of the commitment fee for the unexpired term of this
agreement. Although the Company is currently pursuing alternative financing
agreements, as of the date of this filing, no such arrangements have been
finalized. According to the current agreement, the lender, upon confirmation of
shipments, will advance Italia Collection 70% of the receivable. Upon collection
of the receivable, the lender remits the balance of 30%. Interest is calculated
on the daily cash balance at the rate of prime plus 9% per annum (17.25% as of
the date of this filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. As of the date of this filing, the amount due to
the lender was approximately $750,000. In addition, the secured lender received
personal guarantees from Max Munn, President and Chief Executive Officer of the
Company, and his spouse. During February 1996, the Company's President and Chief

Executive Officer arranged for $160,000 additional financing from this lender at
the rates in effect for existing loans. The President and Chief Executive
Officer, and his spouse, have provided personal guarantees for this additional
funding, in addition to a security interest in certain real estate and Company
stock owned by his spouse. Of these proceeds, approximately $121,000 was used to
pay outstanding tax liabilities. The balance of the proceeds was loaned by the
Company to the President and Chief Executive Officer. A $38,000 demand loan
dated February 8, 1996, bearing an annual rate of interest of 18% was executed
by the President and Chief Executive Officer, and countersigned by the Chief
Financial Officer. On May 13, 1996, the Company's Board of Directors affirmed
by majority vote the loan

F-29
<PAGE>

by the Company to its President and Chief Executive Officer. The principal
balance of the loan will be partially offset by unreimbursed business expenses.
The remaining loan balance will be repaid by the President and Chief Executive
Officer to the Company, with interest as provided above, by September 1997.

9. SHAREHOLDER'S EQUITY

Shareholder's equity

The Company's certificate of incorporation authorizes the issuance of 15,000,000
(adjusted to 30,000,000 as of August 28, 1995 stockholders meeting) Class A
shares, $.001 par value, 2,500,000 Class B shares, $.00l par value, and
2,500,000 (adjusted to 5,300,000 on August 28, 1995) shares of Preferred Stock,
$.01 par value. Each Class B share entitles the holder thereof to five
noncumulative votes per share on all matters on which stockholders may vote at
meetings of stockholders. The Class A and Class B shares shall vote together as
a single class on all matters. The Class B shares are convertible on a
one-for-one basis at any time after issuance at the option of the holder into
Class A shares. The issuance of additional Class B shares could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the voting and other rights of Class A
shares. The Preferred Shares are convertible on a three to one basis at any time
after issuance at the option of the holder into Class A shares.

In June 1994, the Company issued 517,500 shares of Class A Common stock, par
value $.001 per share. 460,000 Class WA warrants to purchase Class A shares and
Class WB warrants, and 258,750 Class WB warrants to purchase Class A shares. The
net proceeds from this Offering were approximately $1,600,000.

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.

On April 4, 1996, the Company's Board of Directors resolved to issue 250,000

shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guaranty and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April 8,
1996. A Promissory Note and Security Agreement, whereby the shares will
collateralize the Promissory Note, was executed by the Company and Ms. Munn
pursuant to these terms.

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 stares, all of which bear a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. Commencing thirty (30) days following the date of the close of the
private placement, any of the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") which shall cover the
shares and allow the Investor to sell the shares to the public. Within fifteen
(15) days following receipt of the Demand Notice, the Company is required to
file such registration

F-30
<PAGE>

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 also agreed to include the shares in its
next registration statement.

The Company has not paid and does not anticipate paying any cash dividends on
its Class A Shares, Class B Shares, or Series A Preferred Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations, and in the
expansion of its business. 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.

Conversions and Stock Grants for Services

$200,000 balance with such revised Note providing for payment of principal on
October 20, 1995, having an interest rate of 14% per annum and being convertible
into 80,000 shares of Preferred Stock and 40,000 Class WC Warrants. On December
15, 1995, this conversion took place. The 80,000 Preferred Shares and 40,000 WC
Warrants were registered in a Registration Statement declared effective
September 18, 1996.

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

F-31
<PAGE>

In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn, Uncle of the President, of 150,000 shares of the Company's Class A Common
Stock, in consideration for past consulting services provided.

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 future services (See Note 10 - Consulting Arrangements). 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.

Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company and sister of the President and
Chief Executive Officer, the Company issued to Ms. Stevens 50,000 shares of the
Company's Class A Common Stock. The Company plans to register these securities
with the Securities and Exchange Commission no later than November 1996. Also

pursuant to the Settlement, the Company issued to Michael Levine as escrow agent
(the "Escrow Agent") 1,250,000 unregistered shares of the Company's Class B
Common shares (the "Escrow Shares".) The Escrow Shares shall not be voted by the
Escrow Agent, unless the Company defaults on its obligations under the
agreement. Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company.

An aggregate of $300,000 was recorded by the Company as expense related to the
aforementioned stock issued to consultants and others for services. These
charges were based upon the fair market value of the shares on the respective
dates granted.

See Note 8 and Note 10 for additional issuances of stock for services.

Warrants

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 Common 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 Class A Common
shares. The Commission declared this Registration Statement effective on July
019, 1996. During August and September 1996, 578,000 of the Company's Class WA
Warrants were exercised at $1.50 per warrant, generating proceeds to the Company
totaling $867,000.

Decor Group Inc. Stock Transaction (See Note 4)

F-32
<PAGE>

On March 3, 1996, the Company acquired 500,000 shares of Series A Convertible
Preferred Stock and an option to purchase 20,000,000 shares (the "Option
Shares") of Series B Non-Convertible Voting Preferred Stock of Decor Group,
Inc., ("Decor") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common stock and 200,000 shares of its Series A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. Also, the Company exercised its
option to purchase the Option Shares in September 1996, for total cash
consideration of $2,000. (See Note 4, Acquisitions, Dispositions and Strategic
Alliances.)

As part of the Company's investment in Decor, during the months of August and
September 1996, the Company purchased 109,867 shares of Decor's Series C

Non-Voting, Convertible, Preferred Stock at a cost of $824,000.

Stock Option Plans

The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc. 1994
Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides for
the granting of options to officers, employees and consultants to purchase not
more than an aggregate of 250,000 Class A Shares. Directors of the Company are
not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.

Pursuant to the 1994 Plan, the Board of Directors or a stock option committee
established by the Board to administer the 1994 Plan determines the persons to
whom options are granted, the number of Class A Shares subject to option, the
period during which the options may be exercised and the option exercise price.
With respect to incentive stock options, no option may be granted more than ten
years after the effective date of the 1994 Plan or exercised more than ten years
after the date of grant (five years if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). Additionally, with
respect to incentive stock options, the option price may not be less than 100%
of the fair market value of the Class A Shares on the date of the grant (110% if
the optionee owns more than ten percent of the Class A Shares of the Company at
the time of grant). The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the 1994 Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the NASDAQ National
Market System upon the basis of the last reported sale or transaction price on
the date of grant or, if the shares were not traded on such date, on the date
nearest preceding that date. Subject to certain limited exceptions, options may
not be exercised unless, at the time of exercise, the optionee is in the service
of the Company.

The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise price
of the option or portion thereof surrendered.

F-33

<PAGE>

of grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice President
of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.

The Director Plan. On June 20, 1994 the Board of Directors approved the 1994
Director Stock Option and Appreciation Rights Plan (the "Director Plan"). The
Director Plan was adopted to provide an incentive to Directors through automatic
and discretionary grants of stock options. The Director Plan provides for the
grant of options intended to qualify as "incentive stock options" under the Code
as well as options which do no so qualify.

The Director Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). Options under the Director Plan may
be granted to each person who is a Director of the Company on the date of grant.
All Directors of the Company are eligible to receive options under the Director
Plan.

The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the recipient
director for extraordinary service to the Company. In addition, on the second
Monday of May of each year each person who is then a director of the Company
shall be automatically granted an option to purchase 10,000 of the Company's
Class A Shares, subject to adjustment as provided for in the Director Plan. The
aggregate number of shares for which options may be issued pursuant to the
Director Plan is 250,000 shares. The exercise price for options granted under
the Director Plan must be equal to the fair market value per Class A Share on
the date of grant. The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the Director Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the NASDAQ National
Market System upon the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Each option granted under the Director Plan expires ten
years after the date of grant, unless a lesser period is specified by the
Committee.

In the event an optionee ceases to be a Director of the Company for any reason
at a time when he holds an option, he may exercise only such options as are
exercisable at the time he ceases to be a Director, within the original term of
the option. Options which are not exercisable at the time an optionee ceases to
be a Director shall terminate. In the event an optionee dies, the Director Plan

provides for the exercise of an option on behalf of the deceased Director.

F-34
<PAGE>

except that Mr. Stevens currently holds 269,750 shares of the Company's Class B
Common shares each of which are convertible into one Class A Common share at Mr.
Stevens option.

At June 30, 1996, pursuant to the execution of a Consulting Agreement between
the Company and Morris Munn, the father of the Company's President and Chief
Executive Officer, the Company granted to Morris Munn an option to purchase up
to 350,000 shares of the Company's Series A Preferred Shares at a net exercise
price of $2.25 per share. The Company recorded charges against earnings of
$87,500 at June 30, 1996 in conjunction with the issuance of these options.
Subsequent to June 30, 1996 all 350,000 of these options were exercised,
generating proceeds to the Company of $787,500.

At June 30, 1996, no other options have been granted. At June 30, 1996, an
aggregate of 209,000 options are exercisable at prices ranging from $3.50 to
$3.85.

At June 30, 1996, certain warrants to acquire Company securities are
outstanding: a) 3,760,000 Class WA Warrants exercisable at $1.50 to acquire one
Class A Common Share and one Class WB Warrant, of which 578,000 such warrants
have been exercised subsequent to June 30, 1996, b) 258,750 Class WB Warrants
exercisable at $2.00 to acquire one Class A Common Share, and c) 2,270,000 Class
WC Warrants exercisable at $5.50 to acquire one Series A Preferred Share.

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 security holders.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

On January 16, 1991, the Company entered into a sublease agreement that provides
for the leasing of a site which serves as the Company's principal office and
manufacturing facility. The term of the sublease expires December 31, 1996. This
lease requires minimum annual lease payments of approximately $265,000. The
Company is currently negotiating the renewal of this lease.

The Company entered into a lease on February 1, 1993 for a 1,800 square foot
Manhattan, New York showroom. The lease expires January 3, 2003, and requires
rent payments of approximately $78,000 per annum.

The Company entered into a lease on August 31, 1995 for a 5,739 square foot
Philadelphia, Pennsylvania showroom. The lease expires on August 31, 2000, and
requires rent payments of approximately $30,000 per annum.

Italia occupies approximately 1,750 square feet at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires minimum annual rent
payments of approximately $26,500.

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<PAGE>

In addition, on March 28, 1996 the Company's Italia operation was closed in
Hialeah Gardens, Florida and the product line was out-sourced to Lance
Corporation in Hudson, Massachusetts.

Future minimum lease payments under operating leases are as follows:

1997 $ 265,837
1998 130,475
1999 110,299
2000 111,648
2001 89,914
Thereafter 180,154
---------
$ 888,327
---------

Rent expense charged to operations, which includes escalation charges, for the
years ended June 30, 1996 and 1995, amounted to $408,458 and $405,945,
respectively.

Union Agreement

Effective April 1, 1991, the Company signed a three-year (with an additional
two-year automatic renewal) union contract for its union members under the terms
of a collective bargaining agreement. The Company has received notice that the
two-year automatic renewal and the existing union contract will remain in effect
through April 1, 1996. The Company is currently negotiating the renewal of its
union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and the Company believes its
relationship with all of its personnel is satisfactory.

Employment Arrangements

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

On May 8, 1995, the Company entered into an employment agreement with Donald
Feldman, Vice President of Sales and Marketing of the Company. The Agreement is
for a term of four years beginning June 1995 and may be terminated by the
Company after the first year with payment of 80% of the employee's salary,
reduced by the employee's other income. The Agreement provides that the Vice
President of Sales and Marketing will be employed at a base salary of $117,500
plus a sales commission structure based on increases in net sales for the
Company. Mr. Feldman will be granted an option to purchase 10,000 shares of the
Company's Class A

F-36
<PAGE>

Common Stock for every full year under the employment agreement at a price of
$2.50 per share. Concurrent with the effective date of Decor Group, Inc.'s
("Decor") initial public offering (See "Acquisitions and Strategic Alliances."),
the Company and Mr. Feldman plan to terminate Mr. Feldman's Employment
Agreement. Mr. Feldman will enter into a three (3) year employment agreement
with Decor at such effective date.

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

Refer to Legal Proceeding Section of this Note for additional disclosure.

Consulting Arrangements

Effective January 4, 1994, the Company entered into a two year Marketing and
Organizational Agreement (the "Marketing Agreement") with Robert M. Leopold.
Pursuant to the Marketing Agreement, Mr. Leopold will consult with and advise
the Company concerning its marketing plans, business operations, organization,
management, strategic planning, products and services, acquisitions, mergers,

and other matters. Mr. Leopold will be paid $9,375 each quarter in advance
together with reimbursement for expenses incurred not to exceed $200 per month.
In August 1995, the Company agreed to issue, at a future date, 60,000 Class A
Common Shares to Mr. Leopold in settlement of all current and future
liabilities, under this agreement. These shares, which bear a restrictive
legend, were issued April 16, 1996. In conjunction with the issuance of these
shares, approximately $55,000 was charged against earnings during the year
ending June 30, 1996.

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 the following: 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.

Legal Proceedings

During April and May of 1995, Hide Tashiro commenced two lawsuits 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. The Company believes it has valid
defenses against these claims and is of the opinion the outcome on this matter
will not have a material impact on the Company's financial position or results
of operations.

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

In July 1995, the Company through its attorneys made demand against Morgan Steel
Ltd. the office of which is located on the Isle of Man, England, for the payment
to the Company of $362,507 on account of a perceived violation of Section 16(b)
of the Securities and Exchange Act. No response to said demand for payment has

F-37
<PAGE>

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.

In July 1996, all litigation brought against the Company (as itemized in the

four following paragraphs) 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.

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, husband of Ann 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 rescission 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
rescission 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 rescission of a certain stock sale agreement between the Company and
Laurie Munn.

The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company was 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. Effective 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. In connection with the Agreement, 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

F-38
<PAGE>

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
release the Escrow Shares to the Company.

On August 13, 1996, 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
seeking monetary damages for the sum of $111,000. The Company considers the
complaint to be without merit and will vigorously defend the action.

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.

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

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

11. RELATED PARTY TRANSACTIONS

In October 1990 A.P.F. issued 100 shares of its Common Stock, no par value, to
Theodore Stevens, then President and a former Director of the Company, for
aggregate consideration of $225,000 and in October 1990 A.P.F. issued 165 shares
of its Preferred Stock, $1,000 par value per share, to Theodore Stevens in
consideration for the payment of $165,000. On June 30, 1992, A.P.F. converted
certain indebtedness arising from services rendered and loans provided by Decor
to A.P.F. in the amount of $114,000 to 114 shares of Preferred Stock of A.P.F.
In March 1994 such shares were transferred by Decor to Theodore Stevens and all
of such 279 shares of Preferred Stock were converted by Mr. Stevens into 124
shares of A.P.F. Common Stock. As a result of the Company's recapitalization,
the Company issued 1,000,000 Class B Shares (constituting all of the then issued
and outstanding Class B Shares of the Company) to Theodore Stevens in exchange
for all of the issued and outstanding Common Stock of A.P.F., the predecessor to
the Company.

In August 1995, Theodore Stevens, a Director of the Company, and Laurie Munn,

wife of Max Munn, President and Chief Executive Officer and a Director of the
Company, entered into an agreement whereby an existing option granted by Mr.
Stevens to Mrs. Munn to purchase 500,000 shares of Class B Common Stock at $3.50
per share was canceled and Mr. Stevens sold to Mrs. Munn 269,750 shares of Class
B Common Stock for $150,000 payable by an initial installment of $15,000 and a
promissory note for the balance of the purchase

F-39
<PAGE>

price payable in 15 years with interest at the rate of 6.6% per annum. On
December 1, 1995, Mr. Stevens filed a complaint in United States District Court,
Southern District of New York against Ms. Munn seeking, among other things, the
rescission of this stock sale. In June 1996, the parties agreed to a settlement
without either the rescission of the stock sale or the need for additional
payments by any party to the transaction (See Note 10).

During the fiscal year ended June 30, 1992, the Company borrowed the sum of
$75,000 from Sol Munn, the uncle of Max Munn, President and Chief Executive
Officer of the Company and borrowed an additional $75,000 in fiscal 1993. The
aggregate amount due, in the amount of $150,000, was evidenced by a promissory
note dated September 1, 1993, payable to The Munn Trust of 1975 - Trustee: Sol
Munn and Evelyn Munn and bore interest at the rate of 12% per annum. The note
was payable September 1, 1996, subject to the right of Sol Munn to extend the
term for an additional one year period upon 60 days notice. In March 1994 the
bearer of the note agreed to purchase certain works of art at 58% above the
Company's cost in full satisfaction of the above note. The Company recorded
approximately $87,000 credit to earnings pursuant to this transaction. On August
13, 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn. co-trustees,
commenced action in the Supreme Court of the State of New York, County of
Suffolk against Laurie Munn, Max Munn, and the Company pursuant to this
transaction, seeking monetary damages for the sum of $111,000 (See Note 10).

On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then respectively
President, Executive Vice President and Executive Vice President of the Company,
personally guaranteed the obligations of the Company under a Promissory Note
dated July 7, 1994 in the amount of $950,000 at an interest rate of prime plus
one percent (9.25% as of the date of this filing) to a New York bank. Pursuant
to terms of settlement involving various issues (See Note 10), in the event that
the Company's debt to the Bank is not repaid in full prior to March 31, 1997,
the Company will pay Ann Stevens, who is married to Mr. Stevens .2083% of the
outstanding balance per month as compensation for her personal guarantee. As of
September 30, 1996, the outstanding balance of this note totals $870,000.

On February 15, 1996, the Company's Italia Collection subsidiary entered into a
Financing Arrangement with a New York corporation 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. 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 $738,000. (See

"Liquidity and Capital Resources.") This Financing Arrangement has been
personally guaranteed by Max Munn, the Company's President and Chief Executive
Officer and his wife.

In October 1994, the Company borrowed the sum of $33,000 from the Vice President
and Chief Financial Officer of the Company. The amount due is evidenced by two
promissory notes dated October 27, 1994 and October 28, 1994 for $8,000 and
$25,000, respectively, which bore interest rates of 18% and 12% per annum,
respectively. The principal and interest were initially due November 17, 1994
and November 18, 1994, respectively, and have been extended to February 15,
1995. Unpaid sums bear interest at the rate of 18% per annum plus $160. In
April, 1995, the Company paid all principal and interest due on both promissory
notes.

F-40
<PAGE>

In October 1994, the Company borrowed the sum of $8,000 from the President of
the Company. The amount due was evidenced by a promissory note dated October 27,
1994, which bore interest at a rate of 12% per annum. The principal and interest
were due November 17, 1994. In November 1994, the Company repaid the loan. In
addition, in November and December 1994, the Company advanced an aggregate
amount of $13,000 to the then Executive Vice President - Operations of the
Company, and now its President and Chief Executive Officer. This amount will be
repaid to the Company during the year ended June 30, 1997.

On February 8, 1996, the Company entered into a demand loan with the President
for $38,000, bearing interest at 18%.

Refer to Note 9, Shareholder's Equity and Note 10, Commitments and Contingencies
for additional related party transactions.

12. PROFIT SHARING AND DEFERRED COMPENSATION PLANS

In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.

13. PROVISION (BENEFIT) FOR INCOME TAXES

The income tax provision (benefit) consists of:

Year Ended June 30,
-------------------
1996 1995
---- ----

Current income taxes:
Federal $ - $ -
State and local 17,859
-------- ---------
17,859 -
Deferred income tax (100,000)
-------- ---------
$ 17,859 $(100,000)
-------- ---------

The difference between the statutory and effective tax rate for the years ended
June 30, 1996 and 1995 results principally from a full reserve against any
benefit generated in 1996 (state taxes are provided) and immaterial
non-deductible expenses in 1995.

The benefit from the Company's net operating loss carryforward for Federal
income tax purposes in the amount of approximately $5,100,000 (which expire
through 2011) has been fully reserved for because future realization is not
considered to be "more likely than not". In addition, due to the changes in
ownership during the last three years and the future, utilization of the net
operating losses against future taxable income may be severely limited. The
deferred tax asset of approximately $1,800,000 is comprised primarily of net
operating losses and temporary differences.

F-41
<PAGE>

No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer of any securities
other than the securities to which it relates or an offer to any person in any
jurisdiction in which such an offer would be unlawful.

----------

TABLE OF CONTENTS
Page
----

Available Information....................................................... 3

Prospectus Summary.......................................................... 4
The Company................................................................. 4
The Offering................................................................ 7
Summary Financial
Information............................................................... 9
Risk Factors................................................................ 11
Use of Proceeds............................................................. 19
Dividend Policy............................................................. 20
Selected Financial Data..................................................... 21
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................................................................. 23
Business.................................................................... 35
Management.................................................................. 48
Principal Stockholders...................................................... 57
Certain Transactions........................................................ 57
Description of
Securities................................................................. 61
Selling Securityholders..................................................... 69
Legal Matters............................................................... 71
Experts..................................................................... 71
Financial Statements........................................................ F-1

----------

Until ____, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

375,000 Shares of Class A Common Stock
and
50,000 Shares of Series A 10% Cumulative
Convertible Preferred Stock

INTERIORS, INC.

----------

PROSPECTUS

----------

_______, 1997

----------

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnity its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) arising
under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.

The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise.

Article Seven of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.

The effect of the foregoing is to require the Company to indemnity the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.

INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.

Item 25. Other Expenses of Issuance and Distribution

The following is a statement of estimated expenses in connection with the
securities being registered, other than selling discounts and commissions:

Securities and Exchange Commission Registration Fee $ 328
Accounting Fees and Expenses to Auditor and Consultant $15,000.
Legal Fees and Expenses $50,000
Miscellaneous Expenses $ 5,000
-------
Total Estimated Expenses $70,328
=======

All such expenses will be borne by the Company.

Item 26. Recent Sales of Unregistered Securities.

The following shares of unregistered securities have been issued by the
Registrant since its inception. There were no underwriting discounts or
commissions paid in connection with the issuance of any of said securities,
except as noted below.

In October 1990 A.P.F. issued 100 shares of its Common Stock, no par
value, to Theodore Stevens, President and a Director of the Company, for
aggregate consideration of $225,000. In October 1990 A.P.F. issued 165 shares of
its Preferred Stock, $1,000 per value per share to Theodore Stevens in
consideration for the payment

II-1
<PAGE>

of $165,000. On June 30, 1992 A.P.F. converted certain indebtedness of A.P.F. to
Decor in the amount of $114,000 to 114 shares of Preferred Stock of A.P.F. In
March 1994 such shares were transferred by Decor to Theodore Stevens and the 279
shares of Preferred Stock were converted by Mr. Stevens into 124 shares of
A.P.F. Common Stock. As a result of the Company's recapitalization, the Company
issued 1,000,000 shares of the Company's Class B Shares to Theodore Stevens in
exchange for all of the issued and outstanding Common Stock of A.P.F.

In March 1994 as part of a bridge financing, the Company issued to two
persons 10% Notes in the aggregate principal amount of $270,000 and Convertible
Notes in the aggregate principal amount of $30,000, all in consideration of
loans to the Company in the aggregate principal amount of $300,000. See "Bridge
Financing."

In November 1994 Theodore Stevens converted 49,500 Class B Shares to
49,500 Class A Shares.

In November 1994 the Company sold 3,000,000 Class WA Warrants to nine
individuals and/or entities for aggregate consideration of $480,000.

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

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. These shares, which bear a
restrictive legend, were issued on April 16, 1996. In conjunction with the
issuance of these shares, approximately $105,000 of charges against earnings
were recorded during the year ended June 30, 1996.

In December 1995, the Company issued 35,000 shares of its Class A Common
Stock to Infinity Investors, Ltd. As part of a restructuring of a certain note
payable by the Company to Infinity Investors, Ltd.

In March 1996, the Company acquired 250,000 shares of Series A Convertible
Preferred Stock and an option to purchase 10,000,000 shares (the "Option
Shares") of Series B Non-Convertible Voting Preferred Stock of Decor Group,
Inc., ("Decor") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common Stock and 200,000 shares of its Series A
Convertible Preferred Stock, all of which bear a restrictive legend. (See
"Liquidity and Capital Resources".)

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 were issued on
April 24, 1996 to various unrelated investors generating gross proceeds of
$431,251. The Company realized net proceeds of $310,609 which was used to pay
certain outstanding liabilities. This filing is meant, among other things for
the purpose of registering these securities with the Securities and Exchange
Commission.

II-2
<PAGE>

In April 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock, all of which are restricted, 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 $437,000 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 value of this transaction.

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 consulting services provided. These shares, which bear a
restrictive legend, were issued on April 12, 1996. In conjunction with the

issuance of these shares, approximately $54,000 of charges against earnings were
recorded during the year ended June 30, 1996. This filing is meant, among other
things, to register these 150,000 Class A Common Shares with the Securities and
Exchange Commission. The Corporation, the Company's investment bankers.

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 restricted shares of the Company's Class A Common Stock. This
filing is meant, among other things, to register these 50,000 Class A Common
Shares with the Securities and Exchange Commission. The 50,000 Class A Common
Shares are subject to a "lock-up" agreement with VTR Capital Corporation, the
Company's investment bankers. 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.

In September 1996, pursuant to the Company's Director Stock Option Plan,
the Company issued: 10,000 of its Class A Common Shares to Roger Lourie, an
outside Director of the Company, and 10,000 of its Class A Common Shares to
various individuals at the instruction of Richard Josephberg, an outside
Director of the Company.

The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to Section 4(2) of the Securities
Act -as transactions by an issuer not involving any public offering. No
broker-dealer or underwriter was involved in the foregoing transactions. All
certificates representing the securities issued and currently outstanding by the
Registrant herein have been or will be appropriately legended.

Item 27. Exhibits.

Exhibit
No. Item
- ------- ----

1.1 Form of Amended Underwriting Agreement.(2)

1.2 Form of Agreement Among Underwaters.(1)

1.3 Form of Selected Dealer Agreement.(1)

2.01 Stock Purchase Agreement, dated October 21, 1994, among the Company and
Murano Crystal Corp. and Stephen M. Tucker.(6)

II-3

<PAGE>

2.02 Stock Purchase Agreement, dated October 21, 1994, among the Company and
Cemmic Productions Corp. and Stephen M. Tucker and Michael D.
Tucker.(2)

3.1 Certificate of Incorporation of the Company.(1)

3.1(a) Amendment to the Certificate of Incorporation.(2)

3.1(b) Certificate of Designations, Rights and Preferences of Series A
Preferred Stock.(2)

3.2 By-Laws of the Company.(1)

3.3 Restated Certificate of Incorporation of A.P.F. Holdings, Inc.(1)

3.4 Certificate of Ownership and Merger between Interiors, Inc. and A.P.F.
Holdings, Inc.(1)

3.5 Articles of Incorporation of Italia Collection, Inc.(7)

3.6 By-laws of Italia Collection, Inc.(7)

4.1 Forms of Representative's Warrants to Purchase Class A Common Stock,
Class WA Warrants and Class WB Warrants.(2)

4.1(a) Consulting Agreement between the Company and VTR Capital, Inc.(2)

4.1(b) Form of Warrant Exercise Fee Agreement by and between the Company, VTR
Capital, Inc., and the Transfer Agent.(2)

4.2 Form of Warrant Agreement by and between the Company, J. Gregory &
Company, Inc., and Transfer Agent.(3)

4.3(a) Specimen Class A Preferred Stock Certificate.(2)

4.3(b) Specimen Class WC Warrant Certificate.(2)

4.3(c) Specimen Class A Common Stock Certificate.(2)

4.4 Specimen Class B Common Stock Certificate.(2)

4.5 Specimen Class WA Warrant Certificate.(2)

4.6 Specimen Class WB Warrant Certificate.(2)

4.7 First Amendment to Warrant Agreement.

5.1 Opinion of Bernstein & Wasserman, LLP, securities counsel for
Registrant.

10.1 Sublease Agreement dated January 16, 1991 between Stern Metals and the
Company.(1)

II-4
<PAGE>

10.2 Lease dated August 11, 1992 between Hoopskirt Factory Partners and
I.R.A.L., Inc.(2)

10.3 Lease dated February 1, 1993 between Arglo Realty Company and the
Company.(1)

10.4 Security Agreement dated November 13, 1990 between the Company and
United Credit Corporation and amendments thereto dated November 13,
1990, January 7, 1992 , October 11, 1991 , December 15, 1992 and June
23, 1993.(1)

10.5 Promissory note dated June 27, 1991 for $75,000 to Mount Vernon Urban
Renewal Agency.(1)

10.6 Mount Vernon Small and Minority Business Loan Agreement dated June 27,
1991.(1)

10.7 Security Agreement between Mount Vernon Urban Renewal Agency and the
Company dated June 27, 1991.(1)

10.8 Intercreditor Agreement dated June 27, 1991 between United Credit
Corporation and Mount Vernon Urban Renewal Agency.(1)

10.9 Promissory note dated April 2, 1992 in favor of Hide Tashiro, in
principal amount Of $150,000.(1)

10.10 Promissory note dated April 2, 1992 in favor of Takehisa Nishijima, in
principal amount of $150,000.(1)

10.11 Promissory note dated June 8, 1992 in favor of Roger Lourie, in
principal amount of $15,000.(1)

10.12 Promissory note dated September 19, 1992 in favor of Howard
Morganstein, in principal amount of $50,000.(1)

10.13 Promissory note dated September 1, 1993 in favor of The Munn Trust of
1975 Trustee: Sol Munn and Evelyn Munn, in the principal amount of
$150,000.(1)

10.14 Agreement dated April 1, 1991 between Production, Merchandising &
Distribution Employees Union, Local 210, affiliated with The
International Brotherhood of Teamsters, Chauffeurs, Warehouseman and
Helpers of America, AFL-CIO and the Company.(1)

10.15 Form of Security Agreement between the Company and the Bridge
Lenders.(1)

10.16 Form of Non-Negotiable 6% Convertible Promissory Note.(1)

10.17 Form of Non-Negotiable 10% Promissory Note.(1)

10.18 Employment Agreement dated March 8, 1994 between A.P.F. Holdings, Inc.
and Max Munn.(1)

10.19 Marketing and Organizational Agreement between the Company and Robert
M. Leopold dated as of January 4, 1994.(1)

10.20 Promissory Note dated March 16 , 1994 in favor of William Evenchick, in
the principal amount of $100,000.(1)

II-5
<PAGE>

10.21 Pledge and Security Agreement between Ted Stevens and Stern Metals,
Inc. dated January 16, 1991.(1)

10.22 Promissory Note dated January 16, 1991 in favor of Stern Metals, Inc.
in the principal amount of $125,000.(1)

10.23 1994 Stock Option and Appreciation Rights Plan.(5)

10.24 1994 Director Stock Option and Appreciation Rights Plan.(4)

10.25 Revised form of Warrant Exercise Fee Agreement.(5)

10.26 Revised form of Consulting Agreement between the Company and J. Gregory
& Company, Inc.(2)

10.27 General Loan and Security Agreement dated July 7, 1994 between the
Company and The Bank of New York.(5)

10.28 Promissory Note dated July 7, 1994 in the amount of $950,000.(5)

10.29 General Guarantees dated July 7, 1994 of Ann Stevens, Theodore Stevens
and Max Munn to The Bank of New York.(5)

10.30 Lease Agreement dated July 15, 1994 between the Company and Robert
Schildkraut.(5)

10.31 Promissory Note dated June 30, 1994 in the amount of $100,000 issued to
Ted Stevens.(5)

10.32 Agreement dated October 6, 1994 among the Company, J. Gregory &
Company, Inc. and Vincent Mongo.(5)

10.33 Consulting agreement between Morris Munn and the Company dated October
1, 1993.(5)

10.34 Consulting agreement between M & E Company and the Company dated
October 1, 1993.(5)

10.35 Promissory Note dated October 25, 1994 in the amount of $100,000 issued

to Nybor Group, Inc. together with Affidavit of Confession of Judgment
relating thereto.(7)

10.36 Employment Agreement dated October 21, 1994, between Murano Crystal
Corp. and Stephen M. Tucker.(6)

10.37 Consulting Agreement dated October 21, 1994, between Murano Crystal
Corp. and Jean Tucker.(6)

10.38 Guaranty issued by the Company to Stephen M. Tucker and Jean Tucker.(6)

10.39 Guaranty issued by the Company to Stephen M. Tucker and Michael D.
Tucker.(6)

10.40 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Corp. and Michael D. Tucker.(6)

II-6
<PAGE>

10.41 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Corp. and Lisette Tucker.(6)

10.42 Promissory Note dated October 27, 1994 in the amount of $8,000 issued
to Max Munn.(7)

10.43 Promissory Notes dated October 27 and October 28, 1994 in the amounts
of $8,000 and $25,000, respectively, issued to Robert M. Schildkraut
together with Affidavits of Confession of Judgment relating thereto.(7)

10.44 Promissory Note dated November 23, 1994 in the amount of $225,000
issued to Ekistics Corp.(7)

10.45 Guarantees dated November 23, 1994 of Theodore Stevens, Max Munn,
Laurie Munn, and Ann Stevens.(7)

10.46 General Loan and Security Agreement dated November 22, 1994 from the
Company to Ekistics Corp.(7)

10.47 Rollover Promissory Notes issued to Robert Schildkraut in the amounts
of $25,000 and $8,000.

10.48 Form of Subscription Agreement for Private Placement of Series A 10%
Convertible Preferred Stock.(8)

10.49 Letter Agreement dated march 15, 1995 between the Company and Chatham
Capital Partners, Ltd.(3)

10.49(a) Form of Subscription Agreement for Offering by Decor Group, Inc.(11)

10.50 Demand note between the Company and Max Munn dated February 8, 1996.(9)

10.51 Non-negotiable Promissory Note between Laurie Munn and the Company

dated April 8, 1996, and Security Agreement relating thereto.(10)

10.51(a) Letter dated March 28, 1995 between Reynders, Gray & Co. Incorporated
to Theodore Stevens.(3)

21.1 Subsidiaries of the Registrant.(5)

23.1 Consent of Arthur Andersen LLP, independent Public accountants.

23.2 Consent of Bernstein & Wasserman, LLP - such consent is contained in
the opinion contained in Exhibit 5. 1.

99.1 U.S. Patent and Trademark office Trademark Reg- No. 1,736,623.(1)

99.2 U.S. Patent and Trademark Office Service mark Reg. No. 1,783,694.(1)

99.3 Consent Order for Permanent injunction for Defendant Max Munn issued by
the Federal Trade Commission in September 1991.(1)

99.4 Satisfaction of Judgement in the matter of A.P.F. Holdings, Inc. vs.
Max Munn.(2)
- ----------

II-7
<PAGE>

(1) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-77288-NY), which exhibit is incorporated herein by
reference.

(2) Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is incorporated
herein by reference.

(3) Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is incorporated
herein by reference.

(4) Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement (Registration No. 33-7728-NY), which exhibit is incorporated
by reference.

(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit
is incorporated herein by this reference.

(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed
November 3, 1994 (File No. 0-24352), which exhibit is incorporated
herein by this reference.

(7) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-86296) and which exhibit is incorporated herein by
reference.

(8) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-08215) and which exhibit is incorporated herein by
this reference.

(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995 and which such
exhibit is incorporated herein by this reference.

(10) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996 and which such exhibit
is incorporated herein by this reference.

(11) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996 (File No. 0-24352),
which exhibit is incorporated herein by this reference.

(12) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-94404), which exhibit is incorporated herein by
reference.

Item 28. Undertakings

(a) Rule 415 Offering.

The undersigned registrant will:

(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;

II-8
<PAGE>

(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

(2) For determining liability under the Securities Act treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.

(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

(b) Indemnification.

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 28 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a c@ for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(d) Rule 430A.

The undersigned Registrant will:

(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under
Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this Registration Statement as of the time the Commission declared
it effective.

(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the
Registration Statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.

II-9

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Mt.
Vernon, State of New York, on January 10, 1997.

INTERIORS, INC.

By: /s/ Max Munn
------------------------------
Max Munn, President
Chief Executive Officer and
Treasurer

In accordance with the requirements of the Securities Act of 1933, as
amended, this amendment to Registration Statement on Form SB-2 was signed by the
following persons in the capacities and on the dates stated.

Signature Title Date
--------- ----- ----

/s/ Max Munn President, Chief Executive January 10, 1997
- -------------------------- Officer, Treasurer and
Max Munn Director

/s/ Donald Feldman Vice President- Sales and January 10, 1997
- -------------------------- Marketing and Director
Donald Feldman

/s/ Michael Amore Vice President and Chief
- -------------------------- Financial and Accounting
Michael J. Amore Officer January 10, 1997

/s/ Roger Lourie Director January 10, 1997
- --------------------------
Roger Lourie

/s/ Richard A. Josephberg Director January 10, 1997
- --------------------------
Richard A. Josephberg

II-10

Exhibit 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
included in or made a part of this registration statement on Form SB-2
registering 375,000 shares of Class A Common Stock and 50,000 shares of Series A
Convertible Preferred Stock.

ARTHUR ANDERSEN LLP
New York, New York
January 10, 1997