INTERIORS INC, 10KSB/A, 1999-11-04

INTERIORS INC
10KSB/A, 1999-11-04
LUMBER & WOOD PRODUCTS (NO FURNITURE)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM 10-KSB/A

|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended: June 30, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _________ to _________

Commission file number 0-24352

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

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

320 Washington Street
Mt. Vernon, New York 10553
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)

Issuer's telephone number, including area code: (914) 665-5400
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.001 par value per share
-----------------------------------------------
(Title or Class)

Series A 10% Cumulative Convertible Preferred Stock, $.01 par value per share
-----------------------------------------------------------------------------
(Title or Class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes|X| No|_|

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

The issuer's revenue for the fiscal year ended June 30, 1999, was
$80,433,426. The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
closing price of such stock on October 8, 1999 was approximately $42,739,249.

As of October 8, 1999, the registrant had outstanding 31,378,067 shares of
Class A Common Stock, $.001 par value per share ("Class A Shares"), and
2,455,000 shares of Class B Common Stock, $.001 par value per share ("Class B
Shares").

DOCUMENTS INCORPORATED BY REFERENCE:
<PAGE>

Portions of the definitive proxy statement of the registrant, which is to
be filed with the Securities and Exchange Commission (the "Commission") within
120 days of the end of the fiscal year, are incorporated by reference into Part
III of this Annual Report on Form 10-KSB.

ii
<PAGE>

INTERIORS, INC.
1999 FORM 10-KSB ANNUAL REPORT

TABLE OF CONTENTS
-----------------

PART I
Item 1. Description of Business ....................................... 1
Item 2. Description of Properties ..................................... 11
Item 3. Legal Proceedings ............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders ........... 12
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ...................................................... 13
Item 6. Management's Discussion and Analysis or Plan of Operations .... 15
Item 7. Financial Statements and Supplementary Data ................... 20
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ......................................... 20
Items 9, 10, 11 & 12 ................................................... 21
Item 13. Exhibits, Financial Statements and Reports on Form 8-K ....... 23
<PAGE>

PART I

Item 1. Description of Business.

Overview

Interiors' goal is to become the premier, national single-source provider
of decorative accessories to the home furnishings industry. To achieve this
goal, Interiors has begun consolidating the highly fragmented decorative
accessories industry, rapidly establishing its national presence through the
acquisition, integration, and growth of established, well-regarded manufacturers
of decorative accessories. The Company's business strategy was developed in
response to changing demands of large retailers, who seek to increase
"single-sourcing" of inventory purchases in order to reduce distribution and
related expenses, including styling costs associated with coordinating related
products from multiple vendors. Interiors intends to integrate and optimize the
operations of acquired companies by consolidating into regional operating units
with centralized management, which the Company believes will lead to better
product design and greater efficiency in manufacturing, shipping and inventory
management, resulting in increased sales.

Prior to 1998, Interiors had two primary operating divisions: its custom
framing division, A.P.F. Master Framemakers, which is engaged in the manufacture
of antique and contemporary picture and mirror frames for museums, art
galleries, designers, collectors and frame retailers; and its wholesale
division, which manufacturers and markets a line of high-end traditional and
contemporary mirrors sold through upscale retail furniture and department
stores.

Since early 1998, the Company has been rapidly acquiring additional
businesses in the decorative accessories industry, which it operates as
corporate subsidiaries or divisions, and has significantly expanded its product
lines. In March 1998, the Company acquired the businesses of Henlor, Inc.
("Henlor"), its subsidiary Vanguard Studios, Inc. ("Vanguard"), and Merchandise
Sales, Inc. ("MSI"; d/b/a Artmaster Studios, Inc., "Artmaster"), manufacturers
of framed mirrors, paintings and prints, lighting products, sculptures and
tabletop accessories, with combined annual sales of approximately $20.2 million.
In July 1998, the Company acquired the businesses of Windsor Art, Inc.
("Windsor"), a manufacturer of framed paintings, prints and mirrors, with annual
sales of approximately $12.7 million. In August 1998, the Company acquired Troy
Lighting, Inc. ("Troy"), a manufacturer of lighting products, with annual sales
of $12.5 million. In February 1999,the Company acquired Model Home Interiors,
Inc. ("Model Home"), a company that provides design, merchandising and leasing
services to the homebuilding industry with annual sales of approximately $12.3
million, and Stylecraft Lamps, Inc. ("Stylecraft"), a manufacturer of portable
lighting products and fixtures with annual sales of approximately $25.4 million.
In March 1999, the Company acquired a 51% interest in CSL Lighting
Manufacturing, Inc. ("CSL"), a publicly-traded manufacturer of lighting fixtures
with annual sales of approximately $12.3 million, and Petals, Inc., a
manufacturer of decorative artificial flower and tree arrangements, with annual
sales of approximately $42.0 million. As a result of these transactions, the
Company's current business includes the design, manufacture and distribution of
a broad range or decorative accessories.

Interiors was originally incorporated in New York in October 1990 under
the name A.P.F. Holdings, Inc., which subsequently merged with and into
Interiors, Inc., a Delaware corporation, in March 1994. A.P.F. Holdings, Inc.
was formed for the purpose of acquiring the assets of the picture framing
business previously operated by a subsidiary of Collectors' Guild International,
a New York corporation formed in 1976.
<PAGE>

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

Industry

According to the most recent Universe Study conducted by Home Accents
Today, domestic retail sales of home furnishings accessories totaled $54 billion
in 1998. The two categories most relevant to the Company are wall decor and
portable lamps, which together accounted for 21.3% of total industry sales, or
$11.5 billion, in 1998. Wall decor consists of three segments: framed art,
framed mirrors and miscellaneous wall objects such as metal sculpture. The
Company has strong product lines in each of these categories. The market for
wall decor has been growing rapidly in recent years. Retail sales of wall decor,
which were $3.8 billion in 1997, increased by 13% in 1998 to $4.3 billion. Home
Accents Today's Universe Study estimated growth for 1999 at 10%, resulting in
anticipated total sales in excess of $4.8 billion in 1999. This represents a
compound annual growth rate of 11.5% since 1997.

The growth in the decorative accessory industry is being driven in part by
demographic changes. The "baby boomer" generation, which represents the largest
population group in the country, is entering their 40s and 50s, their peak
earnings years. The baby boomers have traded up from starter homes into their
dream homes, and are spending more on home improvements, additions, and
furnishings to make their homes more luxurious. Management believes that
Interiors' products appeal to the tastes and quality expectations of the baby
boomer generation.

The manufacturing sector of the decorative accessory industry is highly
fragmented and is composed predominately of small companies with limited product
lines. Over the last 20 years, the retail distribution channels for their
products has shifted from local independent retailers to large, national and
regional retailers in the mass and specialty markets that strive to attain
superior economics of scale and marketing leverage. The Company believes that
the manufacturing sector of the industry is under pressure to consolidate from
these large retailers. These retailers seek increased "single-sourcing" of
inventory purchases, particularly in product categories that do not account for
a significant percentage of their sales. Single-sourcing allows the retailers to
reduce distribution and related expenses, including styling costs associated
with coordinating related products from multiple vendors. Additionally, these
retailers are placing additional burdens on their suppliers by insisting that
suppliers communicate via electronic data interchange ("EDI"), hold inventory to
ensure quick delivery, and drop-ship inventory to each store in the retailer's
chain and, in many instances, directly to the retailer's customers.

The Company also believes that these retailers give preference to vendors
offering coordinated accessories. Coordinated accessories help satisfy the
consumer's preference for one-stop-shopping, whereby the consumer can purchase
furniture, floor coverings, window treatments and accessories from one retailer
in coordinated styles. Consumers find this approach preferable to attempting to
achieve consistent styling of accessories from several retailers. Management
believes that compliance with the demands of retailers and consumers is very
costly for many small manufacturers of decorative accessories. As a result, the
Company believes that many of these manufacturers are receptive to being
acquired by larger manufacturers such as the Company.

The Company, through the acquisition and consolidation of manufacturers
and distributors of decorative accessories, as well as internal growth, intends
to capitalize on both the fragmented nature of the manufacturing sector of this
industry and changing demands of retailers and consumers. Management believes
that increasing the breadth and depth of its product offerings will enhance the
Company's ability to expand its wholesale operations as it develops the
capability to market "whole room" packages of decorative accessories to
retailers in the mass and specialty markets. In addition, management believes
that the operations of acquired businesses can be consolidated into regional
operating units with centralized management, eliminating operating and
management redundancies, which should help Interiors, improve its cash flow and
operating margins. There can be no assurance, however, that Interiors will be
able to successfully integrate the operations, facilities and management of
acquired businesses or realize any benefits from any such acquisitions.

Acquisition and Expansion Strategy

The Company's strategic objective is to become the premier, national
single-source provider of decorative accessories to the home furnishings
industry. Key elements of the Company's strategy to accomplish this objective
are to (i) continue its role as an acquirer of independent manufacturers of
decorative accessories; (ii) integrate the operations of its operating divisions
and capture economies of scale; (iii) expand the Company's product lines through
acquisition and internal growth; and (iv) expand into new markets.

2
<PAGE>

Continue Growth Through Acquisitions. The Company has rapidly established
a national presence and critical customer mass by acquiring several established,
well-regarded companies which design, manufacture and distribute decorative
accessories in selected regions throughout the United States. The Company
intends to continue its acquisition strategy by acquiring additional
manufacturers of decorative accessories in order to deepen and broaden its
market presence and to expand its product offerings. Given the increasing
pressure from large retailers to consolidate, the Company believes that smaller
manufacturers of decorative accessories will continue to be attracted to, and
benefit from, the growth opportunity provided by the Company. As part of its
growth strategy, management intends to generally pursue companies with annual
revenues ranging from $5 million to $25 million, a moderate- to premium-priced
product line, a positive reputation in the marketplace and profitable
operations.

Integrate Operations and Capture Economies of Scale. To support the growth
of its business, the Company has implemented a continuing program designed to
maximize operating efficiencies by reducing manufacturing costs, increasing
inventory turnover and enhancing its management information systems. As a result
of this program, the Company seeks to integrate and optimize the operations of
the companies it acquires by (i) consolidating operations into regional
operating units with centralized management, (ii) providing the acquired
companies with material requirements planning software, which better determines
inventory requirements, (iii) linking ordering systems through EDI, which
permits the computerized receipt of customer orders, billing and exchange of
information with customers, and (iv) providing the acquired companies with the
Company's integrated support services. Management believes that the
centralization of these functions will lead to increased sales, better product
design, and greater efficiency in manufacturing, shipping and inventory
management. The Company also has significant opportunities for cross-marketing
the products of its various operating units.

Expand Product Lines. Interiors continuously introduce new products to
complement new trends in interior design and decorating. As the Company grows,
management intends to centralize and coordinate product design throughout the
Company. Management believes that the Company's acquisitions and integration
activities will also enhance the Company's ability to design and manufacture new
products which are coordinated with products from the Company's other product
lines. Interiors also intends to pursue licensing arrangements by seeking and
forming strategic alliances with designer labels (i.e., product brands with
national or international recognition) which are expected to either (i) grant
the Company the right to develop, market and sell certain of the Company's
products under the designer label's brand name or (ii) grant a designer label
the right to market and sell certain of the Company's products under the
designer label's brand name. Although the Company does not currently have any
licensing arrangements with designer labels, such licensing arrangements would
be expected to bolster the Company's product development efforts.

Expand Into New Markets. The Company intends to expand the distribution of
its products into new domestic and international markets. Initially, the Company
intends to focus on those markets in which it already has achieved some market
penetration or for which access is facilitated through existing distribution
channels and relationships. Currently, the Company principally sells home
furnishings and accessory items through the domestic wholesale market and, to a
more limited extent, the domestic retail market. The Company intends to expand
its business by increasing the Company's retail sales through direct marketing
and catalogue sales through its Petals subsidiary, and to include design,
merchandising and leasing services to the hospitality and assisted living
industries through its subsidiary, Habitat Solutions, Inc. In addition, the
Company intends to expand its domestic and international business by
establishing an Internet presence through Interiors' interactive website,
interiors.com, which is currently operational and expected to be enhanced.

3
<PAGE>

Acquisition History

Set forth below is a list of the Company's acquisitions within the past
three fiscal years along with the date of acquisition, trade or brand names and
product categories related to each acquired company, and the approximate amount
of aggregate annual sales for the businesses acquired in the full year prior to
acquisition:

<TABLE>
<CAPTION>
Approximate
Date Company Trade or Brand Names Product Categories Annual Sales
- ---- ------- -------------------- ------------------ ------------
<S> <C> <C> <C> <C>
March 1998 Vanguard Serengeti International; Framed mirrors, paintings and $13.4 million
Vanguard Studios; Lee Reynolds prints; lighting products;
sculptures and tabletop
accessories

March 1998 Artmaster Renaissance; Artmaster Studios Framed mirrors, paintings and $6.8 million
prints; lighting products

July 1998 Windsor Windsor; Dolbi Cashier Framed paintings and prints; $12.7 million
framed mirrors

August 1998 Troy Troy-Lite Lighting products $12.5 million

February 1999 Model Home Model Home Interiors Design and, merchandising $12.3 million

February 1999 Stylecraft Stylecraft Lamps Lighting products $25.4 million

March 1999 CSL(1) Creative Systems Lighting, Ortek Lighting products $12.3 million

March 1999 Petals Petals Silk floral and tree $42.0 million
arrangements
</TABLE>

- ----------

(1) The Company acquired a 51% interest in CSL.

Vanguard. On March 10, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, an acquisition subsidiary
of the Company, Henlor, and the shareholders of Henlor. Pursuant to the
agreement, the Company's acquisition subsidiary merged with and into Henlor with
Henlor continuing as the surviving corporation. Henlor also merged with its
subsidiary Vanguard Studios, Inc. ("Vanguard"). The merger consideration paid by
the Company consisted of (i) a cash payment of $705,621, (ii) an 8% promissory
note in the aggregate principal amount of $794,379 due December 1, 2000 and
(iii) the issuance of 299,581 Class A Shares to the former shareholders of
Henlor, which shares are subject to adjustment on March 10, 2000 to the extent
such shares are worth more than $1,000,000 or less than $250,000.

Artmaster. On March 23, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, Artmaster, MSI and certain
shareholders of MSI. Pursuant to the agreement, MSI merged with and into
Artmaster, with Artmaster continuing as the surviving corporation. The merger
consideration paid by the Company consisted of a 10% subordinated note of the
Company in the amount of $537,248 and 779,302 Class A Shares (the "MSI Merger
Shares"). In addition, the Company agreed to repay indebtedness of MSI owed to
certain creditors of MSI in the aggregate amount of $1,022,752 (which payment
consisted of a cash payment of $750,000 and a 10% subordinated promissory note
in the amount of $272,752). The Company repaid the $272,752 and $537,248
promissory notes on July 31, 1998 and March 31, 1999, respectively. In May,
1999, the former shareholders of MSI transferred the MSI Merger Shares to
Aberdeen Avenue, LLC in consideration for $1,250,000, and the Company was
released from all continuing obligations under the merger agreement.

4
<PAGE>

consisted $1,706,992 in cash and two secured subordinated 8% promissory notes,
one in the amount of $3.3 million and the other in the amount of $2.0 million
(collectively, the "Windsor Notes"). Concurrently with the purchase of the
shares of Windsor, the Company purchased 150,000 shares of common stock of
Bentley and a warrant to purchase 300,000 shares of common stock of Bentley in
exchange for the issuance of 1,500,000 Class A Shares (the "Windsor Shares").
One of the Windsor Notes, in the amount of $3.3 million, was repaid on September
30, 1998. The other Windsor Note, in the amount of $2.0 million, and the Windsor
Shares were repurchased by the Company for aggregate consideration of $2,643,000
on December 1, 1998. In addition, an officer of Bentley agreed to terminate his
consulting agreement with Windsor. The Windsor Shares were retired by the
Company on February 22, 1999.

Troy. On August 14, 1998, the Company consummated the transactions
contemplated by a July 2, 1998 merger agreement among the Company, Troy, and the
former shareholders of Troy. Pursuant to the agreement, a wholly-owned
subsidiary of the Company merged with and into Troy, with Troy continuing as the
surviving corporation. The merger consideration paid by the Company consisted of
a cash payment of $250,000 and the issuance of 650,000 Class A Shares (the "Troy
Merger Shares"). In addition, the Company agreed to cause Troy to repay
$1,700,000 in indebtedness to certain former shareholders of Troy. On or about
July 31, 1999, the former shareholders of Troy agreed to sell the Troy Merger
Shares to Dominion Capital Fund, Ltd., Dominion Investment Fund, LLC and
Sovereign Partners, L.P. (collectively, the "Troy Purchasers") for $1,000,000.
Contemporaneously therewith, the Company and the Troy Purchasers entered into a
letter agreement pursuant to which the Troy Purchasers agreed not to sell or
otherwise transfer the Troy Merger Shares until December 25, 1999. If the Troy
Merger Shares are worth less $1,150,500 based on the sixty-day average of the
Class A Shares following such date, the Company must either pay cash or issue
additional Class A Shares to the Troy Purchasers in the amount of the shortfall.

Model Home. On February 26, 1999, the Company consummated the transactions
contemplated by a merger agreement among the Company, Model Home and a wholly
owned subsidiary of the Company. Pursuant to the Agreement, the Company's wholly
owned subsidiary merged with and into Model Home, with Model Home continuing as
the surviving corporation merger. The purchase price paid by the Company
consisted of a cash payment of $2.0 million, promissory notes aggregating
$230,766 and Class A Shares having a fair market value of $2,300,000 (the "MHI
Merger Shares") on the eighteenth month anniversary of the closing.
Additionally, the Company agreed to issue Class A Shares with a maximum fair
market value of $2,000,000 (the "Earnout Shares") upon the attainment of certain
earnings goals by Model Home. The Merger Shares are being held in escrow as
security for the mutual obligations of the parties under the merger agreement.

CSL. On March 2, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and CSL. Pursuant
to the agreement, the Company acquired 1,191,752 newly-issued shares of common
stock, par value $.001 per share, of CSL (the "CSL Shares"), representing
approximately 51% of the issued and outstanding shares of common stock of CSL,
pursuant to the March 1, 1999. The purchase price for the CSL Shares consisted
of $600,000 in cash paid to CSL and the issuance of 1,927 shares of Series C
Preferred Stock, par value $.01 per share ("Series C Preferred Shares"), to
certain creditors of CSL in exchange for the cancellation of debt of CSL having
a principal amount of $1,027,500. In conjunction with the transaction, three
designees of the Company were added to the CSL board of directors, and CSL
entered into a standstill agreement, which prohibited the Company and its
affiliates from acquiring any additional shares of common stock of CSL for a
period of 150 days from the closing date.

Petals. On March 23, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the majority stockholders of
Petals and the Company pursuant to which the Company acquired Petals in exchange
for the cancellation of $2,440,000 of debt owed by Petals to one of the
stockholders, an aggregate of $4,000,000 in cash and a 8% convertible note in
the original principal amount of $2,000,000 due March 23, 2001. The note is
convertible into Class A Shares at $2.00 per share. The Company also issued an
aggregate of 100,000 three-year warrants to purchase Class A Shares at an
exercise price of $3.50 per share to the minority stockholders (the "Petals
Warrants"). In connection with the transaction, Petals redeemed the interests of
the minority stockholders for aggregate consideration of approximately $3.9
million in cash and $262,500 paid over nine months as severance payments.

5
<PAGE>

Products

The Company manufactures and distributes an assortment of decorative
accessories for the home furnishing industry, including picture frames and
framed mirrors, paintings and prints, sculptures and tabletop accessories,
portable and fixed lighting products and artificial flower and tree
arrangements. The Company's products, brand names and price positioning are
described below.

Picture Frames and Framed Mirrors. Interiors is a leader in producing
high-end, custom frames for paintings, prints and mirrors. The Company also
restores frames. The Company's frames are primarily reproductions of antique
frames made to look as distressed as genuine frames from that period would look
today. Customers select any combination of elements from the Company's library
of approximately 1,500 elements to generate the frame style best suited for the
picture or mirror and/or their decorating needs. These elements have been
collected over decades, mostly through the Company's restoration activities, and
primarily represent features from antique frames, many of which cannot be
replicated. The Company's skilled craftspeople hand produce the frame based on
the elements selected by the customer. Frame prices range from $300 to $52,000,
but typically are between $800 and $4,000.

Picture frames and mirror frames are made with the same tools, dies and
molds. Mirror frames differ from picture frames in that mirror frames are
constructed in the traditional design, with a top that is different from the
sides and bottom. In comparison, picture frames have the same design throughout
the four sides of the frame. The Company's mirror prices range from $1,000 to
$8,000. The Company's picture frames and framed mirrors are sold primarily under
the trade name of A.P.F. Master Framemakers.

Framed Paintings and Prints. The Company produces framed hand-painted oil
paintings on artist canvas and framed paper prints. The Company's line of framed
hand-painted oil paintings is available in over 500 designs. These large
canvases come in a variety of subjects including floral, abstracts, landscapes,
seascapes, and figurative subjects. The Company also sells prints, both
proprietary and non-proprietary, that are framed and placed under glass. Frames
and mats for both products are carefully selected to complement current trends
in interior design. Retail prices for the Company's framed paintings and prints
range from $70 to $600. The Company's framed art is sold primarily under the
trade names of Vanguard Studios, Artmaster Studios, Lee Reynolds and Windsor.

Lighting Products. The Company manufactures lamps which are available in
over 350 styles. The Company's portable lamps are manufactured with bases made
of metal, crystal and hand-painted hydrocal, a plaster composition that can be
finished to resemble stone, ceramic or metal. Additionally, the Company designs
and manufactures formed and decorated metal lamps, both portable and fixed. The
Company's lighting products generally are contemporary and do not compete with
commodity or imported lighting. The Company's lighting products are sold
primarily under the trade names Stylecraft Lamps, Vanguard Studios, Artmaster
Studios and Troy Lighting.

Silk Flower and Tree Arrangements. The Company designs and manufactures
high-quality silk flower and tree arrangements utilizing unique stems and other
components. The Company's silk flower business, Petals, started over 65 years
ago, was a pioneer in the industry and has enjoyed a very satisfied and loyal
customer following ever since. The Company's products can be used to decorate
homes, apartments and offices. Petals is constantly introducing many original
creations to meet the changing demands of its customers. The main avenue for
distribution of its silk flower and tree arrangements is through direct
mail-order sales. The Company is the leading mail-order catalogue source for
decorative artificial flowers and accessories for the home. Catalogues are
approximately 56 pages and contain over 200 different floral designs and
accessories. The catalogue is published and updated 4 times a year to coincide
with the major seasons of Spring, Summer, Fall and Christmas. Petals also has
five retail locations throughout the New York metropolitan area.

Sculptures and Tabletop Accessories. The Company manufactures and
distributes hand-crafted hydrocal sculptures and tabletop accessories. The
Company's products in this category sell for $75 to $200 at retail. The
Company's sculptures and tabletop accessories are sold primarily under the trade
names of Vanguard Studios and Serengeti International.

6
<PAGE>

Design, Merchandising and Leasing Services. The Company provides design,
purchasing, installation and leasing services to the homebuilding industry. The
Company's experienced team of designers create specific interior designs to be
used in model homes by homebuilders. The designs are created to promote the sale
of new homes by highlighting both the features of the homes and targeting
specific consumer markets. The Company purchases and installs in the model homes
all of the furniture and decorative accessories, many of which are designed and
manufactured by the Company, and either resells or leases the furniture and
accessories to homebuilders.

Raw Materials and Suppliers

The primary raw materials used by Interiors in manufacturing and
distributing its products are wood, hydrocal, composite resins, paint, glass,
plexiglass, corrugated packaging materials, matboards, gold leaf, metal and silk
flower components. The Company purchases its raw materials from a wide variety
of domestic and foreign suppliers. Interiors has at least two, and often more,
suppliers for each item used in its manufacturing process, and has chosen to
limit the majority of its purchases to those vendors with whom it has developed
long-term relationships. Interiors believes that there are a relatively large
number of other suppliers of raw materials available, which enable Interiors to
obtain competitive prices for its raw materials. Interiors does not anticipate,
nor has it experienced, any difficulty in obtaining any of its raw materials,
and is not dependent upon any one supplier. Interiors generally does not enter
into long-term contracts with its suppliers. Significant increases in the costs
of raw materials could have a negative effect on Interiors' gross margins for
its products if Interiors were unable to build these costs into the prices of
its products or to offset such raw material cost increases through cost
reductions.

Manufacturing

All of the Company's products are either manufactured directly by the
Company or specifically on its behalf. The Company operates six manufacturing
and distribution facilities located in California (2), Florida, Mississippi, and
New York (2). Approximately 90% of the Company's finished products are
manufactured at its production facilities. The balance of the Company's products
and certain components and raw materials utilized by the Company are
manufactured primarily in Mexico, China, Taiwan and Europe. The Company's
manufacturing and distribution systems are run by well-trained and experienced
production personnel.

The Company's manufacturing processes vary greatly among product lines,
and include metal fabrication and welding, wood cutting and joining, finishing
processes (including painting, polishing and etching), hydrocal casting,
electrification, silk screening and hand painting. Certain of the Company's
manufacturing processes utilize sophisticated computerized equipment, including
mat cutting, metal cutting and acetate generation, and advanced primer and paint
application systems. The Company emphasizes cost-efficiencies in the
manufacturing process and seeks to improve its manufacturing processes through
capital expenditures in facilities and equipment.

The Company's distribution facilities are located adjacent to its
manufacturing facilities. Interiors is currently investing in sophisticated
computer systems to code and track inventory and to coordinate and monitor
loading and shipment of products to retailers. The Company believes that
coordination of the manufacturing, packaging and distribution functions will
allow for greater quality control and production efficiencies.

Sales and Marketing

The Company's primary customers are domestic retailers in the home
furnishings industry, including furniture stores, home furnishings centers,
catalog retailers, home improvement centers, department stores and lighting
retailers. In addition, the Company's custom frame division markets its products
to museums, art galleries, designers, interior decorators and custom frame
retailers. The Company also sells artificial flower and tree arrangements direct
to consumers through catalogs and five retail stores. The design, merchandising
and leasing services are marketed primarily to home builders. In the fiscal year
ended June 30, 1999, the Company sold products to over 3,000 home furnishings
and specialty accounts.

Each of the Company's product lines is marketed and sold through a network
of independent manufacturers' representatives, who are often agencies employing
a number of sales personnel. These representatives are paid on a commission-only
basis, which the Company believes makes them highly motivated. None of the
Company's present manufacturers' representatives are exclusive to the Company,
and any representative could terminate its relationship with the Company at any
time for any reason. In addition, manufacturers' representatives typically
represent and distribute other non-

7
<PAGE>

competing decorative accessories. Given the large number of accounts, the
Company believes that the use of independent representatives is an effective and
cost-efficient means to distribute its products. The Company's manufacturer's
representatives are supported by an in-house team of sales and marketing
personnel. Each of the Company's product lines is managed by a National Sales
Manager or Vice President of Sales and Marketing who works exclusively with that
product line. In addition, the Company maintains an in-house support staff
consisting of order entry personnel as well as pre-sale and post-sale customer
service personnel.

To supplement its sales efforts to the home furnishings industry and
specialty account customers, the Company uses a variety of means to advertise
and promote its products, including product brochures, trade shows and
cooperative advertising with some of its accounts. Participation in trade shows,
particularly the semi-annual shows in High Point, North Carolina, is an
important element of Interiors' marketing efforts. In addition, the Company
operates sixteen showrooms in five cities around the country.

The Company believes that one of the primary ways it distinguishes itself
from its competitors is through customer service. A critical element of the
Company's customer service is on-time delivery of products to its customers.
Retailers are pursuing a number of strategies to deliver the highest-quality,
lowest-cost products to their customers. A growing trend among retailers is to
purchase on a "just-in-time" basis in order to reduce inventory costs and
increase returns on investment. As retailers shorten their lead times for
orders, manufacturers need to more closely anticipate consumer buying patterns.
The Company supports its retail customers' "just-in-time" inventory strategies
through investments in supporting inventory, improved forecasting systems, more
responsive manufacturing and distribution capabilities and electronic
manufacturing, communications and distribution capabilities. Customer service
also involves customer contact with the Company's top-level decision makers,
which permits early recognition of market trends and timely response to customer
problems.

Competition

The decorative accessories industry is highly competitive, and includes a
large number of domestic and foreign manufacturers, none of which dominate the
market. A number of the companies which compete directly with the Company are
well established and may have financial and other resources equal to, or greater
than, those of the Company. Interiors believes that it is the largest
manufacturer of premium picture and mirror frames (as well as other wall decor)
in the United States. Interiors maintains a strong competitive advantage in this
market due to its extensive collection of tools, dies, and molds developed over
decades from restoration of genuine antique frames. Interiors believes that it
would be extremely difficult for a competitor to build a comparable collection
of these elements. In addition, Interiors has a work force of skilled crafts
people that would be difficult to replicate. Interiors also believes that it
dominates a niche market for mass production of hand-painted oil paintings on
artist canvasses.

The rapid growth of high-volume retailers, together with changes in
consumer shopping patterns, have contributed to a significant consolidation of
the domestic home furnishings retail industry and the formation of dominant
multi-category retailers. Other trends among retailers are to require
manufacturers to maintain or reduce product prices or deliver products with
shorter lead times, or for the retailers to import generic products directly
from foreign sources. The combination of these market influences creates a
highly competitive environment in which the Company's largest customers
continuously evaluate which product suppliers to use, resulting in pricing
pressures and the need for ongoing improvements in customer service. Management
believes that the competition in the decorative accessories industry is
generally a function of timeliness of delivery, price, quality, reliability,
product design, product availability and customer service. Interiors believes
that it competes favorably with other companies due to its (i) dedicated
distribution channels, (ii) established vendor relationships, (iii) broad range
of product offerings, (iv) strong name recognition, (v) relative market share,
(vi) highly efficient, low cost manufacturing capabilities and (vii) experienced
management team.

Intellectual Property Rights

Many of the Company's products and their designs, as well as the design of
many of the tools, dies and molds used in manufacturing certain of the Company's
products, are proprietary to Interiors. In addition, the Company has sought to
establish certain proprietary rights with respect to the marks under which its
products and product categories are marketed. Consequently, the business of the
Company is dependent, to a certain extent, on the Company's ability to establish
and protect its intellectual property rights with respect to its products,
designs, trademarks and trade names under which it does business.

8
<PAGE>

The Company believes that it owns or has the right to use all designs and
proprietary technology necessary to manufacture and market its existing and
planned products. Designs with respect to its products are generally created by
employees and artists on a work-for-hire basis (i.e., the design automatically
becomes the property of the Company upon creation) or purchased or licensed from
independent designers on a consulting or royalty basis. The Company has no
knowledge that it is infringing on any existing copyright, trademark or patent
such that it would be liable for material damages or be prevented from
manufacturing or marketing its products. 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.

Regulatory Matters

Interiors is subject to a wide range of federal, state and local laws and
regulations relating to protection of the environment, worker health and safety
and the emission, discharge, storage, treatment and disposal of hazardous
materials. These laws include the Clean Air Act of 1970, as amended, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act
and the Comprehensive Environmental, Response, Compensation and Liability Act.
Certain of the Company's operations use materials containing chemicals that are
considered hazardous under various environmental laws. Accordingly, management
closely monitors the Company's environmental performance at all of its
manufacturing facilities. Management believes that the Company is in substantial
compliance with all environmental laws. While the Company may be required to
make capital investments at some of its facilities to ensure compliance,
Interiors believes that it will continue to meet all applicable requirements in
a timely fashion and that any investment required to meet these requirements
will not materially affect its financial condition or results of operations.
However, legal and regulatory requirements in these areas have been increasing,
and there can be no assurance that significant costs and liabilities will not be
incurred in the future due to regulatory noncompliance. See "Management's
Discussions and Analysis or Plan of Operations."

Employees

As of June 30, 1999, the Company employed approximately 1,036 full-time
persons, approximately 141 of whom were subject to collective bargaining
agreements. The Company and its subsidiaries are party to two collective
bargaining agreements which expire in the years 2002 and 2003. None of the
Company's employees have been on strike, or threatened to strike, since the
Company's inception and the Company believes that its relations with its
employees are generally good.

Directors and Executive Officers

The following table sets forth the directors and executive officers of the
Company and their respective ages and positions:

<TABLE>
<CAPTION>
Name Age Position(s) Held with the Company
- -------------------- ---- ------------------------------------------------
<S> <C> <C>
Max Munn 55 President, Chief Executive Officer, Chairman of the Board, and Director

Richard P. Belenski 44 Executive Vice President of Finance and Administration, and Chief Financial Officer

Dennis D'Amore 50 Executive Vice President and President of Decorative Accessory Group

Todd R. Langner 44 Executive Vice President of Sales and Marketing

James P. McCorry 54 President of Habitat Solutions, Inc. (a subsidiary of the Company)

9
<PAGE>

David A. Schwartz 32 General Counsel, Executive Vice President and Secretary

Roger Lourie 54 Director

Richard Josephberg 52 Director
</TABLE>

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 a director of Interiors since March 1994 and Chairman of
the Board and President since September 1995. At various times since September
1995, Mr. Munn was Chief Financial Officer of Interiors. Mr. Munn previously
held the positions of Executive Vice President, Operations and Secretary of
Interiors from February 1994 through September 1995. Mr. Munn served as Vice
President of A.P.F. Holdings, Inc. from May 1993 until A.P.F. Holdings, Inc.
merged with Interiors in March 1994. Since June 1996, Mr. Munn has served as a
director and officer of Decor Group, Inc., a publicly-traded affiliate of
Interiors, and since March 1999, Mr. Munn has served as a director and an
officer of CSL Lighting Manufacturing, Inc., a publicly-traded affiliate of
Interiors.

Richard P. Belenski has served as Chief Financial Officer of Interiors
since October 19, 1998. Mr. Belenski has over 20 years experience in the
management of retail, direct marketing and manufacturing companies. From
December 1996 through October 1998, Mr. Belenski was Vice President and Chief
Financial Officer of Petals, Inc. From October 1986 through May 1996, Mr.
Belenski served as Vice President of Finance and Chief Financial Officer for
operating divisions of the J. Crew Group, Inc., an international catalog and
retail company with total revenues of $900 million. Mr. Belenski was also
Director of Budgeting and Financial Analysis at Lincoln Center for the
Performing Arts, Inc. from March 1985 through October 1996 and held management
positions with J.C. Penney Company, Inc. from February 1978 through August 1980.
Since March 1999, Mr. Belenski has served as a director of CSL Lighting
Manufacturing, Inc., a publicly-traded affiliate of Interiors. Mr. Belenski
received a BA degree from Lycoming College in 1977 and holds an MBA from
Fairleigh Dickinson University.

Dennis D. D'Amore has served as Executive Vice President of Interiors and
President of Interiors' Decorative Accessories Division since June 1998. Since
March 1997, Mr. D'Amore has served as President and Chief Financial Officer of
Decor Group, Inc., a publicly-traded affiliate of Interiors, and since March
1999, Mr. D'Amore has served as an officer of CSL Lighting Manufacturing, Inc.,
a publicly-traded affiliate of Interiors. From 1991 through 1996, Mr. D'Amore
was a general business consultant to various private and public companies in a
wide range of industries. From 1989 to 1991, Mr. D'Amore served as Vice
President of Sales and Marketing for Lasco Bathware, a division of Tomkins
Industries. From 1988 to 1989, Mr. D'Amore served as President of
Colford-D'Amore, a management consulting firm. From 1981 to 1988, Mr. D'Amore
served as Executive Vice President and General Manager of Water Jet Corporation.

Todd R. Langner was appointed Executive Vice President of Sales and
Marketing of Interiors in August 1998. From 1990 to 1998, Mr. Langner was
President of Troy Lighting and Chief Operating Officer since March, 1994. From
1988 to 1990 Mr. Langner served as Vice President Sales and Marketing for
Hinkley Lighting and President of its subsidiary, LuminArt. From 1982 to 1988,
Mr. Langner was Vice President Sales, Marketing and Product Development for
Forecast Lighting. From 1979 to 1982, Mr. Langner served as Marketing Manager of
Illuminating Experiences. Mr. Langner holds a Bachelor of Science Degree in
Journalism and Public Relations from the University of Florida.

James J. McCorry was appointed President of Habitat Solutions, Inc., a
subsidiary of Interiors, in July 1998. Since 1996, Mr. McCorry has served as the
Executive Vice President, Chief Operating Officer and Chief Financial Officer of
Plaid Clothing Group, Inc. From 1994 through 1995, Mr. McCorry served as the
Senior Vice President, Chief Financial and Chief Operating Officer of Warnaco
Group, Inc., Warners/Intimates Group. In addition, Mr. McCorry served as the
Chief Financial Officer and Vice President of Operations and Administration of
Sara Lee Corp., Aris Isotoner Division.

10
<PAGE>

David A. Schwartz, has served General Counsel, Secretary and Executive
Vice President of Interiors since February 1999. From April 1996 until January
1999, Mr. Schwartz served as Corporate Counsel and Assistant Secretary for
Complete Management, Inc. Since March 1999, Mr. Schwartz has served as a
director and officer of CSL Lighting Manufacturing, Inc., a publicly-traded
affiliate of Interiors.

Roger Lourie has served as a director of Interiors since May 1995. Since
1980, Mr. Lourie has been a General Partner of Tremont Associates, a private
equity investment fund, and since 1980 has served as President of Misty Ridge
Associates, another private equity investment fund. Mr. Lourie is also Chairman
of the Board of Pneumatic Tool, Inc., a tool manufacturer and Devon-Adair
Publishing, Inc., a book publisher. Mr. Lourie received a B.S. degree in
engineering from Rensselaer Polytechnic Institute of Technology and M.B.A. and
M.I.A. degrees from Columbia University in New York.

Richard Josephberg has served as a director of Interiors since October
1995. Since 1986, Mr. Josephberg has served as the Chairman of Josephberg Grosz
& Co., Inc., a New York-based investment banking firm specializing in providing
private institutional capital to emerging growth companies. From 1969 through
1975, Mr. Josephberg served as a consultant with Goldman Sachs & Co.
Additionally, from 1985 through 1990, Mr. Josephberg served as a member of the
New York Stock Exchange. Mr. Josephberg received a B.B.A. degree from the
University of Cincinnati, and attended the M.B.A. program at Bernard Baruch
Graduate School of Business in New York.

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.

Item 2. Description of Properties.

Interiors' headquarters are located in Mount Vernon, New York, in leased
facilities consisting of 70,000 square feet of manufacturing and warehouse space
together with executive offices and a showroom. The facility is occupied under a
five-year lease expiring at the end of 2001 with a five-year renewal option. The
Company also owns approximately fifteen acres located in Hernando, Mississippi,
where it has a manufacturing and distribution facility. As of June 30, 1999, the
Company owned or leased the manufacturing facilities listed in the table below.

<TABLE>
<CAPTION>
Location Primary Use Approximate Size (sq. ft)
- -------- ----------- -------------------------
<S> <C> <C>
City of Industry, California Manufacturing; Distribution 98,000
Vernon, California Manufacturing; Distribution 235,000
Longwood, Florida Manufacturing; Distribution 70,000
Hernando, Mississippi Manufacturing; Distribution 150,000
Mount Vernon, New York Manufacturing; Executive Offices 70,000
Portchester, New York Warehouse 65,000
White Plains, New York Manufacturing; Distribution 85,000
</TABLE>

- ------------

In addition, the Company leases showroom facilities in High Point, North
Carolina (five showrooms), San Francisco, California (four showrooms), New York,
New York (one showroom) and Dallas, Texas (six showrooms). The showroom sizes
range from 1,500 square feet to approximately 9,800 square feet. In addition,
the Company has five retail outlets located in the New York metropolitan area.

Interiors believes that its facilities are well-maintained and adequate
for its current requirements, and that suitable additional space will be
available as needed to accommodate anticipated growth of its operations in the
foreseeable future.

11
<PAGE>

Item 2. Legal Proceedings.

Interiors is subject to claims and litigation arising in the ordinary
course of its business. In management's opinion, Interiors is not presently a
party to any such litigation or claims the outcome of which would have a
material adverse effect on its financial position or its results of operations.

Item 3. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.

12
<PAGE>

PART II

Item 4. Market for Registrant's Common Equity and Related Stockholder Matters.

The Company's Class A Shares have been traded on the Nasdaq Small Cap
Market ("NASDAQ") under the symbol INTXA since June 23, 1994. Prior to that
date, there was no public market for the Company's Class A Shares. The Class B
Shares are not traded on any public market. The high and low bid prices of the
Class A Shares on NASDAQ set forth below represent inter-dealer prices without
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions:

Fiscal Year Ending June 30, 1999 High Low
---- ---
First Quarter.................$2.19 $ .94
Second Quarter................$1.94 $ .69
Third Quarter ................$4.50 $1.38
Fourth Quarter................$2.25 $1.06

Fiscal Year Ending June 30, 1998 High Low
---- ---
First Quarter ................$1.63 $ .75
Second Quarter ...............$1.53 $ .97
Third Quarter ................$2.50 $ .97
Fourth Quarter ...............$2.03 $1.69

As of August 31, 1999, there were 190 holders of record of the Company's
Class A Shares and one holder of record of the Company's Class B Shares. On
September 29, 1999, the last reported sale price on the NASDAQ for the Company's
Class A Shares was $1.19.

The Company has never declared or paid cash dividends on its Class A
Shares or Class B Shares. The Company intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future. The Company's
ability to pay dividends is limited by factors the Board of Directors deems
relevant, including results of operations, financial condition and capital and
surplus requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, pursuant to the Company's
Certificate of Designations Rights and Preferences, (a) the Company's Series A
Preferred Shares are entitled to a dividend, prior to any payment of dividends
on the Class A Shares, of $0.50 per share per annum payable in cash or Class A
Shares in semi-annual installments of $0.25 per share, (b) the Company's Series
B Preferred Stock, par value $.01 per share ("Series B Preferred Shares"), are
entitled to a dividend, prior to any payment of dividends on the Class A Shares,
at a rate of 8% per year, and (c) the Company's Series C Preferred Shares are
entitled to a dividend, prior to any payment of dividends on the Class A Shares,
at a rate of 7% per year.

Unregistered Offerings

On or about October 7, 1998, the Company issued 125,000 Class A Shares to
Laurie Munn upon conversion of 125,000 Class B Shares. The issuance of the Class
A Shares was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by the issuer not involving any public offering because (i) the
offering was limited to one person, (ii) such person had sophisticated
representatives, (iii) such person had a pre-existing relationship with the
Company and access to information that would be required in a registration
statement and (iv) the offering was made through direct negotiations and did not
include general advertising or solicitation.

On or about October 22, 1998, the Company issued 10,000 Series A Preferred
Shares to SJP Contractors of New York, Inc. in settlement of litigation against
the Company. The issuance of the Series A Preferred Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering because (i) the offering was limited to
one person, (ii) such person had sophisticated representatives, (iii) such
person had a pre-existing relationship with the Company and (iv) the offering
was made through direct negotiations and did not include general advertising or
solicitation.

On or about October 22, 1998, the Company issued 10,000 Class A Shares to
Jules L. Marx in settlement of litigation against the Company's Chief Executive
Officer. The issuance of the Class A Shares was exempt from registration

13
<PAGE>

under Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering because (i) the offering was limited to one
person, (ii) such person had sophisticated representatives, (iii) such person
had a pre-existing relationship with the Company and (iv) the offering was made
through direct negotiations and did not include general advertising or
solicitation

On or about November 23, 1998, the Company issued 10,000 Class A Shares to
Roger Lourie, a director of the Company, and 10,000 Class A Shares to various
designees named by Richard Josephberg, a director of the Company. These shares
were issued as compensation for serving as a member of the Board of Directors
and valued at the fair market value on the date of issuance. The issuance of the
Class A Shares was exempt from registration under Section 4(2) of the Securities
Act, as a transaction by the issuer not involving any public offering because
(i) the offering was limited to one person, (ii) such person had a pre-existing
relationship with the Company and access to information that would be required
in a registration statement and (iii) the offering was made through direct
negotiations and did not include general advertising or solicitation.

On November 23, 1998, the Company issued 15,000 Class A Shares to JG
Partners LP in connection with certain investment banking services provided by
Josephberg Grosz & Co., Inc. ("Josephberg Grosz"), an affiliate of Richard
Josephberg, a director of the Company. These shares were valued at the fair
market value on the date of issuance. The issuance of the Class A Shares was
exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering because (i) the
offering was limited to one person, (ii) such person had a pre-existing
relationship with the Company and access to information that would be required
in a registration statement and (iii) the offering was made through direct
negotiations and did not include general advertising or solicitation.

On March 11, 1999, the Company issued 10,000 Class A Shares to Roger
Lourie, a director of the Company, and 10,000 Class A Shares to various
designees named by Richard Josephberg, a director of the Company. These shares
were issued as compensation for serving as a member of the Board of Directors
and were valued at the fair market value on the date of issuance. The issuance
of the Class A Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving any public offering
because (i) the offering was limited to two persons, (ii) such persons had a
pre-existing relationship with the Company and access to information that would
be required in a registration statement and (iii) the offering was made through
direct negotiations and did not include general advertising or solicitation.

On April 28, 1999, the Company issued 4,650 Class A Shares to JG Capital
Inc. and 5,350 Class A Shares to various designees named by Richard Josephberg,
a director of the Company, in connection with certain investment banking
services provided by Josephberg Grosz, an affiliate of Mr. Josephberg. These
shares were valued at the fair market value on the date of issuance. The
issuance of the Class A Shares was exempt from registration under Section 4(2)
of the Securities Act, as a transaction by the issuer not involving any public
offering because (i) the offering was limited to one person, (ii) such person
had a pre-existing relationship with the Company and access to information that
would be required in a registration statement and (iii) the offering was made
through direct negotiations and did not include general advertising or
solicitation.

No underwriters were engaged by the Company in connection with any of the
issuances described above and, accordingly, no underwriting discounts or
commissions were paid.

14
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operations.

Overview

Interiors, Inc., a Delaware corporation (the "Company"), is a designer,
manufacturer and marketer of a broad range of decorative accessories for the
residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall mirrors,
hand-painted oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories,
and silk floral and tree arrangements. The Company's goal is to become the
premier, national single-source provider of decorative accessories to the home
furnishings industry. To achieve this goal, the Company has begun consolidating
the highly fragmented decorative accessories industry, rapidly establishing its
national presence through the acquisition, integration and growth of
established, well-regarded manufacturers of decorative accessories.

Results of Operations

Comparison of Fiscal Years Ended June 30, 1999 and 1998

Net Sales for the fiscal year ended June 30, 1999 were $80,433,426
compared to $13,447,234 for the fiscal year June 30, 1998, an increase of
$66,986,192 or approximately 498%. The increase in net sales was primarily due
to the Company's acquisitions in March 1998 of Vanguard and Artmaster, which
added approximately $9,498,000 in additional net sales, the acquisition in
August 1998 of Windsor, which added approximately $12,533,000 in additional net
sales, the acquisition in August 1998 of Troy, which added approximately
$12,073,000 in additional net sales, the acquisition in February 1999 of MHI,
which added approximately $5,368,000 in additional net sales, the acquisition in
February 1999 of Stylecraft, which added approximately $13,946,000 in additional
net sales, the acquisition in March 1999 of Petals, which added approximately
$11,371,000 in additional net sales and the acquisition of an interest in March
1999 in CSL which added approximately $3,113,000 in additional net sales.

Cost of goods sold for the twelve months ended June 30, 1999 increased to
$50,449,519 from $8,268,922 for the same period in 1998, an increase of
$42,180,597. Cost of goods sold includes the costs directly related to the
recognition of the Company's net sales. The increase in cost of goods sold was
primarily due to the Company's acquisitions of Vanguard and Artmaster, which
added approximately $7.0 million in additional cost, the acquisition of Windsor,
which added approximately $8.7 million in additional cost, the acquisition of
Troy, which added approximately $8.6 million in additional cost, the acquisition
of MHI, which added approximately $2.7 million in additional cost, the
acquisition of Stylecraft, which added approximately $9.2 million in additional
cost, the acquisition of Petals, which added approximately $4.6 million in
additional cost, and the acquisition of an interest in CSL, which added $1.9
million in additional cost.

As a percentage of net sales, cost of goods sold for the fiscal year ended
June 30, 1999 increased to 62.7% from 61.4% for the same period of the prior
year. The concomitant decrease in profit margin resulted primarily from the
acquisition of additional businesses with alternative margin structures.

Selling, general and administrative expenses increased to $28,964,186 for
the fiscal year ended June 30, 1999 compared to $3,982,779 for the fiscal year
1998, an increase of $24,981,407. General and administrative expenses represent
overhead and administrative expenses excluding costs directly related to
operations and the recognition of the Company's net sales. The increase in
general and administrative expenses was primarily due to the Company's
acquisitions of Vanguard and Artmaster, which added approximately $4.1 million
in additional expenses, the acquisition of Windsor, which added approximately
$2.7 million in additional expenses, the acquisition of Troy, which added
approximately $3.4 million in additional expenses, the acquisition of MHI, which
added approximately $2.3 million in additional expenses, the acquisition of
Stylecraft, which added approximately $2.0 million in additional expenses, the
acquisition of Petals, which added approximately $5.2 million in additional
expenses, and the acquisition of an interest in CSL, which added $1.2 million in
additional expenses.

As a percentage of net sales, selling, general and administrative expenses
for the twelve-month period ended June 30, 1999 increased to 36.0% from 29.6%
for the same period of the prior year. This increase primarily resulted from
acquisitions of new businesses with alternative cost structures.

15
<PAGE>

Interest expense and non-cash financing charges increased to $4,185,220
for the fiscal year ended June 30, 1999 from $863,057 for the same period in
1998 principally due to financing activities associated with the Company's
acquisitions.

Other income reported for the twelve month period ended June 30, 1999
increased to $559,599 from $335,000 of other income for the same period of 1998.
During the third quarter of fiscal 1999, the Company recorded an impairment loss
of its entire investment, approximately $3.3 million, in Decor Group, Inc.
("Decor"), a publicly-traded corporation that designs and manufactures metal
sculptures, because the Company believes that, based on Decor's current
financial condition its investment has been permanently impaired. The Company
has established reserves for the uncollectibility of its entire receivable,
approximately $1.0 million, owed to the Company from Decor and the possibility
that the Company would be required to pay up to $300,000 pursuant to its
guaranty of approximately $580,000 of indebtedness of Decor owed to Austin
Financial. During the fourth quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $1.1 million, in
Photo-To-Art, Ltd. ("Photo-to-Art"), a company that converts photographs into
paintings, because the Company believes that, based on Photo-to-Art's current
financial condition its investment has been permanently impaired. The Company
has established reserves for the uncollectibility of $250,000 of its receivable,
approximately $325,000, owed to the Company from Photo-to-Art. During the twelve
month period ended June 30, 1999, the Company also had an extraordinary gain
from early extinguishment of debt in the amount of $870,264.

The Company reflected income tax expense of $200,000 for fiscal 1999 and a
tax benefit of $108,000 for the year ended June 30, 1998. The benefit recorded
is net of the various state income tax requirements and is primarily as a result
of net operating losses accumulated since the Company's inception and available
to offset future taxable income. The decrease in the benefit rate primarily
results from an increase in the Company's state income tax rate for the year
ended June 30, 1999 as compared to June 30, 1998.

Comparison of Fiscal Years Ended June 30, 1998 and 1997

Net sales from operations for the fiscal year ended June 30, 1998,
increased by $8,651,000, or 180%, to $13,447,000 from $4,796,000 for the fiscal
year ended June 30, 1997. Sales increased by $6,130,000 as a result of the
Company's acquisitions of Vanguard and MSI during March 1998. Net sales for the
A.P.F. Master Framemakers division increased $2,665,000 for the year ended June
30, 1998, due to increased sales to a major wholesale customer. For the year
ended June 30, 1997, net sales includes $144,000 of non-cash royalties and
commissions recognized as a result of a settlement of previously reserved
receivables.

Cost of goods sold as a percentage of net sales was 61% for the year ended
June 30, 1998, and 64% for the year ended June 30, 1997. The cost of sales for
the A.P.F. Master Framemakers division declined from approximately 64% as of
June 30, 1997 to 59% as of June 30, 1998. The cost of goods sold improved at the
A.P.F. Master Framemakers division as a result of increased sales to a major
wholesale customer and increases in factory productivity. The Company's cost of
goods sold was further improved due to the acquisitions of Vanguard and MSI. As
a result of the acquisitions, the Company recorded rapid sales growth in the
fourth quarter of fiscal 1998. During this period, the Company achieved savings
in the cost of raw materials and direct labor as a percentage of sales as a
result of manufacturing synergies resulting from the consolidation of
manufacturing facilities of these two subsidiaries.

Selling, general and administrative expenses as a percentage of net sales
totaled 30.4% for the year ended June 30, 1998, versus 53.6% for the year ended
June 30, 1997. The reduction in the ratio of selling, general, and
administrative expenses as a percentage of net sales for the year ended June 30,
1998 versus the prior period resulted primarily the increase in sales, the
containment of the growth of administrative personnel which led to reduced
salaries, benefits and travel expenses as a percentage of sales. Furthermore,
discretionary spending for such items as stationery and supplies, advertising,
and consulting fees were curtailed. These cost containments were achieved during
the same periods that sales grew rapidly as a result of the above acquisitions.

Interest expense as a percentage of net sales totaled approximately 4.1%
for the year ended June 30, 1998, versus approximately 8.4% for the year ended
June 30, 1997. Interest expense was approximately $152,000 higher in the year
ended June 30, 1998 versus the year ended June 30, 1997, due largely to new debt
to finance acquisitions.

Other income (expense) from consulting and management fee income decreased
$805,000 from fiscal 1997 to 1998. During 1997, the Company reflected $1,140,000
in revenues as a result of its non-cash transactions (sale of certain assets

16
<PAGE>

and other goods and services) with an affiliate. For the fiscal year ended June
30, 1998, the Company has recognized an aggregate of $335,000 in other income
for consulting and management services rendered to affiliates.

The Company reflected income tax benefits of approximately $108,000 and
$19,000, respectively, for the years ended June 30, 1998 and 1997. The benefit
recorded in each year is net of the various state income tax requirements and is
primarily as a result of net operating losses accumulated since the Company's
inception and available to offset future taxable income. The decrease in the
benefit rate primarily results from an increase in the Company's state income
tax rate for the year ended June 30, 1998 as compared to June 30, 1997.

For the year ended June 30, 1998, the Company realized net income of
approximately $634,000 ($0.04 per share), versus net income of approximately
$106,000 (($0.09) per share) for the year ended June 30, 1997.

Due to declining revenues and high operating costs, on December 16, 1996,
the Board of Directors decided to dissolve and discontinue Italia. On December
27, 1996, a Notice of Public Auction was distributed by the Company, advising
all interested parties that a public auction of all the assets of Italia
consisting of molds, equipment, models, and inventory listed in a Security
Agreement entered into between Italia as a debtor and United Credit Corporation,
as secured party, was to occur. The auction took place on January 10, 1997 and
the Company was the successful bidder, thereby acquiring all the assets of
Italia in consideration of a payment of $2,000 and the assumption by the Company
of the liabilities of Italia to United Credit Corporation, which as December 31,
1996 totaled approximately $806,000. Due to its preexisting relationship with
the Company coupled with the evaluation of the Company's prospects and financial
condition on a going forward basis, United Credit Corporation approved of this
transaction. Since the financial statements of Italia are consolidated into
those of the Company, Italia's liabilities have already been reflected on the
Company's historical consolidated financial statements. At June 30, 1997, the
Company made the adjustments necessary to properly state the remaining assets
and liabilities of Italia. These adjustments included approximately $586,000
write-offs of debt recorded based on the advice of the Company's legal counsel
(as the Company is not legally liable for such liabilities. Furthermore, the
Company wrote-off approximately $534,000 in assets related to its Italia
subsidiary, which were not considered to benefit the Company's future
operations. The write-off of the assets is reflected in the "cost of goods sold"
and "selling, general and administrative expenses" components of the June 30,
1997 statement of income. In addition a general reserve on $56,000 was recorded
and included on the Company's historical consolidated financial statements.

Liquidity and Capital Resources

During the fiscal year ended June 30, 1999, the Company has primarily used
its cash to support operating activities, to fund acquisitions and for capital
expenditures. The Company's primary sources of cash during this period have been
the proceeds raised by (a) the private placement of two 24.5% secured promissory
notes issued to United Credit in the aggregate principal amount of $2,000,000,
(b) the private placement of five 12% convertible demand notes aggregating
$686,000 (the "12% Notes"), which are convertible into Class A Shares at $1.125
per share, (c) the private placement of a secured promissory note due October
25, 1999 (the "Landis Note") issued to the Landis Brothers Corporation
("Landis"), which currently bears interest at a rate of 16% per annum, (d) the
issuance of Series B Preferred Shares, which raised approximately $2.0 million,
(e) the issuance of Series C Preferred Shares, which raised approximately $4.5
million, and (e) the exercise of the Company's warrants to purchase Class A
Shares ("WB Warrants") and warrants to purchase Series A Preferred Shares ("WC
Warrants"), which raised approximately $18.2 million. In addition, as discussed
below, the Company currently has formula based secured financing arrangements
with Austin Financial Services, Inc. ("Austin"), NationsBank ("NationsBank") and
Finova Growth Finance (f/k/a United Credit, "Finova"). At June 30, 1999, the
Company had working capital of $19,183,047.

Net cash used by operating activities during fiscal year 1999 was
$1,932,035

Net cash used in investing activities during fiscal year 1999 was
$29,258,607, primarily due to the acquisitions of Windsor, Troy, MHI, Stylecraft
and Petals.

Net cash provided by financing activities during fiscal year 1999 was
$32,499,659, primarily due to proceeds raised from the issuance of debt and the
exercise of the WB Warrants and WC Warrants.

The Company has secured formula based financing arrangements with several
lenders relating to the operations of its subsidiaries. As of September 27,
1999, the Company owed Austin Financial approximately $10,529,000 at an annual

17
<PAGE>

rate equal to prime plus 2.0% (10.25% as of the date of this filing), and could
borrow approximately an additional $3,271,000, relating to the operations of
Windsor, Troy, Vanguard and Stylecraft. As of September 27, 1999, the Company
owed NationsBank approximately $2,513,000 at an annual rate equal to prime
(8.25% as of the date of this filing), and could borrow approximately an
additional $1,487,000, relating to the operations of MHI. As of September 27,
1999, the Company owed Finova approximately $565,000 at an annual rate equal to
prime plus 8.0% (16.25% as of the date of this filing), and could borrow
approximately an additional $935,000, relating to the operations of the
Company's A.P.F. Master Framemakers division. The Company's obligations owed to
Finova are personally guaranteed by Max Munn, the Chairman, President and Chief
Executive Officer of the Company, and his spouse. The Company is currently
seeking to replace these financing arrangements in an effort to reduce its
overall interest expense. There can be no assurance, however, that the Company
will be able to obtain sufficient financing on terms that are equal to or more
favorable than its current arrangements.

On March 20, 1999, the Company redeemed 916,591 WB Warrants and 103,610 WC
Warrants for aggregate consideration of $10,202.01 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. Prior to redemption, an amount of WB Warrants and WC Warrants were
exercised at $2.00 and $5.50, respectively, resulting in the issuance of
2,796,032 Class A Shares and 2,322,355 Series A Preferred Shares, and the
Company received gross proceeds of approximately $18.2 million. In connection
with the redemption, the Company paid a fee of $175,000.

As of June 30, 1999, the Company had accrued but unpaid dividends of
$133,256 on its Series A Preferred Shares.

During fiscal year 1999, the Company conducted an active acquisition
program using both cash, stock and debt as consideration in its transactions. In
order to accomplish additional acquisitions, the Company anticipates that it
will be required to pay additional cash, issue additional securities and/or
incur additional debt.

The Company believes that its current cash, cash flow from operations, and
available lines of credit will enable it to meet its working capital and capital
expenditure requirements through the first quarter of fiscal 2001.

Impact of Inflation

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

Sales Variations

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

18
<PAGE>

Year 2000 Compliance

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than one year, computer systems and
software used by many companies may need to be upgraded to comply with Year 2000
requirements. The Company has begun a full evaluation of its Year 2000
compliance needs with respect to its computer system and has authorized funding
of approximately $100,000 and contracted with a Year 2000 consulting service to
meet those needs. The Company is currently in the process of restructuring its
computer systems in order to prevent disruptions in operations involving the
transition of dates from 1999 to 2000 and expects to be fully Year 2000
compliant by such time. If due to an unforeseen circumstance, the Company cannot
achieve complete Year 2000 compliance by the year 2000, the Company is prepared
to institute temporary computer modifications which will allow it to transition
from the year 1999 to the year 2000 with only minor disruptions. These
disruptions are not anticipated to have any material effect on Interiors'
operations. Under a worst case scenario, however, system failure or
miscalculation could result in an inability to process transactions, send
invoices, accept customer orders, provide customers with products and services,
or engage in similar normal business activity. The Company has not completed its
assessment of potential Year 2000 related problems among third parties upon
which it relies, including its suppliers and customers. Substantial business
interruptions at key suppliers or major customers could have a material adverse
effect on the Company

As Year 2000 preparations continue, the Company may discover additional
Year 2000 problems, may not be able to develop, implement or test redemption or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. The foregoing factors, individually or in the
aggregate, could materially adversely affect the Company's operating results and
could make comparison of historic operating results and balances difficult or
not meaningful.

Forward - Looking Statements

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

In particular, in connection with certain past acquisitions the Company
has disclosed expected additions to its revenues from such transactions. Such
revenue forecasts are forward-looking information and as such are inherently
subject to risk and uncertainty. Important factors, including those set forth
below, could cause the Company's actual results from these transactions to
differ materially and adversely from the projections, or the additional revenues
from these transactions could be offset by a diminution of other revenues.
Accordingly, there can be no assurance that the Company will achieve the
projected revenues, or, if attained, what effect such revenues will have on the
Company's net earnings or earnings per share. In addition, the Company is
particularly susceptible to various factors that may affect future results, such
as: risks relating to the integration in connection with acquisitions; hiring
and retaining upper management personnel; capital requirements; identification
of growth opportunities; implementation of cost and accounting controls; the
issuance of securities that may be dilutive to current equity holders,
maintaining high levels of debt and the possible volatility of stock prices.

19
<PAGE>

Item 7. Financial Statements and Supplementary Data.

Reference is made to the Index to Consolidated Financial Statements on
page F-1 for the Company's consolidated financial statements and notes thereto.
Supplementary schedules for the Company have been omitted as not required or not
applicable because the information required to be presented is included in the
financial statements and related notes.

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

None.

20
<PAGE>

PART III

Items 9, 10, 11 & 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Commission within
120 days of the end of the fiscal year.

Item 13. Exhibits, Financial Statements and Reports on Form 8-K.

(a) The following documents are filed as part of this Report:

1. Financial Statements:

The Financial Statements are incorporated herein as part of Item 8
of this Report.

2. Exhibits:

See Index on Page 23 of this Report.

(b) Reports on Form 8-K:

The following reports on Form 8-K were filed during the last quarter of
fiscal year ended June 30, 1999:

(1) Current Report on Form 8-K reporting "Item 2 Acquisition or
Disposition of Assets" as filed with the Commission on April 9,
1999;

(2) Current Report on Form 8-K/A reporting "Item 2 Acquisition or
Disposition of Assets" and including the required financial
statements as filed with the Commission on May 10, 1999; and

(3) Current Report on Form 8-K/A reporting "Item 2 Acquisition or
Disposition of Assets" and including the required financial
statements as filed with the Commission on June 7, 1999.

21
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.

INTERIORS, INC.

By: /s/ MAX MUNN
------------------------------------
Name: Max Munn
Title: President, Chairman and
Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

Signature Title Date
- --------- ----- ----

/s/ MAX MUNN President, Chairman, Chief November 3, 1999
- ------------------------- Executive Officer, and Director
Max Munn

/s/ RICHARD P. BELENSKI Executive Vice President Finance November 3, 1999
Richard P. Belenski and Administration, and Chief
Financial Officer

/s/ ROGER LOURIE Director November 3, 1999
- -------------------------
Roger Lourie

/s/ RICHARD JOSEPHBERG Director November 3, 1999
- -------------------------
Richard Josephberg

22
<PAGE>

EXHIBIT INDEX

Exhibit
No. Description of Exhibit
- ------- ----------------------

2.1 Stock Purchase Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). (1)

2.2 Agreement and Plan of Merger dated December 31, 1998 by and between
MHI Acquisition Corp., Interiors and Model Home Interiors, Inc. (2)

2.3 Stock Purchase Agreement dated August 27, 1998 by and among
Interiors, Jimmy D. Webster, Jr., Bettye Jo Webster and Henry L.
Gray. (3)

2.4 Agreement and Plan of Merger, dated July 2, 1998, by and among Troy
Acquisition Corp., Interiors, Troy, Barry R. Jackson, and Todd R.
Langner ("Langner"). (4)

2.5 Stock Purchase Agreement dated July 7, 1998, by and between
Interiors and Bentley. (5)

2.6 Purchase Agreement dated December 11, 1999 by and among Interiors,
and Mark N. Sklar, Drew M. Brown, the Bennett Dorrance Trust, the
Bennett Dorrance, Jr. Trust, the Ashley Dorrance Trust, the Dorrance
1995 Issue Trust and DMB Property Ventures Limited Partnership. (6)

3.1 Certificate of Incorporation of Interiors. (7)

3.2 Certificate of Ownership and Merger between Interiors, Inc. and
A.P.F. Holdings, Inc. (7)

3.3 Certificate of Amendment of Certificate of Incorporation of
Interiors. (8)

3.4 Certificate of Designations, Rights and Preferences of Series A
Preferred Stock. (8)

3.5 Certificate for Restoration, Renewal and Revival of the Certificate
of Incorporation. (9)

3.6 Certificate of Merger of Interiors, Inc. into Interiors Holdings,
Inc. (9)

3.7 By-Laws of Interiors. (7)

3.8 Certificate of Designations, Rights and Preferences of Series B
Preferred Stock. (10)

3.9 Certificate of Designations, Rights and Preferences of Series C
Preferred Stock. (10)

4.1 Specimen Class A Preferred Stock Certificate. (8)

4.2 Specimen Class A Common Stock Certificate. (8)

4.3 Specimen Class B Common Stock Certificate. (8)

23
<PAGE>

4.4 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Dominion Capital
Fund, Ltd. ("Dominion"). (9)

4.5 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Sovereign Partners,
L.P. ("Sovereign"). (9)

4.6 7% Convertible Debenture due July 29, 2001, dated July 30, 1998, in
the amount of $1,250,000, issued by Interiors to RBB Bank AG
("RBB"). (9)

4.7 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Dominion. (9)

4.8 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Sovereign. (9)

4.9 Common Stock Purchase Warrant A to Purchase 535,714 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to RBB.
(9)

4.10 Common Stock Purchase Warrant B to Purchase 50,000 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Cardinal Capital Management Inc. ("Cardinal"). (9)

4.11 Common Stock Purchase Warrant B to Purchase 62,500 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to
Cardinal. (9)

4.12 Registration Rights Agreement, dated July 27, 1998, by the Holders
listed therein and Interiors. (9)

4.13 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Sovereign. (9)

4.14 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Dominion. (9)

4.15 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Sovereign. (9)

4.16 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Dominion. (9)

4.17 Registration Rights Agreement, dated August 25, 1998, by the Holders
listed therein and Interiors. (9)

4.18 Escrow Agreement dated July 2, 1998 by and among Buyer, U.S. First
Trust, a national association, and Barry R. Jackson. (10)

4.19 The Windsor Art, Inc. Voting Trust Agreement No. 1 dated July 30,
1998 by and among Lloyd R. Abrams and Max Munn, Buyer and Bentley.
(10)

4.20 Series B Warrant to purchase up to 2,000,000 Class A Shares issued
to Seaside Partners, L.P. (10)

24
<PAGE>

4.21 Form of 12% Convertible Promissory Notes. (10)

4.22 Form of Registration Rights Agreement by and among Interiors and
minority shareholders of Petals. (10)

4.23 Form of Warrant to Purchase Class A Shares issued to minority
shareholders of Petals. (10)

4.24 10% Convertible Promissory Note dated March 23, 1999 in the amount
of $2,000,000 issued to majority shareholder of Petals. (10)

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

10.2 Standstill Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). (1)

10.3 1994 Stock Option and Appreciation Rights Plan. (11)

10.4 1994 Director Stock Option and Appreciation Rights Plan. (12)

10.5 Revised form of Warrant Exercise Fee Agreement. (11)

10.6 Consulting Agreement, dated October 1, 1993, between Morris Munn and
Interiors. (11)

10.7 Employment Agreement, dated November 1, 1998, between Interiors and
Max Munn. *

10.8 Promissory Note, dated March 10, 1998, made by Interiors in favor of
Michael H. Greeley ("Greeley"), in the principal sum of $794,379.(9)

10.9 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of $3,300,300.
(5)

10.10 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of $2,000,000.
(5)

10.18 Consulting Agreement, dated July 30, 1998, by and among Windsor,
Lloyd R. Abrams, and Interiors. (5)

10.19 Securities Purchase and Registration Rights Agreement, dated July
30, 1998, by and among Max Munn, Bentley, and Interiors. (5)

10.20 Employment Agreement, dated March 10, 1998, by and between Greeley
and Henlor. (13)

10.21 Employment Agreement, dated August 14, 1998, by and between
Interiors and Langner. (4)

10.22 Stock Purchase Agreement dated as of July 30, 1999 by and among
Interiors, Barry R. Jackson, U.S. Bank Trust and the entities listed
on Schedule A annexed thereto.*

25
<PAGE>

10.23 Letter Agreement dated August 2, 1999 by and among Interiors,
Sovereign, Dominion and Dominion Investment Fund, LLC.*

11.1 Statement re: computation of per share earnings.

21.1 Subsidiaries of the Registrant.*

27 Financial Data Schedule

99.1 U.S. Patent and Trademark Office Trademark Reg. No. 1,736,623. (7)

99.2 U.S. Patent and Trademark Office Service Mark Reg. No. 1,783,694.(7)
* Previously filed.

(1) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 4, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.

(2) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 9, 1999 (File No. 00-24352) which exhibit is
incorporated herein by reference.

(3) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 9, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.

(4) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed August 14, 1998 (File No. 00-24352), as amended, which
exhibit is incorporated herein by this reference.

(5) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed August 10, 1998 (File No. 00-24352), as amended, which
exhibit is incorporated herein by this reference.

(6) Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed April 9, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.

(7) Previously filed as an exhibit to the Registration Statement on Form
SB-2 (the "Registration Statement") (Registration No. 33-77288-NY),
which exhibit is incorporated herein by reference.

(8) 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.

(9) Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1998 (File No. 0-24352), which exhibit is
incorporated herein by this reference.

(10) Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 333-63207),
which exhibit is incorporated herein by reference.

(11) Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit is
incorporated herein by this reference.

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

(13) Previously filed as an exhibit to Current Report on Form 8-K filed
March 10, 1998 (File No. 00-24352), which exhibit is incorporated
herein by reference.

26
<PAGE>

Item 7. FINANCIAL STATEMENTS

Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Page
----

Report of Independent Public Accountants.....................................F-2

Consolidated Financial Statements:

Consolidated Balance Sheet as of June 30, 1999...............................F-3

Consolidated Statements of Operations for the
years ended June 30, 1999 and 1998.....................................F-4 - F-5

Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1999 and 1998......................F-6 - F-7

Consolidated Statements of Cash Flows for
the years ended June 30, 1999 and 1998.................................F-8 - F-9

Notes to Consolidated Financial Statements...........................F-10 - F-30

F-1
<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) and subsidiaries, as of June 30, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended June 30, 1999. 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
subsidiaries as of June 30, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.

New York, New York
October 13, 1999

F-2
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1999
Assets

Current Assets:
Cash and cash equivalents ............................... $ 6,910,013
Accounts receivable, net of allowance for doubtful
accounts of $792,985 .............................. 14,464,499
Inventories ............................................. 22,971,573
Other current assets .................................... 3,474,473
------------
Total current assets .............................. 47,820,558
------------

Investment in Affiliates ...................................... --

Property and Equipment, net ................................... 11,902,445

Goodwill, Net ................................................. 32,261,841

Other Assets .................................................. 1,781,029
------------
Total assets ...................................... 93,765,873
============

Liabilities and Stockholders' Equity

Current Liabilities:
Notes payable and current maturities of long-term debt .. 7,653,960
Accounts payable and accrued liabilities ................ 23,027,682
------------
Total current liabilities ......................... 30,681,642
------------

Long Term Debt ................................................ 17,092,869
Other Long Term Liabilities ................................... 938,880

Minority Interest in Subsidiary ............................... 54,713

Commitments and Contingencies (See Note 11)

Mandatory Redeemable Series B Preferred Stock ................. 1,000,000

Stockholders' Equity:
Preferred stock, $.01 par value, 5,300,000 shares
authorized, 1,272,577 shares issued and outstanding
Series A Convertible
Redeemable Preferred Stock, $.01
par value, 2,870,000 shares
authorized, 1,066,050 shares
issued and outstanding ...................... 10,660

Series B Convertible Redeemable
Preferred Stock, $.01 par value,
200,000 shares authorized, 200,000
shares issued and outstanding ............... 1,000

Series C Convertible Redeemable
Preferred Stock, $.01 par value
6,527 shares authorized, 6,527
shares issued and outstanding ............... 65

Class A common stock, $.001 par value,
60,000,000 shares Authorized,
30,173,459 shares issued and
outstanding ................................. 30,173

Class B common stock, $.001 par value,
2,500,000 shares Authorized,
2,455,000 shares issued and
outstanding ................................. 2,455

Treasury stock .......................................... (1,317,023)
Additional paid-in-capital .............................. 65,531,022
Accumulated deficit ..................................... (17,048,703)
Notes receivable ........................................ (3,211,880)
------------
Total stockholders' equity ........................ 43,997,769
------------
Total liabilities and stockholders' equity .................... $ 93,765,873
============

The accompanying notes are an integral part of this consolidated
financial statement.

F-3
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations
For the Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
-------------- -----------

<S> <C> <C>
Net Sales....................................................................... $80,433,426 $13,447,234

Cost of Goods Sold.............................................................. 50,449,519 8,268,922
-------------- ------------

Gross profit............................................................. 29,983,907 5,178,312
-------------- ------------

Selling, General, and Administrative Expenses................................... 28,964,186 4,024,821

Income (loss) from operations............................................ 1,019,721 1,153,491
-------------- ------------

Other Expenses (Income)
Interest expense......................................................... 2,992,861 557,341
Financing charges - non-cash............................................. 1,192,359 405,716
Impairment loss on investments and non-operating receivables............. 6,088,372 --
Consulting and management fees........................................... (442,100) (335,000)
Minority interest........................................................ (117,499)
-------------- ------------
Total other expense (income)....................................... 9,713,993 628,057
-------------- ------------

Income (loss) before provision (benefit) for income taxes
and extraordinary item..................... (8,694,272) 525,434

Provision (Benefit) for Income Taxes............................................ 200,000 (108,240)
-------------- ------------

Income (loss) before extraordinary item.................................. (8,894,272) 633,674

Extraordinary Gain from Early Extinguishment of Debt............................ 870,264 --
-------------- ------------
Net (Loss) Income............................................................... $ (8,024,008) $ 633,674
============== ============

Earnings Per Common Share:
Basic
Income (loss) before extraordinary item.................................. (8,894,272) 633,674
Preferred dividends...................................................... (518,265) (339,719)
Accreted preferred dividends............................................. (832,000) --
-------------- ------------
Net income (loss) attributable to common shares before
extraordinary item............................ (10,244,537) 293,955
Extraordinary gain from early extinguishment of debt, net................ 870,264 --
-------------- ------------
Net income (loss)........................................................ (9,374,273) 293,955
============== ============
Net earnings per common share - basic:...................................
Earnings from continuing operations...................................... (0.46) 0.04
Extraordinary gain from early extinguishment of debt..................... 0.04 --
-------------- ------------
Net earnings per common share - basic.................................... (0.42) 0.04
============== ============
</TABLE>

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

F-4
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations (continued)
For the Years Ended June 30, 1999 and 1998

<TABLE>
<S> <C> <C>
Diluted
Income (loss) before extraordinary item ............................ (8,894,272) 633,674
Preferred dividends ................................................ (518,265) (339,719)
Accreted preferred dividends ....................................... (832,000) --
----------- ----------
Net income attributable to common shares before extraordinary item . (10,244,537) 293,955
Extraordinary gain from early extinguishment of debt, net .......... 870,264 --
----------- ----------
Net income (loss) .................................................. (9,374,273) 293,955
=========== ==========
Net earnings per common share - diluted:
Earnings from continuing operations ................................ (0.46) 0.04
Extraordinary gain from early extinguishment of debt ............... 0.04 --
----------- ----------
Net earnings per common share - diluted: ........................... (0.42) 0.04
=========== ==========

Weighted average number of shares used in computation of earnings per share
Basic .............................................................. 22,035,755 7,251,193
Diluted ............................................................ 22,035,755 8,154,083

Weighted average number of shares used in computation of earnings per share
from extraordinary gain
Basic .............................................................. 22,035,755 7,251,193
Diluted ............................................................ 23,480,512 8,154,083
=========== ==========
</TABLE>

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

F-5
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 1,147,060 11,471
Sale of Treasury Stock
Conversion of preferred stock to common stock (517,622) (5,177)
Class B Common Shares issued
Escrow shares
Class A Common Shares issued for services
rendered
Common stock issued in connection with
acquisitions
Exercise of Class WA Warrants, net of
expenses
Warrants issued in connection with
convertible debt
Stock dividends declared December, 1997
Conversion of Class B Common shares into
Class A Common shares
Issuance of Preferred Stock 50,000 500
Conversion of promissory notes to Class A
common
Beneficial Conversion Adjustment
Net income through June 30, 1998
Balance, June 30, 1998 679,438 6,794
Class B Common Shares issued
Series B Preferred Shares issued, net of
expenses 100,000 1,000
Series C Preferred Shares issued, net of
expenses 4,500 45
Conversion of Class B to Class A Common
Conversion of Preferred to Class A Common (1,945,743) (19,457)
Escrow shares
CSL acquisition 2,027 20
Troy Lighting acquisition
Windsor Art acquisition
MHI acquisition

<CAPTION>
Class A Class B Additional Paid
Common Stock Common Stock in Capital
------------ ------------ ----------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 5,261,241 5,261 1,769,750 1,770 13,216,636
Sale of Treasury Stock 479,400
Conversion of preferred stock to common stock 1,552,866 1,553 3,624
Class B Common Shares issued 730,000 730 510,270
Escrow shares 7,500,000 7,500 (7,500)
Class A Common Shares issued for services
rendered 226,670 227 350,993
Common stock issued in connection with
acquisitions 1,078,883 1,079 1,748,921
Exercise of Class WA Warrants, net of
expenses 2,607,116 2,607 3,775,567
Warrants issued in connection with
convertible debt 200,000
Stock dividends declared December, 1997 530,331 530 529,801
Conversion of Class B Common shares into
Class A Common shares 394,750 395 (394,750) (395)
Issuance of Preferred Stock 249,500
Conversion of promissory notes to Class A
common 463,000 463 694,537
Beneficial Conversion Adjustment
Net income through June 30, 1998
Balance, June 30, 1998 19,614,857 19,615 2,105,000 2,105 21,751,749
Class B Common Shares issued 1,725,000 1,725 2,004,225
Series B Preferred Shares issued, net of
expenses 1,004,000
Series C Preferred Shares issued, net of
expenses 4,479,955
Conversion of Class B to Class A Common 125,000 125 ( 125,000) (125)
Conversion of Preferred to Class A Common 5,837,229 5,837 13,620
Escrow shares 5,000,000 5,000 (5,000)
CSL acquisition 1,926,980
Troy Lighting acquisition 650,000 650 974,350
Windsor Art acquisition 1,500,000 1,500 2,529,750
MHI acquisition 1,056,342 1,056 2,298,944

<CAPTION>
Accumulated Treasury Note
(Deficit) Stock Receivable Total
-------- ----- ---------- -----

<S> <C> <C> <C> <C>
Balance, June 30, 1997 (8,679,208) (600) (437,500) 4,117,830
Sale of Treasury Stock 600 480,000
Conversion of preferred stock to common stock
Class B Common Shares issued (510,500) 500
Escrow shares
Class A Common Shares issued for services
rendered 351,220
Common stock issued in connection with
acquisitions 1,750,000
Exercise of Class WA Warrants, net of
expenses 3,778,174
Warrants issued in connection with
convertible debt 200,000
Stock dividends declared December, 1997 (530,331)
Conversion of Class B Common shares into
Class A Common shares
Issuance of Preferred Stock 250,000
Conversion of promissory notes to Class A
common 695,000
Beneficial Conversion Adjustment
Net income through June 30, 1998 633,674 633,674
Balance, June 30, 1998 (8,575,865) (948,000) 12,256,398
Class B Common Shares issued (1,607,100) 398,850
Series B Preferred Shares issued, net of
expenses 1,005,000
Series C Preferred Shares issued, net of
expenses 4,480,000
Conversion of Class B to Class A Common
Conversion of Preferred to Class A Common
Escrow shares
CSL acquisition 1,927,000
Troy Lighting acquisition 975,000
Windsor Art acquisition 2,531,250
MHI acquisition 2,300,000
</TABLE>

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

F-6
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (continued)
For the Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants
Exercise of Class WB Warrants
Exercise of Class WC Warrants 2,322,355 23,223
Exercise of other warrants
Warrants issued with convertible debentures
Warrants issued in Petals acquisition
Shares issued for services rendered
Shares issued in connection with settlement 10,000 100
Escrow shares transferred to outside investor
Shares issued in connection with employment
agreement
Discount incurred with convertible notes
Class A shares issued, convertible notes
Stock Dividend
Windsor Art extinguishment of debt
Escrow shares transferred to outside investor
Shares issued for Stylecraft finance charges
Retirement of escrow and Windsor shares
Finance charges connected with 12%
promissory notes
Stock options issued to officer
Deferred financing expense

Net income (loss) through June 30, 1999

Balance June 30, 1999 1,066,050 10,660 100,000 1,000 6,527 65

<CAPTION>
Class A Class B Additional Paid
Common Stock Common Stock in Capital
------------ ------------ ----------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants 240,517 240 360,536
Exercise of Class WB Warrants 2,796,032 2,796 5,589,268
Exercise of Class WC Warrants 12,573,380
Exercise of other warrants 826,905 827 1,150,482
Warrants issued with convertible debentures 1,000,000
Warrants issued in Petals acquisition 50,000
Shares issued for services rendered 181,167 181 342,729
Shares issued in connection with settlement 10,000 10 42,300
Escrow shares transferred to outside investor 1,250,000 1,250 (1,250,000) (1,250) 1,200,020
Shares issued in connection with employment
agreement 100,000 100 124,900
Discount incurred with convertible notes 728,439
Class A shares issued, convertible notes 2,130,900 2,131 1,932,869
Stock Dividend 344,510 345 448,485
Windsor Art extinguishment of debt
Escrow shares transferred to outside investor 2,774,980
Shares issued for Stylecraft finance charges 10,000 10 16,240
Retirement of escrow and Windsor shares (11,500,000) (11,500) 11,500
Finance charges connected with 12%
promissory notes 48,833
Stock options issued to officer 75,000
Deferred financing expense 82,488

Net income (loss) through June 30, 1999

Balance June 30, 1999 30,173,459 30,173 2,455,000 2,455 65,531,022

<CAPTION>
Accumulated Treasury Note
(Deficit) Stock Receivable Total
-------- ----- ---------- -----

<S> <C> <C> <C> <C>
Exercise of Class WA Warrants 360,776
Exercise of Class WB Warrants 5,592,064
Exercise of Class WC Warrants (381,800) 12,214,803
Exercise of other warrants 1,151,309
Warrants issued with convertible debentures 1,000,000
Warrants issued in Petals acquisition 50,000
Shares issued for services rendered 342,910
Shares issued in connection with settlement 42,410
Escrow shares transferred to outside investor 1,200,020
Shares issued in connection with employment
agreement 125,000
Discount incurred with convertible notes 728,439
Class A shares issued, convertible notes 1,935,000
Stock Dividend (448,830) 0
Windsor Art extinguishment of debt (1,317,023) (1,317,023)
Escrow shares transferred to outside investor (274,980) 2,500,000
Shares issued for Stylecraft finance charges 16,250
Retirement of escrow and Windsor shares 0
Finance charges connected with 12%
promissory notes 48,833
Stock options issued to officer 75,000
Deferred financing expense 82,488

Net income (loss) through June 30, 1999 (8,024,008) (8,024,008)

Balance June 30, 1999 (17,048,703) (1,317,023) (3,211,880) 43,997,769
</TABLE>

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

F-7
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
June 30,
-----------------------------------------------
1999 1998
---------------------- --------------------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Income (Loss)............................................................ (8,024,008) $ 633,674
Adjustments To Reconcile Net Income (Loss) To Net Cash Used In Operating Activities --
Depreciation and amortization................................................ 2,223,046 741,722
NBV of rental property disposed.............................................. 599,112 --
Loss on equipment disposal................................................... (3,211) --
Provision for losses on accounts receivable.................................. 31,402 228,160
Impairment loss on investments and other non-operating receivables........... 6,088,372 --
Non-cash financing charge.................................................... 1,192,359 405,716
Minority interest in subsidiary.............................................. 54,694 --
Changes In Assets and Liabilities: --
Decrease (increase) in accounts receivable, trade............................ (162,583) (416,843)
Decrease (increase) in inventories........................................... (1,697,095) (138,960)
Decrease (increase) in prepaid expenses and other current assets............. (886,293) (539,347)
Decrease (increase) in other assets.......................................... 834,023 (1,354,345)
Increase (decrease) in accounts payable and accrued expenses................. (2,181,853) 102,456
--------------------- --------------------
Net cash used in operating activities........................................ (1,932,035) (337,767)
--------------------- --------------------
Cash Flow From Investing Activities:
Capital expenditures......................................................... (4,226,220) (237,255)
Acquisition of Bentley International......................................... (2,277,056) --
Acquisition of Troy Lighting................................................. (2,343,837) --
Acquisition of MHI........................................................... (2,188,028) --
Acquisition of CSL........................................................... (678,323) --
Acquisition of Stylecraft Lamps.............................................. (10,623,838) --
Acquisition of Petals........................................................ (6,921,305) --
Business acquisitions net of stock issued.................................... (1,828,000)
--------------------- --------------------
Net cash used in investing activities........................................ (29,258,607) (2,065,255)
--------------------- --------------------
Cash Flow From Financing Activities:
Net proceeds from issuance of debt........................................... 19,363,230 3,142,796
Repayments of debt and capitalized lease obligations......................... (16,368,893) (846,602)
Net proceeds from exercise of common and preferred stock warrants............ 19,320,302 3,873,174
Net proceeds from sale of common and preferred stock options................. 10,185,020 --
--------------------- --------------------
Net cash provided by financing activities.................................... 32,499,659 6,169,368
--------------------- --------------------
Net increase in cash......................................................... 1,309,017 3,766,346
Cash, beginning of year...................................................... 5,600,996 269,244
===================== ====================
Cash, end of year............................................................ 6,910,013 $ 4,035,590
===================== ====================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for - --
Interest..................................................................... $ 3,014,847 $ 449,554
Taxes........................................................................ 13,396 19,943
</TABLE>

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

F-8
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
June 30,
---------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Non-Cash Financial Activities:
Conversion of Series A Preferred Stock to Class A Common Stock........... 13,620 --
Stock issuance for financing charges...................................... 65,073 --
Stock issuance for services ............................................. 342,910 --
Stock issuance in connection with legal settlement........................ 42,410
Stock issuance per employment agreement................................... 125,000
Debt Financing Costs...................................................... 351,220
Debt issued for services rendered......................................... 45,000
Common Stock repurchased in conjunction with early extinguishment of debt. (1,317,023)
Debt and Guarantee Reduction Through Treasury Stock Issuance.............. 480,000
Stock Issuance Financed by note or Short-Term Receivable.................. 760,500
Debt Discount-Warrants Issued............................................. 200,000
Promissory Note Conversion................................................ 1,935,000 695,000
Common Stock issued for preferred dividends............................... 448,830 530,531
Supplemental disclosure of cash flows related to acquisitions:
Fair value of assets acquired, excluding cash............................. 41,263,434 4,670,570
Issuance of common stock.................................................. (5,806,250) (1,750,000)
Issuance of preferred stock............................................... (2,027,000)
Issuance of notes payable................................................. (2,230,766) (1,604,379)
Issuance of warrants...................................................... 50,000
Payments in connection with acquisitions, net of cash acquired
net of cash required................................................ (23,466,981) (1,709,818)
Liabilities assumed....................................................... 27,442,410 6,051,947
Supplemental disclosure of non-cash items from investing activities:
Issuance of common stock in connection with acquisitions.................. 5,806,250 1,750,000
Issuance of preferred stock in connection with acquisitions............... 2,027,000
Issuance of debt in connection with acquisitions.......................... 2,230,766 1,604,379
Issuance of warrants in connection with convertible debentures.................. 1,000,000
Issuance of Class B Common Shares in connection with Laurie Munn debt guarantees 2,455,000
</TABLE>

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

F-9
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Organization

Organization

Interiors, Inc., a Delaware corporation ("Interiors" or the "Company") ,
is a designer, manufacturer and marketer of a broad range of decorative
accessories for the residential, commercial, institutional and contract markets,
including museum-quality traditional and contemporary picture frames, framed
wall mirrors, oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories
and silk floral and tree arrangements. Interiors primarily markets its products
to retailers in the home furnishings industry, including furniture stores, home
furnishings centers, catalog retailers, home improvement centers, department
stores and lighting retailers. The Company's silk flower and tree arrangements,
as well as other accessories, are also sold directly to consumers through a
direct mail catalogue, and the Company has recently begun marketing several
products through the internet. The Company also provides design, merchandising
and leasing services to the homebuilding industry. The Company believes that it
has a unique competitive advantage in serving a broad range of customers because
of the breadth and depth of its product lines as well as its ability to
coordinate design among several product lines. The Company has consummated
several acquisitions during fiscal years 1999 and 1998. While management
believes that it operates in one overall business segment, as our businesses are
integrated and we acquire new businesses, we will be better able to assess our
segment reporting requirements. During the period of integration and growth,
including the installation of an enterprise wide software system, we are
managing the business on a geographic basis. Following is certain financial
information available on a geographic basis for our decorative home furnishings
businesses:

Net Sales: 1999 1998
---- ----
West Coast Operations $ 43,347,074 $ 6,129,820
Stylecraft 13,945,725 --
Petals 11,370,712 --
APF 6,401,438 7,317,414
Other 5,368,477 --
------------- ------------

Total $ 80,433,426 $ 13,447,234
============= ============

Gross Margin: 1999 1998
---- ----
West Coast Operations $ 13,209,937 $ 2,203,826
Stylecraft 4,708,948 --
Petals 6,734,122 --
APF 2,684,527 2,974,486
Other 2,646,373 --
-------------- ------------

Total $ 29,983,907 $ 5,178,312
============== ============

Revenues are from external sales.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated statements of operations, stockholders' equity and cash
flows include the accounts of Interiors, Inc. and its wholly-owned and majority
owned subsidiaries, which are included from their respective dates of
acquisition. Accordingly, significant intercompany accounts and transactions
have been eliminated in the consolidation. See Note 4 - "Acquisitions and
Dispositions."

F-10
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

Revenue is recognized at the time finished goods, whether standard product
or custom work is shipped or acceptance (for a small portion of 1998 revenue) is
acknowledged by the customer. Payments received for merchandise not yet shipped
or accepted are reflected within prepaid sales and customer deposits, current
liabilities. Historically, sales returns have not been significant.

Cash and Cash Equivalents

The Company classifies as cash and cash equivalents on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.

Inventories

Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out method. Finished goods consists of
those items available for shipping.

F-11

<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment In Affiliates

The Company accounts for its investment in affiliates under the cost
method.

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
Building and Improvements........... 7 - 40

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 basis
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 14 - "Provision
(Benefit) For Income Taxes."

Goodwill and Other Long-lived Assets

In connection with acquisitions amounts were paid in excess of the fair
market value of the net identifiable assets acquired. These amounts have been
recorded as goodwill and are being amortized over 40 years. The Company
continually reviews its long-lived assets for events or changes in circumstances
that might indicate the carrying amount of the assets may not be recoverable.
The Company assesses the recoverability of assets by determining whether the
depreciation of such assets over their remaining lives can be recovered through
projected undiscounted cash flows. The amount of impairment if any, is measured
based on projected discounted future cash flows using a discount rate reflecting
the Company's average cost of funds. At June 30, 1999, no such impairment of
assets was indicated. Amortization of goodwill was $529,000 and $42,000 in
fiscal year 1999 and 1998, respectively. Accumulated amortization was $571,000
and $42,000 at June 30, 1999 and 1998, respectively.

Deferred Financing Costs

Debt financing costs are deferred and amortized over the term of the
related debt.

F-12

<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 those estimates.

Fair Value of Financial Instruments

In accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company has determined the estimated
fair value of its financial instruments using appropriate market information and
valuation methodologies. Considerable judgement is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt. The carrying value of these assets and liabilities is
a reasonable estimate of their fair market value at June 30, 1999 and 1998.

Earnings Per Common Share

In accordance with SFAS No. 128, net earnings per share amounts ("basic
EPS") were computed by dividing net earnings by the weighted average number of
common shares outstanding, and excluding any potential dilution.

For purposes of this calculation, common shares include both Class A
Common Stock, par value $.001 per share, of the Company ("Class A Shares") and
Class B Common Stock, par value $.001 per share, of the Company. Net earnings
per diluted share amounts ("diluted EPS") were computed assuming potential
dilution from the exercise of outstanding stock options, warrants and other
securities. All periods presented include a deduction for the dividend
requirement of the Company's 10% Series A Cumulative Convertible Preferred
Stock, par value $.01 per share ("Series A Preferred Stock"), Series B Preferred
Stock, par value $.01 per share ("Series B Preferred Stock"), and Series C
Preferred Stock, par value $.01 per share ("Series C Preferred Stock").

F-13
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as follows:

<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
-------------------------------------------- ---------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
------------ ------------- ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings $(8,024,088) $ 633,674
Less: Dividends
On Preferred Stock.................. (518,265) (339,719)
Less: Accreted Preferred Dividends.. (832,000)

Basic EPS
Net Earnings Attributable
To Common Stock .................... (9,374,273) 22,035,755 $ (0.43) 293,955 7,251,193(1) $0.04

Effect Of Dilutive Securities
Stock Warrants & Options............ --(3) 902,890(2)

Diluted EPS
Net Earnings Attributable To Common
Stock And Assumed Warrant
Exercises .......................... $(9,374,273) 22,035,755 $ (0.43) $ 293,955 8,154,083 $0.04
=========== ========== ======= ========= ========= =====
</TABLE>

Conversion of shares of Series A Preferred Shares is not assumed for computation
purposes since effect would be antidilutive.

(1) 7,500,000 shares that were held in escrow and issued during the year were
not included in Basic EPS computation as their ultimate status was
uncertain. These shares were retired by the Company during fiscal year
1999.

(2) 7,500,000 shares that were held in escrow and issued during the year were
not included in diluted EPS computation since effect would be
antidilutive. These shares were retired by the Company during fiscal year
1999.

(3) Conversion of cumulative preferred stock and dilutive securities not
assumed for computation purposes since effect would be antidilutive.

Reclassifications

Certain balances in 1998 have been reclassified to conform to current year
presentation.

Fourth Quarter Adjustments

The Company recorded approximately $1,800,000 in fiscal year 1999 fourth
quarter adjustments primarily related to the write-off of the Company's
investment in Photo-2-Art of approximately $1,100,000 million and professional
service fees of approximately $500,000.

F-14

<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recorded approximately $550,000 of adjustments during the
fourth quarter of fiscal year 1998. The adjustment related primarily to
write-offs of certain other assets, along with related amortization expense
interest expense and certain other selling general and administrative expenses.

Recent Accounting Pronouncements

In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended in SFAS No. 137 which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities on the statement of financial position and measure those
instruments at fair value. At June 30, 1999, adoption of SFAS No. 133 would not
have a material effect on the Company's financial statements.

3. Investment In Affiliates

(a) In the formation of Decor Group, Inc. ("Decor"), a separate
publicly-traded corporation, the Company's intention was to create a company
with a corporate identity separate and distinct from that of the Company.
Accordingly, pursuant to a March 3, 1996 agreement, Decor issued to the Company
83,333 shares of Series A Non-Voting Convertible Preferred Stock (sold by
Interiors in February 1997 and later reacquired in January 1999 for $190,000)
and an option to purchase 6,666,667 shares of Series B Non-Convertible Voting
Preferred Stock (the "Option Shares") in exchange for 200,000 Class A Shares,
200,000 Series A Preferred Shares (both of which have subsequently been sold by
Decor) and a guarantee with respect to certain indebtedness should such
indebtedness become necessary. During the months of August and September 1996,
the Company purchased 18,311 shares of Decor's Series C Non-Voting Convertible
Preferred Stock, which is convertible into three shares of Decor's common stock,
at a cost of $824,000. Effective with the Company's acquisition of the Option
Shares in September 1996 for total cash consideration of $2,000, the Company
executed a Voting Agreement (the "Voting Agreement") to vest the power to vote
the Option Shares in a Voting Trust until the repayment of certain indebtedness.
The Voting Agreement terminates upon the earlier of repayment of such
indebtedness or February 20, 2007 and is still in effect. On November 12, 1996,
Decor completed an initial public offering of certain of its securities. The
proceeds of such offering were used to acquire the net assets of Artisan House,
Inc., a designer and manufacturer of wall hangings. All Decor related
disclosures have been adjusted to reflect subsequent reverse stock splits and/or
stock dividends. The Company has terminated its agreement dated April 1998 to
acquire the common stock of Decor.

The Company's holding in Decor is recorded on the Company's financial
statements under the cost method of accounting. The cost method has been used by
Interiors as it is subject to the Voting Agreement and it presently has no
residual common equity interest and the minority interest in Decor's profits and
losses is 100%. During the third quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $3.3 million, in Decor
because the Company believes that, based on Decor's current financial condition
its investment has been permanently impaired. The Company has established
reserves for the uncollectibility of its entire receivable, approximately $1.0
million, owed to the Company from Decor and the possibility that the Company
would be required to pay up to $300,000 pursuant to its guaranty of
approximately $580,000 of indebtedness of Decor owed to Austin Financial. See
Note 12 "Related Party Transactions."

(b) The Company consummated certain transactions during the year ended
June 30, 1997, with Photo-To-Art, Ltd. ("Photo-to-Art"), a company that converts
photographs into paintings, whereby the Company agreed to sell certain canvas
related assets as well as other goods and services to Photo-to-Art consisting of
consulting services related to day-today operations and raising capital, as well
as certain contractual reimbursements of administrative expenses by Photo-to-Art
to the Company. Interiors also received $50,000 in cash for use of its mailing
lists. The contract required that the stated aggregate cash selling price on the
assets and other goods and services transferred to Photo-to-Art, $1,140,000,
must be reinvested in Photo-to-Art equity. Such amounts are reflected as a cost
basis investment on the Company's balance sheet. The Company owns 270,000 shares
of Photo-to-Art stock and 120,000 warrants to purchase additional stock at $4.50
per share. The valuation ascribed to this transaction by the Company was
comparable to the values received by unrelated investors in private placement
transactions between those investors and Photo-to-Art. During the fourth quarter
of fiscal 1999, the Company recorded an impairment loss of its entire
investment, approximately $1.1 million, in Photo-to-Art because the Company
believes that, based on Photo-to-Art's current financial condition its
investment has been permanently impaired, in addition, a 250,000 reserve has
been recorded against non-operating receivables from Photo-To-Art. The Company
has established reserves for the uncollectibility of $250,000 of its receivable,
approximately $325,000, owed to the Company from Photo-to-Art. See Note 12 -
"Related Party Transactions."

F-15
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company evaluates its cost basis investments for recoverability on a
quarterly and annual basis. It is the Company's policy to review all available
financial data as well as discuss each investment's operations with respective
company management. Should available information at any reporting date indicate
impairment in the carrying value of either of the Company's cost investments, an
adjustment would be recorded.

4. Acquisitions and Dispositions

Vanguard. On March 10, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, an acquisition subsidiary
of the Company, Henlor, Inc. ("Henlor"), and the shareholders of Henlor.
Pursuant to the agreement, the Company's acquisition subsidiary merged with and
into Henlor with Henlor continuing as the surviving corporation. Henlor also
merged with its subsidiary Vanguard Studios, Inc. ("Vanguard"). The merger
consideration paid by the Company consisted of (i) a cash payment of $705,621,
(ii) an 8% promissory note in the aggregate principal amount of $794,379 due
December 1, 2000 and (iii) the issuance of 299,581 Class A Shares to the former
shareholders of Henlor, which shares are subject to adjustment on March 10, 2000
to the extent such shares are worth more than $1,000,000 or less than $250,000.
This acquisition has been accounted for under the purchase method of accounting
and the results of the operations have been included in the consolidated
financial statements since the date of acquisition. The excess of purchase price
over the fair values of net assets acquired was approximately $3.0 million and
has been recorded as goodwill in the consolidated balance sheet, and is being
amortized on a straight-line basis over forty years.

Artmaster. On March 23, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, Merchandise Sales, Inc.
("MSI"), Artmaster Studios, Inc. ("Artmaster"), and certain shareholders of MSI.
Pursuant to the agreement, MSI merged with and into Artmaster, with Artmaster
continuing as the surviving corporation. The merger consideration paid by the
Company consisted of a 10% subordinated note of the Company in the amount of
$537,248 and 779,302 Class A Shares (the "MSI Merger Shares"). In addition, the
Company agreed to repay indebtedness of MSI owed to certain creditors of MSI in
the aggregate amount of $1,022,752 (which payment consisted of a cash payment of
$750,000 and a 10% subordinated promissory note in the amount of $272,752). The
Company repaid the $272,752 and $537,248 promissory notes on July 31, 1998 and
March 31, 1999, respectively. In May 1999, the former shareholders of MSI
transferred the MSI Merger Shares to Aberdeen Avenue, LLC in consideration for
$1,250,000, and the Company was released from all continuing obligations under
the merger agreement. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over the fair values of net assets acquired was approximately
$3.8 million and has been recorded as goodwill in the consolidated balance
sheet, and is being amortized on a straight-line basis over forty years.

Windsor. On July 30, 1998, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and Bentley
International, Inc. ("Bentley"), a publicly-traded Missouri corporation.
Pursuant to the agreement, the Company purchased all of the issued and
outstanding shares of Windsor Art, Inc. ("Windsor"). The purchase price
consisted of $1,706,992 in cash and two secured subordinated 8% promissory
notes, one in the amount of $3.3 million and the other in the amount of $2.0
million (collectively, the "Windsor Notes"). Concurrently with the purchase of
the shares of Windsor, the Company purchased 150,000 shares of common stock of
Bentley and a warrant to purchase 300,000 shares of common stock of Bentley in
exchange for the issuance of 1,500,000 Class A Shares (the "Windsor Shares").
One of the Windsor Notes, in the amount of $3.3 million, was repaid on September
30, 1998. The other Windsor Note, in the amount of $2.0 million, and the Windsor
Shares were repurchased by the Company for aggregate consideration of $2,643,000
on December 1, 1998. In addition, an officer of Bentley agreed to terminate his
consulting agreement with Windsor. The Windsor Shares were retired by the
Company on February 22, 1999. This acquisition has been accounted for under the
purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of acquisition.
The excess of purchase price over the fair values of net assets acquired was
approximately $8.2 million and has been recorded as goodwill in the consolidated
balance sheet, and is being amortized on a straight-line basis over forty years.

Troy. On August 14, 1998, the Company consummated the transactions
contemplated by a July 2, 1998 merger agreement among the Company, Troy
Lighting, Inc. ("Troy"), and the former shareholders of Troy. Pursuant to the
agreement, a wholly-owned subsidiary of the Company merged with and into Troy,
with Troy continuing as the surviving corporation. The merger consideration paid
by the Company consisted of a cash payment of $250,000 and the issuance of
650,000 Class A Shares (the "Troy Merger Shares"). In addition, the Company
agreed to cause Troy to repay $1,700,000 in indebtedness to certain former
shareholders of Troy. On or about July 31, 1999, the former shareholders of Troy
agreed to sell the Troy Merger Shares to Dominion Capital Fund, Ltd., Dominion
Investment Fund, LLC and Sovereign Partners, L.P. (collectively, the "Troy
Purchasers") for $1,000,000. Contemporaneously

F-16

<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

therewith, the Company and the Troy Purchasers entered into a letter agreement
pursuant to which the Troy Purchasers agreed not to sell or otherwise transfer
the Troy Merger Shares until December 25, 1999. If the Troy Merger Shares are
worth less $1,150,500 based on the sixty-day average of the Class A Shares
following such date, the Company must either pay cash or issue additional Class
A Shares to the Troy Purchasers in the amount of the shortfall. This acquisition
has been accounted for under the purchase method of accounting and the results
of the operations have been included in the consolidated financial statements
since the date of acquisition. The excess of purchase price over the fair values
of net assets acquired was approximately $3.3 million and has been recorded as
goodwill in the consolidated balance sheet, and is being amortized on a
straight-line basis over forty years.

Model Home. On February 26, 1999, the Company consummated the transactions
contemplated by a merger agreement among the Company, Model Home Interiors, Inc.
("Model Home" or "MHI") and a wholly owned subsidiary of the Company. Pursuant
to the Agreement, the Company's wholly owned subsidiary merged with and into
Model Home, with Model Home continuing as the surviving corporation merger. The
purchase price paid by the Company consisted of a cash payment of $2.0 million,
promissory notes aggregating $230,766 and 1,056,342 shares of Class A Shares
having a fair market value of $2,300,000 (the "MHI Merger Shares") on the
eighteenth month anniversary of the closing. Additionally, the Company agreed to
issue Class A Shares with a maximum fair market value of $2,000,000 (the
"Earnout Shares") upon the attainment of certain earnings goals by Model Home.
The Merger Shares are being held in escrow as security for the mutual
obligations of the parties under the merger agreement. This acquisition has been
accounted for under the purchase method of accounting and the results of the
operations have been included in the consolidated financial statements since the
date of acquisition. The excess of purchase price over the fair values of net
assets acquired was approximately $225,000 and has been recorded as goodwill in
the consolidated balance sheet, and is being amortized on a straight-line basis
over forty years.

Stylecraft. On February 22, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the Company and the former
shareholders of Stylecraft Lamps, Inc. ("Stylecraft") pursuant to which the
Company acquired all of the outstanding capital stock of Stylecraft for
$10,319,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over the fair values of net assets acquired was approximately
$5.4 million and has been recorded as goodwill in the consolidated balance
sheet, and is being amortized on a straight-line basis over forty years.

CSL On March 2, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and CSL Lighting
Manufacturing, Inc. ("CSL"). Pursuant to the agreement, the Company acquired
1,191,752 newly-issued shares of common stock, par value $.001 per share, of CSL
(the "CSL Shares"), representing approximately 51% of the issued and outstanding
shares of common stock of CSL, pursuant to the March 1, 1999. The purchase price
for the CSL Shares consisted of $600,000 in cash paid to CSL and the issuance of
1,927 Series C Preferred Shares to certain creditors of CSL in exchange for the
cancellation of debt of CSL having a principal amount of $1,027,500. In
conjunction with the transaction, three designees of the Company were added to
the CSL board of directors, and CSL entered into a standstill agreement, which
prohibited the Company and its affiliates from acquiring any additional shares
of common stock of CSL for a period of 150 days from the closing date. This
acquisition has been accounted for under the purchase method of accounting and
the results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair values of net assets acquired was approximately $2.5 million and has been
recorded as goodwill in the consolidated balance sheet, and is being amortized
on a straight-line basis over forty years.

Petals. On March 23, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the majority stockholders of
Petals, Inc. ("Petals") and the Company pursuant to which the Company acquired
Petals in exchange for the cancellation of $2,440,000 of debt owed by Petals to
one of the stockholders, an aggregate of $4,000,000 in cash and a 8% convertible
note in the original principal amount of $2,000,000 due March 23, 2001. The note
is convertible into Class A Shares at $2.00 per share. The Company also issued
an aggregate of 100,000 three-year warrants to purchase Class A Shares at an
exercise price of $3.50 per share to the minority stockholders (the "Petals
Warrants"). In connection with the transaction, Petals redeemed the interests of
the minority stockholders for aggregate consideration of approximately $3.9
million in cash and $262,500 paid over nine months as severance payments. This
acquisition has been accounted for under the purchase method of accounting and
the results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair values of net assets acquired was approximately $5.2 million and has been
recorded as goodwill in the consolidated balance sheet, and is being amortized
on a straight-line basis over forty years.

Following are selected pro forma statements of income which reflect these
transactions as if they occurred at the beginning of each year ended June 30,
1999 and 1998.

F-17
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30,
1999 1998
--------------- --------------
Net Revenues.............. $ 141,239,000 $ 140,358,000
Net Income (Loss)......... (8,377,000) 2,406,000
EPS Basic................. (.36) .23
EPS Diluted............... (.36) .21

F-18
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Inventories

The components of inventory are as follows:

June 30, 1999
-------------
Raw Materials................. $ 9,657,146
Work in Process............... 738,325
Finished Goods................ 12,576,102
------------

Total:.................. $ 22,971,573
============

6. Other Current Assets

The components of other current assets are as follows:

June 30, 1999
-------------
Prepaid Expenses.............. $ 2,100,442
Due From Affiliates........... 78,954(1)
Other......................... 1,295,077(2)
------------
Total:.................. $ 3,474,473
============

(1) Due from affiliates represents amounts owed from Photo-to-Art. See Note 12
- "Related Party Transactions."

(2) Included in other current assets are amounts due from the Company's
employees, salespeople and officer. During fiscal year 1999, the Company
made advances aggregating $458,057 to the Company's Chief Executive
Officer. As of September 15, 1999, this entire amount was repaid to the
Company.

7. Property and Equipment, net

The components of property and equipment are as follows:

June 30, 1999
-------------
Machinery and Equipment................... $ 7,384,868
Furniture and Fixtures.................... 5,894,746
Leasehold Improvements.................... 2,814,545
Buildings and Improvements................ 83,892
Accumulated Depreciation and Amortization.$ (4,275,606)
-------------
Total:.............................. $ 11,902,445
=============

Depreciation expense was $590,346 and $485,000 for the years ended
June 30, 1999 and 1998, respectively.

F-19
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Accounts Payable and Accrued Liabilities

June 30, 1999
-------------
Accounts Payable....................$ 12,644,753
Salaries and Employee Benefits...... 1,706,877
Rent................................ 34,484
Deferred Rent....................... 147,256
Union Dues and Benefits............. 87,865
Professional Fees................... 737,660
Insurance........................... 241,204
Interest............................ 868,550
Royalties & Commissions............. 362,167
Income, Sales and Payroll Taxes..... 1,274,693
Other............................... 4,895,173
============
Total:........................$ 23,027,682
============

9. Notes Payable

June 30, 1999
-------------
Notes Payable
Bank lines of credit(a)...................$ 18,400,000
15% Convertible Demand Notes (b).......... 686,000
15% Convertible Note - Morgan Steel (c)... 250,000
12% Convertible Demand Notes (d).......... 140,000
12% Promissory Note - Ekistics (e)........ 250,000
10% Convertible Debenture - Petals (f).... 2,000,000
8% Promissory Note - Vanguard (g)......... 375,000
8% Promissory Notes -MHI (h).............. 231,000
Promissory Note - Landis (i).............. 1,000,000
Other notes payable (j)................... 1,415,000
------------
Total......................... 24,747,000
------------
Less current portion...................... 7,654,000
------------
Long term portion.........................$ 17,093,000
============

(a) The Company has secured formula based financing arrangements with several
lenders relating to the operations of its subsidiaries. As of June 30,
1999, the Company owed Austin Financial Services, Inc. approximately
$11,060,000 at an annual rate equal to prime plus 2.0% (10.25% as of the
date of this filing), and could borrow approximately an additional
$840,000, relating to the operations of Windsor, Troy and Stylecraft. As
of June 30, 1999, the Company owed NationsBank, N.A. approximately
$3,908,000 at an annual rate equal to prime (8.25% as of the date of this
filing), and could borrow approximately an additional $92,000, relating to
the operations of MHI. As of June 30, 1999, the Company owed Finova
Capital Corp. approximately $641,000 at an annual rate equal to prime plus
8.0% (16.25% as of the date of this filing), and could borrow
approximately an additional $359,000, relating to the operations of the
Company's A.P.F. Master Framemakers division. The Company's obligations
owed to Finova Capital Corp. are personally guaranteed by Max Munn,
Chairman, President and Chief Executive Officer of the Company, and his
spouse. As of June 30, 1999 the Company owed Capital Business Credit
approximately $1,210,000 at an annual rate of prime plus 2.50% (10.75% as
of the date of this filing) and could borrow approximately an additional
$8,000 relating to the operations of Vanguard.

F-20
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(c) Issued to Morgan Steel Ltd., due April 16, 2001 and convertible into Class
A Shares at $1.75 per share. Warrants to purchase 15,000 Class A Shares
and 15,000 Series A Preferred Shares were issued in connection with this
note.

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

(e) Issued to Ekistics Corp. and due December 31, 1998. On October 8, 1999,
the Company repaid Ekistics Corp. the outstanding principal, plus all
accrued interest.

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

(g) Issued in connection with the acquisition of Vanguard Studios, Inc. The
note is due December 1, 2000 and requires quarterly principal payments of
$62,500, plus interest.

(h) Issued in connection with the acquisition of Model Home Interiors, Inc.
The notes are due February 16, 2000.

(i) Issued to the Landis Brothers Corporation ("Landis"), due October 25, 1999
and personally guaranteed by Max Munn, Chairman President and Chief
Executive Officer of the Company, and his spouse. Effective September 27,
1999, the maturity date was extended to October 25, 2000 and the interest
rate was set at prime plus 8%; provided, however, as long as the prime
rate does not exceed 8.25%, the rate of the note shall be 16%.

(j) Includes $598,000 of capital lease obligations.

During the twelve month period ended June 30, 1999, the Company had an
extraordinary gain from early extinguishment of debt in the amount of $870,264.

In connection with the convertible notes and related warrants issued debt
discount was recorded, to be amortized over the life on the related debt.
Favorable conversion features, when applicable to the notes described above were
recorded and are being expensed through the date of the earliest conversion
period.

Aggregate maturities of notes payable over the next five years (inclusive
of aggregate amounts due under financing agreements, which are classified as
current) are as follows:

2000................$ 7,654,000
2001................ 6,811,000
2002................ 10,154,000
2003................ 90,000
2004................ 38,000
-----------
Total......... $24,747,000
===========

F-21
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Shareholders Equity

Description of Securities

Common Stock

Class A Shares. The Certificate of Incorporation of the Company authorizes
the issuance of up to 60,000,000 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.

Class B Shares. The Certificate of Incorporation of the Company authorizes
the issuance of up to 2,500,000 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 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.

The holders of Class A Shares and Class B Shares (collectively, "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 non-assessable. Except as otherwise required by law,
the holders of 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. Of this
amount 2,870,000 shares have been designated as Series A 10% Cumulative
Convertible Preferred Stock (the "Series A Preferred Shares"), 200,000 shares
have been designated Series B Preferred Stock ("Series B Preferred Shares") and
6,527 shares have been designated Series C Preferred Stock ("Series C Preferred
Shares"). 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 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 Class A Shares 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.

Series A Preferred Shares

The Series A Preferred Stock consists of 2,870,000 shares. After September
17, 2000, each Series A Preferred Share is redeemable by the Company in whole or
in part at $5.50 per share upon 30 days prior written notice. Each Series A
Preferred Share is convertible, subject to adjustment, into three Class A Shares
of the Company. The Series A Preferred Stock is entitled to a dividend, prior to
any payment of dividends on the Class A Shares or Class B Shares, of $0.50 per
share per annum payable in semi-annual installments of $0.25 per share. If the
dividend on the Series A Preferred Shares is not paid, it accumulates until paid
in full to date. The Company may elect to pay the dividend either in cash or in
Class A Shares, which Class A Shares shall be issued for such purposes on the
basis of the average closing prices of the Class A Shares for the ten business
days prior to the date of declaration of the dividend. The Series A Preferred
Shares shall not have any right to vote except to the extent, if

F-22
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

any, required by Delaware law. Upon liquidation of the Company, each Series A
Preferred Share is entitled to receive $5.00 plus accrued and unpaid dividends
before any payment is made to the holders of Common Stock.

On December 31, 1998 and May 24, 1999, the Company's Board of Directors
declared stock dividends equivalent to $0.25 per share on its Series A Preferred
Shares to stockholders of record as of the close business on September 30, 1998
and June 10, 1999, respectively. Accordingly, a total of 344,510 Class A Shares
were issued for this purpose and accumulated deficit was charged $448,830 in
conjunction with the issuance of these securities.

As of June 30, 1999, the Company has not declared or established a record
date for a dividend for its Series A Preferred Shares for the $0.25 dividend due
September 1, 1999. Cumulative but unpaid dividends on Series A Preferred Shares
as of June 30, 1999 total approximately $133,256.

Series B Preferred Shares

On January 22, 1999, in order to provide it with additional working
capital, the Company completed a private placement with one accredited investor
of newly designated Series B Preferred Shares and redeemable three year warrants
to purchase up to 2,000,000 Class A Shares at an exercise price of $0.75 per
share (the "Series B Warrants"). The Company received $2,020,000 of gross
proceeds from the sale of the Series B Preferred Shares and Series B Warrants.
The Company incurred expenses of $15,000 in connection with the issuance of
these securities. The Series B Preferred Shares consist of 200,000 shares, all
of which are issued and outstanding. The holders of the Series B Preferred
Shares were granted certain registration rights with respect to the underlying
Class A Shares issuable upon conversion of the Series B Preferred Shares or
exercise of the Series B Warrants. The Series B Warrants were valued at fair
market value on the date of issuance.

The Series B Preferred Shares rank in parity with the Company's Series A
Preferred Shares with respect to dividends and liquidation, pays an 8% annual
dividend, payable quarterly in cash or by the issuance of additional shares of
Series B Preferred Shares, and is convertible by the holder at any time on or
after January 31, 2000 into Class A Shares at a conversion price of $2.35 per
share. Under certain limited conditions relating to a sale of the Company,
through merger, sale of substantially all of its assets or tender offer, the
Series B Preferred Shares may be converted into Class A Shares by the holder
prior to January 31, 2000. The conversion price and the number of Class A Shares
issuable upon conversion of the Series B Preferred Shares is subject to
adjustment to protect the holder against dilution.

In the event that the average price of the Class A Shares, as traded on
NASDAQ or another national securities exchange, for the 12 trading days
immediately prior to January 1, 2000 (the "Anniversary Price") shall be less
than 140% of the conversion price in effect ($3.30 per share, based on the $2.35
per share conversion price), but exceed the conversion price, the Company has
the right to redeem the Series B Preferred Shares prior to January 31, 2000, for
a price equal to the sum of $10 per share, plus accrued and unpaid dividends,
plus a premium of $5.00 per share, prorated over the period from January 22,
1999 to the date of redemption. In such event, the Company may redeem for $0.1
each a number of Series B Warrants equal to 2.5% of the outstanding Series B
Warrants for each 1% that the Anniversary Price exceeds the conversion price. In
the event that such Anniversary Price shall be less than the conversion price,
the holder of the Series B Preferred Shares shall have the right, during the 30
days ending January 31, 2000, to compel the Company to redeem and repurchase up
to 50% of the Series B Preferred Shares for a redemption price equal to $10 per
share, plus accrued and unpaid dividends. In such event, the Company may redeem
a number of Series B Warrants equal to 200% of the Class A Shares into which the
redeemed Series B Preferred Shares could have been converted. In the event that
the Anniversary Price shall exceed 140% of the conversion price of the Series B
Preferred Shares then in effect, the Company shall also have the right after
January 1, 2000 to redeem all of the Series B Warrants for $.01 each, and a
lesser number of Series B Warrants in pro-rata amounts if such Anniversary Price
exceeds the conversion price, but is less than 140% of such conversion price.

Series C Preferred Shares

On February 18, 1999, in order to provide it with the capital resources to
complete pending acquisitions, the Company completed a private placement with
four accredited investors of 6,427 newly designated Series C Preferred Shares.
The Series C Preferred Shares have a liquidation value of $1,000 per share. In
consideration for the issuance of 4,500 Series C Preferred

F-23
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Shares, the Company received $4,500,000 in gross proceeds. The Company incurred
expenses of $20,000 in connection with the issuance of these securities. In
addition, two of the purchasers of the Series C Preferred Shares, who were also
holders of $1,027,500 of 7% notes previously issued to them by CSL Lighting
Manufacturing, Inc., an affiliate of the Company, canceled such notes in
exchange for the issuance of 1,927 Series C Preferred Shares. The Company also
issued 100 Series C Preferred Shares as a fee in connection with the acquisition
of CSL. The holders of the Series C Preferred Shares were granted certain
registration rights with respect to the underlying Class A Shares issuable upon
conversion of the Series C Preferred Shares.

The Series C Preferred Shares rank in parity with the Company's Series A
Preferred Shares and Series B Preferred Shares with respect to dividends and
upon liquidation, pays a 7% cumulative annual dividend, payable quarterly in
cash, and is convertible at any time on or before October 15, 1999 at a
conversion price per share equal to 120% of the average closing bid prices of
the Class A Shares for the five trading days immediately prior to conversion, or
at any time from and after October 16, 1999, at a conversion price per share
equal to 100% of the average closing bid prices of the Company's Class A Shares
for the five trading days immediately prior to conversion. The conversion price
and the number of Class A Shares issuable upon conversion of the Series C
Preferred Shares is subject to adjustment to protect the holders against
dilution. However, in no event may the aggregate number of Class A Shares
issuable upon conversion of all Series C Preferred Shares exceed 19.9% (or
approximately 4,275,000 Class A Shares) of the issued and outstanding Class A
Shares and Class B Shares at the date of issuance of the Series C Preferred
Shares. In the event that such limitation on the maximum number of Class A
Shares issuable shall, based on the conversion price then in effect, not permit
the holders to convert all shares of Series C Preferred Shares into Class A
Shares, the remaining Series C Preferred Shares shall be redeemed by the Company
for their $1,000 per share liquidation value, plus accrued and unpaid dividends,
either by the payment in cash or by the issuance of a 15% demand note. At the
end of three years from their effective date of issuance (January 31, 2002), the
Series C Preferred Shares shall be subject to mandatory conversion into Class A
Shares at the conversion price then in effect; provided, that the Class A Shares
are then traded on NASDAQ or another national securities exchange at a price of
$1.00 or more. If such conditions are not met, any unconverted Series C
Preferred Shares are subject to redemption at the option of the holders at
$1,571 per share, plus accrued dividends.

Subsequent to the date of these financial statements, the Company
exchanged approximately $5.0 million of the Series C Preferred Stock into
secured notes due September 2004. See Note 15 - "Subsequent Events."

Equity Transactions

During the fiscal year ended June 30, 1999, the Company issued shares to
certain persons for a variety of reasons. These shares were valued at the fair
market value on the date of issuance for purposes of the consolidated financial
statements.

On July 7, 1998, holders of WA Warrants to purchase Class A Common Stock
at $1.50 per warrant exercised such warrants resulting in the issuance of
240,517 shares of Class A Common Stock and total proceeds of $360,776.

On or about October 7, 1998, the Company issued 125,000 Class A Shares to
Laurie Munn upon conversion of 125,000 Class B Shares. On or about October 22,
1998, the Company issued 10,000 Series A Preferred Shares to SJP Contractors of
New York, Inc. in settlement of litigation against the Company. On or about
October 22, 1998, the Company issued 10,000 Class A Shares to Jules L. Marx in
settlement of litigation against the Company's Chief Executive Officer.

On November 11, 1998, the Company issued 44,431 Class A Shares to James
McCorry as a bonus. On November 16, 1999, the Company issued 38,820 Class A
Shares to Todd Langner as a bonus. On or about November 23, 1998, the Company
issued 10,000 Class A Shares to Roger Lourie, a director of the Company, and
10,000 Class A Shares to various designees named by Richard Josephberg, a
director of the Company. On November 23, 1998, the Company issued 15,000 Class A
Shares to JG Partners LP in connection with certain investment banking services
provided by Josephberg Grosz & Co., Inc. ("Josephberg Grosz"), an affiliate of
Richard Josephberg, a director of the Company.

On December 31, 1998, the Company declared a $0.25 dividend on its Series
A Preferred Stock for holders of record at September 30, 1998. This dividend was
paid in 165,576 shares of the Company's Class A Common Stock.

F-24
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 22, 1999, in order to provide it with additional working
capital, the Company completed a private placement with one accredited investor
of newly designated shares of Series B Preferred Stock, par value of $0.01 and
liquidation value of $10.00 per share, and redeemable three year warrants to
purchase up to 2,000,000 Class A Shares at an exercise price of $0.75 per share.
The Company received $2,020,000 of gross proceeds from the sale of the Series B
Preferred Shares and Series B Warrants. The Series B Preferred Shares consist of
200,000 shares, all of which are issued and outstanding.

On February 9, 1999, the Company issued to Pauline Raschella, an employee
of Windsor, an incentive bonus of 100,000 Class A Shares.

On February 18, 1999, in order to provide it with the capital resources to
complete the Stylecraft and CSL acquisitions, the Company completed a private
placement with five accredited investors of 6,527 shares of newly created Series
C Preferred Shares. The Series C Preferred Shares have a liquidation value of
$1,000 per share. In consideration for the issuance of 4,500 Series C Preferred
Shares, the Company received $4,500,000 in gross proceeds. In addition, two of
the purchasers of the Series C Preferred Shares, who were also holders of
$1,027,500 of 7% notes previously issued to them by CSL, canceled such notes in
exchange for the issuance of an additional 1,927 shares of the Company's Series
C Preferred Shares. The Company issued 100 shares of Series C Preferred shares
as consideration for expenses incurred relating to the acquisition of CSL.

On March 1, 1999, the Company issued to Earley Kielty and Associates,
Inc., an executive search firm, 26,666 Class A Shares in connection with a
search related to MHI. On March 11, 1999, the Company issued to Maria Matos, a
former employee of the Company, 10,000 Class A Shares as a severance payment. On
such date, the Company also issued to Judith E. Schneider, 6,250 Class A Shares
in consideration for certain consulting services. On March 11, 1999, the Company
issued 10,000 Class A Shares to Roger Lourie, a director of the Company, and
10,000 Class A Shares to various designees named by Richard Josephberg, a
director of the Company.

On May 24, 1999 the Company declared a $0.25 dividend on its Series A
Preferred Stock for holders of record at June 10, 1999. This dividend was paid
in 178,934 shares of the Company's Class A Common Stock

During fiscal year 1999, an aggregate of 1,945,743 shares of Series A
Preferred Stock were converted into 5,837,229 shares of Class A Common Stock.

During fiscal year 1999, the Company issued 375,000 Class B Shares having
a fair market value of $397,500 to Laurie Munn, wife of the Company's Chief
Executive Officer, in consideration for her personal guarantee of $5,300,000 of
the Company's obligations in connection with its acquisitions of Windsor and
Troy. In addition, the Company issued 1,350,000 Class B Shares to Ms. Munn upon
the exercise of an option. The exercise price for the option was $1,350 in cash
and a promissory note in the amount of $1,607,000. The note bears interest at a
rate of 6.5% per annum and matures on December 8, 2005. As of June 30, 1999, Ms.
Munn owes the Company approximately $2.6 million, all of which is secured by a
lien, which is subordinate to liens held by Landis and Finvoa Credit, on
2,455,000 Class B shares, and Ms. Munn guarantees debt of the Company in the
amount of $2.4 million.

F-25
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During fiscal year 1999, the Company issued an aggregate of 3,206,342
shares of its Class A Common Stock relating to its various acquisitions. In
addition, the Company retired 1.5 million shares of Class A Common Stock that
was being held in escrow related to the acquisition of Windsor. See Note 4 -
"Acquisitions and Dispositions."

During fiscal year 1999, 3,750,000 shares of Class A Common Stock were
transferred out of escrow to an accredited investor as collateral for the
$500,000 paid to Ann Stevens as part of the Company's settlement agreement with
Stevens. Of these shares, 1,250,000 shares were converted from shares of Class B
Common Stock previously held in escrow and 2,500,000 shares of Class A Common
Stock were issued out of such escrow. Total proceeds resulting from the transfer
was $3,975,000, of which $3,700,020 was paid in cash and $274,980 was paid by
satisfying a promissory note. In addition, the Company retired 10,000,000 shares
of Class A Common Stock previously held in such escrow.

During fiscal year 1999, holders of 6% Convertible Notes issued in March
and April 1998 with a principal amount of $1,700,000 and holders of 12%
Convertible Demand Notes with a principal amount of 235,000 issued in March
1998, converted these notes into an aggregate of 2,130,900 shares of Class A
Common Stock.

During fiscal year 1999, other warrants were exercised at prices ranging
from $1.38 to $1.75 resulting in the issuance of 826,905 Class A Shares and
total proceeds of $1,151,309.

No underwriters were engaged by the Company in connection with any of the
issuance's described above and, accordingly, no underwriting discounts or
commissions were paid.

Warrants and Other

On July 7, 1998 WA Warrants were exercised at $1.50 resulting in the
issuance of 240,517 Class A Shares and total proceeds of $360,776.

During fiscal year 1999, other warrants were exercised at prices ranging
from $1.38 to $1.75 resulting in the issuance of 826,905 Class A Shares and
total proceeds of $1,151,309.

The Company has outstanding options and warrants to purchase 8,116,239
Class A Shares at prices ranging from $0.75 to $3.25.

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, as
amended, currently provides for the granting of options to officers, employees
and consultants to purchase not more than an aggregate of 250,000,000 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.

The Director Plan. On June 20, 1994 the Board of Directors approved the
1994 Director Stock Option and Appreciation Rights Plan (the "Director Plan"),
which, as amended, currently provides for the granting of options to directors
to purchase not more than an aggregate of 750,000 Class A Shares. 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.

F-26
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Director Plan provides that 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 by 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. Each option
granted under the Director Plan expires ten years after the date of grant,
unless a less period is specified by the option committee administering the
plan.

The status of the Company's stock option plans is summarized below as of
June 30, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year ....... 877,500 $1.76 350,000 $2.25
Granted......................................... 4,320,025 1.41 527,500 1.44
Exercised....................................... -- -- --
Terminated...................................... 890,000 1.77 -- --
Options outstanding at end of year.............. 4,307,525 1.41 877,500 1.76
Exercisable at end of year...................... 438,025 $1.27 191,083 2.03

Weighted average fair value of options granted.. 1.20 1.09
</TABLE>

Of the 4,307,525 options outstanding as of June 30, 1999:

(a) 63,025 options have exercise prices of $0.001, weighted average fair
market values on the date of grant of $1.16 and remaining
contractual lives of 9.5 years.

(b) 1,494,500 options have exercise prices ranging from $1.00 to $2.13,
weighted average exercise prices of $1.46, weighted average fair
market values on the dates of grant of $1.29 and weighted average
remaining contractual lives of 9.5 years.

(c) 2,750,000 options (including options to purchase 250,000 Series A
Preferred Shares, each of which is convertible into three Class A
Shares) were granted outside of the Company's stock option plans.
These options are not exercisable until November 2008, however,
275,000 of the options may become exercisable each year that the
Company reaches certain specified earnings targets. Exercise prices
for these options range from $1.19 to $3.63 and increase at a rate
of 10% per annum. As of June 30, 1999: 2,500,000 of these options
have exercise prices of $1.19, fair market values on the dates of
grant of $.98 and remaining contractual lives of 11.5 years; 250,000
options have exercise prices of $3.63, fair market values on the
date of grant of $2.88 and remaining contractual lives of 11.5
years.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumption used for those options granted in 1999 and 1998, respectively:
Dividend yield of 0%, expected volatility of 91% and 83%, risk-free interest
rates ranging from 0% to 6%, and expected lives of 10 years and 5 years,
respectively.

The Company accounts for its plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees", under which no compensation cost is recognized
for options granted at or above fair market value on the date of grant.
Compensation expense of $75,000, in connection with the issuance of incentive
stock options to an officer of the Company, has been charged to income for the
year-ended June 30, 1999. Had compensation expense been determined based upon
fair values at the grant dates for options granted under those plans in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net losswould have been increased follows:

F-27
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
1999 1998
------------------------ --------------------------
<S> <C> <C>
Net Earnings Attributable to Common Stock before Extraordinary Gain
As Reported........................................................ $ (10,244,537) $ 293,955

Pro Forma.......................................................... (10,784,811) (177,505)

Basic EPS As Reported.............................................. $ (0.46) $ .04
Pro Forma.......................................................... $ (0.49) $ (.02)

Diluted EPS As Reported............................................ $ (0.46) $ .04
Pro Forma.......................................................... $ (0.49) $ (.02)
</TABLE>

11. Commitments and Contingencies

Operating Leases

The Company's headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with executive offices and a showroom. The facility is
occupied under a five-year lease expiring at the end of 2001 with a five-year
renewal option. As of June 30, 1999, the Company owned or leased the
manufacturing facilities listed in the table below.

The approximate future minimum lease payments per fiscal year under
operating leases exclusive of sublease income are as follows:

2000............................... $5,096,000
2001............................... 4,622,000
2002............................... 4,264,000
2003............................... 3,196,000
2004............................... 1,562,000
Thereafter......................... 5,284,000
------------
Total.......................:$24,024,000
============

F-28
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Union Agreement

The Company and its subsidiaries are party to two collective bargaining
agreements. None of the Company's employees have been on strike, or threatened
to since the Company's inception and the Company believes its relationship with
all of its personnel is satisfactory. The Company owes a union approximately $
114,347 as of this filing and has agreed to retire this amount through monthly
payments of approximately $11,000.

Information Systems

The Company has contracted for the installation of company-wide enterprise
software from a third party vendor. Such commitment is between $1.5 million and
2.0 million. Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures.

Consulting Arrangements

Refer to Note 13 for discussion of these arrangements.

Legal Proceedings

The Company is subject to claims and litigation and other claims arising
in the ordinary course of its business. In management's opinion, Interiors is
not presently a party to any such litigation or claims the outcome of which
would have a material adverse effect on its financial position or its results of
operations.

12. Related Party Transactions

From time to time, the Company has entered into transactions with parties
related to the Company. The Company believes that all transactions with related
parties were entered into on terms no more or less favorable to the Company than
could have been obtained from unrelated third parties.

During fiscal year 1999, the Company generated management fees in the
amount of $115,000 in connection with the provision of management services to
Decor Group, Inc., a publicly-traded affiliate of the Company ("Decor"). The
Company owns 83,333 shares of Series A Non-Voting Convertible Preferred Stock,
6,666,667 shares of Series B Non-Convertible Voting Preferred Stock and 18,311
shares of Series C Non-Voting Convertible Preferred Stock of Decor. Such
ownership amounts to approximately 78% of the voting securities of Decor and is
subject to the Voting Agreement. Messrs. Munn and D'Amore are directors of
Decor. As of June 30, 1999, Decor owes the Company $1,005,542. The Company has
established reserves for the uncollectibility of this entire receivable and the
possibility that the Company would be required to pay up to $300,000 pursuant to
its guaranty of approximately $580,000 of indebtedness of Decor owed to Austin
Financial.

During fiscal year 1999, the Company loaned CSL an aggregate of $355,000
in exchange for two 6.75% promissory notes due April 30, 2001 and convertible
into common stock of CSL at $0.345 per share. In addition, the Company generated
management fees in the amount of approximately $200,000 in connection with the
provision of certain management services to CSL. The Company owns 51% of the
outstanding common stock of CSL, and Messrs. Munn, Belenski and Schwartz are
directors of CSL. As of June 30, 1999, CSL owes the Company $362,804. The
Company has guaranteed debt of CSL owed to Coast Business Credit in the amount
of approximately $1.6 million as of June 30, 1999.

During fiscal year 1999, the Company loaned $275,000 to Photo-to-Art, Ltd.
("Photo-to-Art"). In addition, the Company was paid $76,320 from Photo-to-Art in
connection with the sublease of certain space in the Company's facility located
in Mount Vernon and $215,771 for the purchase of merchandise. The Company owns
270,000 shares, or approximately 0.5%, of the common stock of Photo-to-Art and
warrants to purchase 120,000 common shares of Photo-to-Art at $4.50 per share.
As of June 30, 1999, Photo-to-Art owes the Company $325,000 for which a $250,00
reserve has been established. The Company

F-29
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

has established reserves for the uncollectibility of $250,000 of this
receivable. Max Munn, the Company's Chairman, President and Chief Executive
Officer, has guaranteed debt of Photo-to-Art of approximately $180,000.

During fiscal year 1999, the Company earned $375,000 of management fees
from an entity that was subsequently acquired for general management services.

During fiscal year 1999, the Company issued 375,000 Class B Shares to
Laurie Munn, wife of the Company's Chief Executive Officer, in consideration for
her personal guarantee of $5,300,000 of the Company's obligations in connection
with its acquisitions of Windsor and Troy. In addition, the Company issued
1,350,000 Class B Shares to Ms. Munn upon the exercise of an option. The
exercise price for the option was $1,350 in cash and a promissory note in the
amount of $1,606,500. The note bears interest at a rate of 6.5% per annum and
matures on December 8, 2005. As of June 30, 1999, Ms. Munn owes the Company
$2,555,100, plus accrued interest, all of which is secured by a lien, which is
subordinate to liens held by the Landis and Finvoa Credit, on 2,455,000 Class B
Shares, and Ms Munn guarantees debt of the Company in the amount of $2.4
million.

During fiscal year 1999, the Company paid Morris Munn, father of the
Company's Chief Executive Officer, $64,405 for consulting services pursuant to a
five-year agreement commencing June 30, 1996.

During fiscal year 1999, the Company caused the payment of $500,000 to Ann
Stevens, a former executive of the Company and sister of the Company's President
and Chief Executive Officer to extinguish all of the Company's obligations under
a settlement agreement.

In connection with certain investment banking services provided during
fiscal year 1999 by Josephberg Grosz, an affiliate of Richard Josephberg, a
director of the Company, the Company issued (a) a four-year warrant to purchase
135,000 Class A Shares at $1.75 per share, 4,650 Class A Shares and $30,000 cash
to JG Capital, Inc., (b) 15,000 Class A Shares to JG Partners, LP (c) 5,350
Class A Shares to various designees named by Richard Josephberg. The shares were
valued at the fair market value on the date of issuance.

During fiscal year 1999, the Company made advances aggregating $458,057 to
the Company's Chief Executive Officer. As of September 15, 1999, this entire
amount was repaid to the Company.

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 no 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.

13. 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.

14. Provision For Income Taxes

The income tax provision consists of:

Years Ended June 30,
----------------------------------
1999 1998
--------------- --------------
Current Income Taxes:

Federal................ $ -- $ --

F-30
<PAGE>

INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

State and Local........ 200,000 52,543
Deferred Income Tax.... -- (160,783)
--------- ---------
Total............ $ 200,000 $ 108,240
========== =========

The benefit from the Company's net operating loss ("NOL") carry forward
for Federal income tax purposes is approximately $3,600,000 (which expires
through 2011). The deferred tax asset of approximately $3,839,000 is comprised
primarily of net operating losses and reserves. The utilization of such NOL's
maybe limited in the future due to changes in ownership.

The majority of the Company's deferred tax assets are reserved resulting
in a net deferred tax asset of approximately $200,000. There has been no change
in the valuation allowance during the year ended June 30, 1999. The recorded
valuation allowance was reduced by $161,000 for the year ended June 30, 1998.

The reduction of the valuation allowance in both 1999 and 1998 was
calculated at the statutory federal income tax rate. State income taxes have
been recorded based upon the applicable state requirements.

15. Subsequent Events

As of September 30, 1999, the Company entered into a transaction with the
holders of its Series C Preferred Shares and other investors pursuant to which
$5,027,000 principal amount, plus accrued and unpaid dividends, of the Company's
outstanding Series C Preferred Shares were exchanged for Secured Convertible
Notes due September 30, 2004 and bearing interest at 17% per annum (the "Secured
Notes"). The Secured Notes have an aggregate principal amount of $13,540,626,
are secured by the Company's ownership of common stock of Petals and convertible
after September 30, 2000 into Class A Shares at the fair market value of such
securities at the time of conversion. Interest on the Secured Notes is not
payable until the earlier of a redemption, conversion or default of such
securities, however, the Company is required to pay a administrative fee in
connection with the Secured Notes equal to 1% of the outstanding principal
amount of the securities per month until the earlier of a redemption, conversion
or default of such securities. In connection therewith, the Company issued
1,000,000 warrants to purchase Class A Shares at an exercise price of $2.00 per
share (the "Secured Note Warrants"). At any time, the Company may redeem the
Secured Notes at their face value plus all accrued and unpaid interest, and the
Secured Note Warrants at $0.25 per warrant. The Company received aggregate
proceeds of $7.5 million, and after paying an investment banking fee equal to 3%
and other fees and expenses, the Company received net proceeds of approximately
$7.2 million in the transaction.

F-31

Exhibit 11.1

Interiors, Inc.
Computation of Weighted Average Number of Shares
Outstanding for the Year Ended June 30, 1999

<TABLE>
<CAPTION>
Class A &
Class B
Common Weighted Basic Weighted Diluted
(000) (000) (000)
<S> <C> <C> <C>
Total Common Shares outstanding at June 30, 1998 21,720
Escrow Shares at June 30, 1998 (8,750)

Class A Common and Class B Common for EPS at June 30, 1998 12,970 7,251 8,154

Additional Common Shares 19,659 7,693 7,693

Total Common Shares Outstanding at June 30, 1999 32,629
Escrow Shares at June 30, 1999 (82)

Class A Common and Class B Common for EPS at June 30, 1999 32,547 22,036 22,036
</TABLE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Income in the company's Form 10-Q
for the twelve months ending June 30, 1999 and is qualified in its entirety by
reference to such consolidated financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,910,013
<SECURITIES> 0
<RECEIVABLES> 14,464,499
<ALLOWANCES> 0
<INVENTORY> 22,971,573
<CURRENT-ASSETS> 47,820,558
<PP&E> 11,902,445
<DEPRECIATION> 590,346
<TOTAL-ASSETS> 93,765,873
<CURRENT-LIABILITIES> 30,681,642
<BONDS> 0
32,628
1,000
<COMMON> 10,725
<OTHER-SE> 63,039,878
<TOTAL-LIABILITY-AND-EQUITY> 93,765,873
<SALES> 80,433,426
<TOTAL-REVENUES> 80,433,426
<CGS> 50,449,519
<TOTAL-COSTS> 50,449,519
<OTHER-EXPENSES> 34,492,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,185,220
<INCOME-PRETAX> (8,694,272)
<INCOME-TAX> (8,894,272)
<INCOME-CONTINUING> 0
<DISCONTINUED> 870,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,024,008)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)

</TABLE>