<PAGE>   1
================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                   ----------

                        COMMISSION FILE NUMBER 333-62021

                          HOME INTERIORS & GIFTS, INC.
             (Exact name of registrant as specified in its charter)

             TEXAS                                               75-0981828
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)

       1649 FRANKFORD ROAD, W
         CARROLLTON, TEXAS                                       75007-4605
(Address of principal executive offices)                         (Zip Code)

       Registrant's Telephone Number, Including Area Code: (972) 386-1000

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

     As of August 09, 2001, 15,240,218 shares of the Company's common stock, par
value $0.10 per share, were outstanding.

================================================================================

<PAGE>   2

                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                                      INDEX

<Table>
<Caption>
                                                                           PAGE NO.
                                                                           --------

<S>                                                                        <C>
PART I - FINANCIAL INFORMATION

Item 1.  Unaudited Interim Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2000 and
  June 30, 2001......................................................          3

Consolidated Statements of Operations and Comprehensive
  Income for the three months and six months ended June 30, 2000 and
  2001...............................................................          4

Consolidated Statements of Cash Flows for the six months
  Ended June 30, 2000 and 2001.......................................          5

Notes to Unaudited Interim Consolidated Financial
  Statements.........................................................          6

Item 2.  Management's Discussion and Analysis of Financial
  Condition and Results of Operations................................         15

Item 3.  Quantitative and Qualitative Disclosures About
  Market Risk........................................................         23

PART II - OTHER INFORMATION

Item 1.  Legal proceedings...........................................         24
Item 6.  Exhibits and Reports on Form 8-K............................         24
</Table>

                                       2
<PAGE>   3

ITEM 1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS.

                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                    AS OF DECEMBER 31, 2000 AND JUNE 30, 2001
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<Table>
<Caption>
                                                                         DECEMBER 31,      JUNE 30,
                                                                            2000             2001
                                                                         ------------      ---------
                                                                                          (unaudited)

<S>                                                                      <C>               <C>
                                      ASSETS

Current assets:
  Cash and cash equivalents .......................................       $  41,720        $   5,325
  Accounts receivable, net ........................................           9,608           11,045
  Inventories, net ................................................          27,493           35,067
  Deferred income tax benefit .....................................           4,353            4,315
  Other current assets ............................................           2,262            2,285
                                                                          ---------        ---------
          Total current assets ....................................          85,436           58,037
                                                                          ---------        ---------
Restricted cash ...................................................             900              900
Property, plant and equipment, net ................................          60,600           62,144
Investments .......................................................              48               48
Debt issuance costs, net ..........................................          13,385           15,349
Other assets ......................................................           5,029            5,263
                                                                          ---------        ---------
          Total assets ............................................       $ 165,398        $ 141,741
                                                                          =========        =========

                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Book overdrafts payable .........................................       $      --        $     133
  Accounts payable ................................................          17,693           16,885
  Accrued seminars and incentive awards ...........................          15,108           14,978
  Royalties payable ...............................................           4,527            4,230
  Hostess prepayments .............................................             790              628
  Income taxes payable ............................................           1,260               --
  Current maturities of long-term debt and capital
       lease obligations ..........................................          58,503           46,053
  Other current liabilities .......................................          14,162           25,593
                                                                          ---------        ---------
          Total current liabilities ...............................         112,043          108,500
Long-term debt and capital lease obligations, net of current
  maturities ......................................................         406,830          384,679
Other liabilities .................................................           8,636            9,187
                                                                          ---------        ---------
          Total liabilities .......................................         527,509          502,366
                                                                          ---------        ---------

Commitments and contingencies
Shareholders' deficit:
  Preferred stock, 10,000,000 shares authorized ...................              --               --
  Common stock, par value $0.10 per share, 75,000,000 shares
     authorized, 15,240,218 shares issued and
     outstanding ..................................................           1,524            1,524
  Additional paid-in capital ......................................         179,624          179,658
  Accumulated deficit .............................................        (542,939)        (541,666)
  Other ...........................................................            (320)            (141)
                                                                          ---------        ---------
          Total shareholders' deficit .............................        (362,111)        (360,625)
                                                                          ---------        ---------
          Total liabilities and shareholders' deficit .............       $ 165,398        $ 141,741
                                                                          =========        =========
</Table>

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

                                       3
<PAGE>   4

                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
        FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 2001
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<Table>
<Caption>
                                                                   THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                        JUNE 30,                          JUNE 30,
                                                                --------------------------        --------------------------
                                                                  2000             2001             2000             2001
                                                                ---------        ---------        ---------        ---------

<S>                                                             <C>              <C>              <C>              <C>
Net sales ...............................................       $ 107,008        $ 106,088        $ 219,098        $ 200,532
Cost of goods sold ......................................          49,777           45,987          105,910           87,708
                                                                ---------        ---------        ---------        ---------
Gross profit ............................................          57,231           60,101          113,188          112,824
Selling, general and administrative:
  Selling ...............................................          18,689           18,547           38,745           38,762
  Freight, warehouse and distribution ...................          11,782           10,528           23,932           21,274
  General and administrative ............................           8,315           12,625           18,336           27,319
  Loss (gain) on the disposition of assets ..............          (2,711)             367           (2,713)             364
  Stock option expense (credit) .........................             196              (14)             324               34
  Redundant warehouse and distribution ..................             570              839              570            1,147
  Homco restructuring ...................................              --               --            1,027               --
                                                                ---------        ---------        ---------        ---------
          Total selling, general and administrative .....          36,841           42,892           80,221           88,900
                                                                ---------        ---------        ---------        ---------
Operating income ........................................          20,390           17,209           32,967           23,924
Other income (expense):
  Interest income .......................................             494              270            1,115              911
  Interest expense ......................................         (11,268)         (11,426)         (22,399)         (23,088)
  Other income (expense) ................................           1,074               53              480              266
                                                                ---------        ---------        ---------        ---------
          Other income (expense), net ...................          (9,700)         (11,103)         (20,804)         (21,911)
                                                                ---------        ---------        ---------        ---------
Income before income taxes ..............................          10,690            6,106           12,163            2,013
Income taxes ............................................           3,719            2,219            4,296              739
                                                                ---------        ---------        ---------        ---------
Net income ..............................................           6,971            3,887            7,867            1,274

Other comprehensive income:
   Cumulative translation adjustment and other ..........            (165)             (19)            (133)             (48)
   Unrealized gains on derivative swaps at adoption of
      SFAS No. 133 ......................................              --               --               --              456
   Amortization to earnings of unrealized gain on
      derivative swap ...................................              --             (114)              --             (229)
                                                                ---------        ---------        ---------        ---------
Comprehensive income ....................................       $   6,806        $   3,754        $   7,734        $   1,453
                                                                =========        =========        =========        =========
</Table>

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

                                       4
<PAGE>   5

                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<Table>
<Caption>
                                                                                              SIX MONTHS ENDED
                                                                                                  JUNE 30,
                                                                                           ------------------------
                                                                                             2000            2001
                                                                                           --------        --------

<S>                                                                                        <C>             <C>
Cash flows from operating activities:
Net income .........................................................................       $  7,867        $  1,274
                                                                                           --------        --------
Adjustments  to  reconcile  net income to net cash (used in) provided by operating
activities:
  Depreciation and amortization ....................................................          2,285           4,405
  Amortization of debt issuance costs ..............................................          1,553           1,354
  Provision for doubtful accounts ..................................................            894             418
  Provision for losses on inventories ..............................................          1,268           1,413
  Realized gains on derivative swap ................................................            (38)           (228)
  Loss (gain) on the disposition of assets .........................................         (2,713)            364
  Stock option expense .............................................................            324              34
  Equity in earnings of an affiliate ...............................................            (22)             --
  Deferred tax expense (benefit) ...................................................           (280)          1,208
  Minority interest ................................................................             92              --
  Changes in assets and liabilities:
    Accounts receivable ............................................................         (1,508)         (1,855)
    Inventories ....................................................................           (529)         (8,987)
    Other current assets ...........................................................            900             (23)
    Other assets ...................................................................             --            (397)
    Accounts payable ...............................................................           (333)           (809)
    Income taxes payable ...........................................................         (3,737)         (1,260)
    Other accrued liabilities ......................................................         (5,561)          8,028
                                                                                           --------        --------
        Total adjustments ..........................................................         (7,405)          3,665
                                                                                           --------        --------
        Net cash provided by operating activities ..................................            462           4,939
                                                                                           --------        --------

Cash flows from investing activities:
  Purchases of property, plant, and equipment ......................................        (26,638)         (6,736)
  Payments received on notes receivable ............................................            189              --
  Proceeds from the sale of property, plant, and equipment .........................          5,407             236
  Decrease in restricted cash ......................................................         14,590              --
                                                                                           --------        --------
        Net cash used in investing activities ......................................         (6,452)         (6,500)
                                                                                           --------        --------

Cash flows from financing activities:
  Change in book overdrafts payable ................................................             --             133
  Capital contribution from the minority owner of  Laredo Candle ...................            642              --
  Payments under capital lease obligations .........................................             --            (762)
  Payments under the Senior Credit Facility ........................................        (12,625)        (14,839)
  Proceeds from borrowings under the revolving loan ................................             --          10,000
  Payments under the revolving loan ................................................             --         (29,000)
  Debt issuance costs ..............................................................             --            (318)
                                                                                           --------        --------
          Net cash used in financing activities ....................................        (11,983)        (34,786)
                                                                                           --------        --------

Effect of cumulative translation adjustment ........................................           (133)            (48)
                                                                                           --------        --------
Net decrease in cash and cash equivalents ..........................................        (18,106)        (36,395)
Cash and cash equivalents at beginning of year .....................................         32,406          41,720
                                                                                           --------        --------
Cash and cash equivalents at end of period .........................................       $ 14,300        $  5,325
                                                                                           ========        ========
</Table>

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

                                       5
<PAGE>   6

                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

          NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BACKGROUND

     Home Interiors & Gifts, Inc. ("HI"), together with its subsidiaries (the
"Company"), is a direct seller of home decorative accessories using the "party
plan" method whereby members of its non-employee, independent sales
representatives ("Displayers") conduct shows in the homes of potential
customers. The Company believes that in-home shows provide a comfortable
environment where the unique benefits and attributes of the Company's products
can be demonstrated in a more effective manner than the typical retail setting.

     The Company has been located in Dallas, Texas since its inception in 1957.
Approximately 46% of the dollar volume of products purchased by the Company in
the first six months of 2001 were purchased from, and manufactured by, the
Company's subsidiaries. The Company's subsidiaries sell substantially all of
their products to the Company. The Company expanded its operations
internationally in 1995.

     The following is a brief description of the Company's operating
subsidiaries, each of which is wholly owned:

     -    Dallas Woodcraft Company, LP (formally Dallas Woodcraft, Inc.) ("DWC")
          manufactures framed artwork and mirrors using custom-designed
          equipment.

     -    GIA, Inc. ("GIA") manufactures various types of molded plastic
          products using custom-designed equipment. In April, 2000, the Company
          consolidated its Homco operations into its GIA facilities in Grand
          Island, Nebraska and sold the Homco facility in McKinney, Texas.

     -    Homco, Inc. ("Homco") prior to April 2000, also manufactured molded
          plastic products similar to GIA.

     -    Laredo Candle Company, L.P. ("Laredo Candle") manufactures candles
          using custom-designed equipment. Laredo Candle, a Texas limited
          partnership, was formed after the Company purchased the remaining 40%
          ownership interest in Laredo Candle Company L.L.P. in July, 2000.

     -    Spring Valley Scents, Inc. ("SVS") is the general partner of Laredo
          Candle.

     -    Subsidiaries of the Company in Mexico and Puerto Rico provide sales
          support services to the international Displayers.

2. SIGNIFICANT ACCOUNTING POLICIES

     These consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated. The Company records sales and related expenses on a weekly basis
ending on each Saturday and each quarter consists of thirteen weeks. The last
days of the quarters ended June 30, 2000 and 2001 in the accompanying unaudited
consolidated financial information were July 1, 2000 and June 30, 2001,
respectively.

     The consolidated financial information as of June 30, 2001 and for the
three months and six months ended June 30, 2000 and 2001 is unaudited. In the
opinion of management, the accompanying unaudited consolidated financial
information and related notes thereto contain all adjustments, consisting only
of normal, recurring adjustments, necessary to present fairly the Company's
consolidated financial position as of June 30, 2001, its operating results and
comprehensive income for the three months and six months ended June 30, 2000 and
2001, and its cash flows for the six months ended June 30, 2000 and 2001.
Certain information and footnote disclosures normally included in

                                       6
<PAGE>   7

financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.

     These unaudited interim consolidated financial statements and notes thereto
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 2000 as filed with the SEC.

     Certain reclassifications have been made to prior period's balances to
conform with current year presentation.

3. INVENTORIES

     Inventories, net consisted of the following as of December 31, 2000 and
June 30, 2001 (in thousands):

<Table>
<Caption>
                                     DECEMBER 31,     JUNE 30,
                                         2000           2001
                                     ------------     --------

<S>                                  <C>              <C>
Raw materials ....................     $  5,697       $  5,278
Work in process ..................        1,563          2,293
Finished goods ...................       25,089         30,341
                                       --------       --------
                                         32,349         37,912

Allowance for raw materials ......       (2,002)        (1,065)
Allowance for finished goods .....       (2,854)        (1,780)
                                       --------       --------
                                       $ 27,493       $ 35,067
                                       ========       ========
</Table>

4. OTHER CURRENT LIABILITIES

     Other current liabilities consisted of the following as of December 31,
2000 and June 30, 2001 (in thousands):

<Table>
<Caption>
                                           DECEMBER 31,    JUNE 30,
                                              2000          2001
                                           ------------    --------

<S>                                        <C>             <C>
Interest payable .....................       $ 2,300       $ 2,267
Accrued compensation .................         2,726         4,231
Employee benefit plan contributions ..         1,030         1,749
Sales taxes payable ..................         2,354         2,296
Other taxes payable ..................         1,427         1,349
Reserve for debt restructuring fees ..            --         3,000
Deferred revenue .....................            --         6,678
Other current liabilities ............         4,325         4,023
                                             -------       -------
                                             $14,162       $25,593
                                             =======       =======
</Table>

5. OTHER LIABILITIES

    Other long-term liabilities consisted of the following as of December 31,
2000 and June 30, 2001 (in thousands):

<Table>
<Caption>
                                         DECEMBER 31,   JUNE 30,
                                            2000         2001
                                         ------------   --------

<S>                                      <C>            <C>
Deferred income tax liability ......       $1,854       $3,025
Abandoned lease commitments, net ...        4,434        3,788
Other long-term liabilities ........        2,348        2,374
                                           ------       ------
                                           $8,636       $9,187
                                           ======       ======
</Table>

                                       7
<PAGE>   8

6. RESTRUCTURING, REDUNDANCY AND REORGANIZATION

Redundant Warehouse and Distribution Cost

     Redundant warehouse and distribution costs for the three months and six
months ended June 30, 2001 were approximately $839,000 and $1.1 million,
respectively. These costs consist primarily of costs of operating certain manual
distribution centers longer than anticipated. Redundant warehouse and
distribution costs for the three and six months ended June 30, 2000 were
approximately $570,000.

Reorganization Cost

     During 2000, the Company implemented a corporate reorganization plan that
included, among other things, staff reductions and the elimination of excess
facility costs. As part of the reorganization, the Company has downsized various
departments. In December 2000, the Company relocated its corporate headquarters
to a new warehouse and distribution facility. As a result of the move, the
Company was able to sublet 40,000 square feet to a subtenant and has accelerated
amortization of the related leasehold improvements. During the second quarter of
2001, the Company was able to sublet an additional 2,600 square feet to the same
subtenant.

     Included in general and administrative expenses in the three months ended
June 30, 2001 and June 30, 2000 Consolidated Statements of Operations and
Comprehensive Income is approximately $1.1 million and $574,000, respectively,
of redundant headquarters facility costs and consulting costs associated with
the Company's reorganization plan. These costs totaled $1.2 million and $574,000
for the six months ended June 30, 2001 and 2000, respectively. Selling expense
also includes redundant costs of approximately $130,000 in the three and six
months ended June 30, 2001. There were no related redundant selling costs in the
three or six months ended June 30, 2000.

7. ADOPTION OF NEW ACCOUNTING STANDARD

     The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") as of January
1, 2001. Upon adoption of SFAS No. 133, the Company transferred a January 1,
2001 liability balance of approximately $456,000 related to the deferred gain on
the terminated swap portion of an interest rate swap to Accumulated Other
Comprehensive Income. This balance continues to be amortized into earnings as an
adjustment to interest expense through December 2001.

     The Company adopted the provisions of Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") as of January 1, 2000.
See Footnote 10 to the Consolidated Financial Statements.

     SFAS No. 141, "Business Combinations" ("SFAS No. 141") was issued on July
20, 2001. SFAS No. 141 addresses financial accounting and reporting for business
combinations. The provisions of SFAS No. 141 apply to all business combinations
initiated after June 30, 2001, and to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001, or
later. We adopted the provisions of this statement as of July 1, 2001, and there
was no financial accounting impact associated with its adoption.

     SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") was
issued on July 20, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. The provisions of
SFAS No. 142 are required to be applied starting with fiscal years beginning
after December 15, 2001, and must be applied at the beginning of a fiscal year
and to all goodwill and other intangible assets recognized in the financial
statements at that date. Under the provisions of SFAS No. 142, there will be no
amortization of goodwill or intangible assets with indefinite lives. Impairment
of these assets will need to be assessed annually and in certain circumstances.
We are currently reviewing SFAS No. 142 to assess its impact on the financial
statements and will adopt the provisions of this statement on January 1, 2002.

                                       8
<PAGE>   9

8. SEGMENT REPORTING

     The Company's reportable segments are based upon functional lines of
business as follows:

     -    Home Interiors ("HI") -- direct seller of home decorative accessories
          in the United States;

     -    Manufacturing -- manufactures framed artwork and mirrors, as well as
          various types of molded plastic products and candles for HI; and

     -    International -- direct seller of home decorative accessories in
          Mexico and Puerto Rico.

     The Company evaluates the performance of its segments and allocates
resources to them based on earnings before interest, taxes, the effects of SAB
101, depreciation and amortization, reorganization costs, redundant warehouse
and distribution expenses, Homco restructuring, non-cash (expenses) credit for
stock options and gains on sale of assets, Senior Credit Facility amendment fee
and other income (expense) ("EBITDA"). The accounting principles of the segments
are the same as those described in Note 2. Segment data includes intersegment
sales. Eliminations consist primarily of intersegment sales between
Manufacturing and HI, as well as the elimination of the investment in each
subsidiary for consolidated purposes. The table below presents information about
reportable segments used by the chief operation decision-maker of the Company as
of and for the three months and six months ended June 30, 2000 and 2001 (in
thousands):

<Table>
<Caption>
THREE MONTHS ENDED
    JUNE 30:                   HI                MANUFACTURING          INTERNATIONAL           ELIMINATIONS         CONSOLIDATED
------------------          --------             -------------          -------------           ------------         ------------

<S>                         <C>                  <C>                    <C>                     <C>                  <C>
2000
Net sales                   $105,317               $ 18,997                $  3,385               $ (20,691)             $107,008
EBITDA                        14,609                  4,464                     235                     (11)               19,297

2001
Net sales                   $103,192               $ 28,203                $  5,215               $ (30,522)             $106,088
EBITDA                        12,445                  9,078                     454                    (665)               21,312
</Table>

<Table>
<Caption>
SIX MONTHS ENDED
    JUNE 30:                   HI                MANUFACTURING          INTERNATIONAL           ELIMINATIONS         CONSOLIDATED
----------------            --------             -------------          -------------           ------------         ------------

<S>                         <C>                  <C>                    <C>                     <C>                  <C>
2000
Net sales                   $216,380                $ 39,474               $  6,223               $(42,979)            $219,098
EBITDA                        28,555                   8,219                    301                    301               37,376
Total assets                 147,005                  65,819                    206                (47,632)             165,398
Capital expenditures          22,263                   4,362                     13                     --               26,638

2001
Net sales                   $195,351                $ 53,592               $  9,698               $(58,109)            $200,532
EBITDA                        19,204                  16,429                    666                   (852)              35,447
Total assets                 118,963                  57,500                  1,369                (36,091)             141,741
Capital expenditures           5,479                   1,232                     25                     --                6,736
</Table>

                                9
<PAGE>   10

     The following table represents a reconciliation of consolidated EBITDA to
income before income taxes for the three months and six months ended June 30,
2000 and 2001 (in thousands):

<Table>
<Caption>
                                                     THREE MONTHS ENDED              SIX MONTHS ENDED
                                                          JUNE 30,                       JUNE 30,
                                                  ------------------------        ------------------------
                                                    2000            2001            2000            2001
                                                  --------        --------        --------        --------

<S>                                               <C>             <C>             <C>             <C>
EBITDA ....................................       $ 19,297        $ 21,312        $ 37,376        $ 35,447
Effects of SAB 101 ........................          1,031             791          (2,342)         (2,268)
Depreciation and amortization .............         (1,309)         (2,124)         (2,285)         (4,405)
Gain (loss) on the disposition of assets ..          2,711            (367)          2,713            (364)
Stock option (expense) credit .............           (196)             14            (324)            (34)
Homco Restructuring .......................             --              --          (1,027)             --
Reorganization costs ......................           (574)         (1,101)           (574)         (1,331)
Redundant warehouse & distribution ........           (570)           (839)           (570)         (1,147)
Senior credit facility amendment fees .....             --            (477)             --          (1,974)
Interest income ...........................            494             270           1,115             911
Interest expense ..........................        (11,268)        (11,426)        (22,399)        (23,088)
Other income (expense), net ...............          1,074              53             480             266
                                                  --------        --------        --------        --------
Income before income taxes ................       $ 10,690        $  6,106        $ 12,163        $  2,013
                                                  ========        ========        ========        ========
</Table>

9. GUARANTOR FINANCIAL DATA

     DWC, GIA, Homco, SVS, Laredo Candle and Homco Puerto Rico (collectively,
the "Guarantors") unconditionally, on a joint and several basis, guarantee the
Company's 10-1/8% Senior Subordinated Notes due 2008 in the amount of $200
million (the "Notes"). Laredo Candle became a guarantor in connection with the
purchase of the 40% ownership of Laredo Candle Company L.L.P. from the minority
owner on July 3, 2000. Prior to the purchase, Laredo Candle was not a guarantor.
The Company's other subsidiaries, Home Interiors de Mexico and Home Interiors de
Mexico Services (the "Non-Guarantors") have not guaranteed the Notes. Guarantor
and Non-Guarantor financial statements on an individual basis are not
significant and have been omitted. Accordingly, the following table presents
financial information of the Guarantors and Non-Guarantors on a consolidating
basis (in thousands):

                     CONSOLIDATING STATEMENTS OF OPERATIONS
                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000

<Table>
<Caption>
THREE MONTHS ENDED
     JUNE 30:                           HI           GUARANTORS     NON-GUARANTORS    ELIMINATIONS     CONSOLIDATED
------------------                   ---------       ----------     --------------    ------------     ------------

<S>                                  <C>              <C>           <C>               <C>              <C>
Net sales ....................       $ 105,317        $  16,572        $   5,810        $ (20,691)       $ 107,008
Cost of goods sold ...........          54,553           11,825            4,021          (20,622)          49,777
                                     ---------        ---------        ---------        ---------        ---------
  Gross profit ...............          50,764            4,747            1,789              (69)          57,231
Total selling, general and
  administrative .............          36,960           (1,504)           1,487             (102)          36,841
                                     ---------        ---------        ---------        ---------        ---------
  Operating income ...........          13,804            6,251              302               33           20,390
Other income (expense), net ..         (10,089)             248              (15)             156           (9,700)
                                     ---------        ---------        ---------        ---------        ---------
  Income before income
     Taxes ...................           3,715            6,499              287              189           10,690
Income taxes .................           1,604            2,096               19               --            3,719
                                     ---------        ---------        ---------        ---------        ---------
  Net income .................       $   2,111        $   4,403        $     268        $     189        $   6,971
                                     =========        =========        =========        =========        =========
</Table>

<Table>
<Caption>
 SIX MONTHS ENDED
     JUNE 30:                           HI           GUARANTORS     NON-GUARANTORS    ELIMINATIONS     CONSOLIDATED
 ----------------                    ---------       ----------     --------------    ------------     ------------

<S>                                  <C>              <C>           <C>               <C>              <C>
Net sales ....................       $ 216,380        $  34,767        $  10,930        $ (42,979)       $ 219,098
Cost of goods sold ...........         115,509           25,780            7,563          (42,942)         105,910
                                     ---------        ---------        ---------        ---------        ---------
  Gross profit ...............         100,871            8,987            3,367              (37)         113,188
Total selling, general and
  administrative .............          78,200             (425)           2,867             (421)          80,221
                                     ---------        ---------        ---------        ---------        ---------
  Operating income ...........          22,671            9,412              500              384           32,967
Other income (expense), net ..         (20,963)             426              (22)            (245)         (20,804)
                                     ---------        ---------        ---------        ---------        ---------
  Income before income
     taxes ...................           1,708            9,838              478              139           12,163
Income taxes .................             828            3,422               46               --            4,296
                                     ---------        ---------        ---------        ---------        ---------
  Net income .................       $     880        $   6,416        $     432        $     139        $   7,867
                                     =========        =========        =========        =========        =========
</Table>

                                       10
<PAGE>   11
                     CONSOLIDATING STATEMENTS OF OPERATIONS
                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001

<Table>
<Caption>
THREE MONTHS ENDED
     JUNE 30:                                         HI           GUARANTORS    NON-GUARANTORS     ELIMINATIONS     CONSOLIDATED
------------------                                 ---------       ----------    --------------     ------------     ------------
<S>                                                <C>             <C>           <C>                <C>              <C>
Net sales ......................................   $ 103,192        $  28,539       $   4,879        $ (30,522)       $ 106,088
Cost of goods sold .............................      54,293           18,780           2,409          (29,495)          45,987
                                                   ---------        ---------       ---------        ---------        ---------
  Gross profit .................................      48,899            9,759           2,470           (1,027)          60,101
Total selling, general and
  administrative ...............................      39,599            1,578           2,078             (363)          42,892
                                                   ---------        ---------       ---------        ---------        ---------
  Operating income .............................       9,300            8,181             392             (664)          17,209
Other income (expense), net ....................     (11,553)             372              78               --          (11,103)
                                                   ---------        ---------       ---------        ---------        ---------
  Income (loss) before income
     taxes .....................................      (2,253)           8,553             470             (664)           6,106
Income taxes ...................................        (753)           3,140            (168)              --            2,219
                                                   ---------        ---------       ---------        ---------        ---------
  Net income (loss) ............................   $  (1,500)       $   5,413       $     638        $    (664)       $   3,887
                                                   =========        =========       =========        =========        =========
</Table>

<Table>
<Caption>
 SIX MONTHS ENDED
     JUNE 30:                                         HI           GUARANTORS    NON-GUARANTORS     ELIMINATIONS     CONSOLIDATED
 ----------------                                  ---------       ----------    --------------     ------------     ------------
<S>                                                <C>             <C>           <C>                <C>              <C>
Net sales ......................................   $ 195,351        $  54,172       $   9,118        $ (58,109)       $ 200,532
Cost of goods sold .............................     103,545           36,228           4,512          (56,577)          87,708
                                                   ---------        ---------       ---------        ---------        ---------
  Gross profit .................................      91,806           17,944           4,606           (1,532)         112,824
Total selling, general and
  administrative ...............................      82,613            2,931           4,037             (681)          88,900
                                                   ---------        ---------       ---------        ---------        ---------
  Operating income .............................       9,193           15,013             569             (851)          23,924
Other income (expense), net ....................     (22,759)             794              54               --          (21,911)
                                                   ---------        ---------       ---------        ---------        ---------
  Income (loss) before income
     taxes .....................................     (13,566)          15,807             623             (851)           2,013
Income taxes ...................................      (5,157)           6,064            (168)              --              739
                                                   ---------        ---------       ---------        ---------        ---------
  Net income (loss) ............................   $  (8,409)       $   9,743       $     791        $    (851)       $   1,274
                                                   =========        =========       =========        =========        =========
</Table>

                           CONSOLIDATING BALANCE SHEET
                             AS OF DECEMBER 31, 2000

<Table>
<Caption>
                                                      HI           GUARANTORS     NON-GUARANTORS   ELIMINATIONS      CONSOLIDATED
                                                   ---------       ----------     --------------   ------------      ------------
<S>                                                <C>             <C>            <C>              <C>               <C>
                        ASSETS

Current assets:
  Cash and cash equivalents ....................   $  40,823        $     432       $     465        $      --        $  41,720
  Accounts receivable, net .....................       9,008              227             373               --            9,608
  Inventories ..................................      22,587            5,903           1,106           (2,103)          27,493
  Other current assets .........................       5,194            1,265             156               --            6,615
  Intercompany .................................     (21,648)          28,403          (2,124)          (4,631)              --
                                                   ---------        ---------       ---------        ---------        ---------
     Total current assets ......................      55,964           36,230             (24)          (6,734)          85,436
Property, plant and equipment, net .............      43,393           16,844             363               --           60,600
Investment in subsidiaries .....................      31,993            3,714              --          (35,707)              --
Debt issuance costs and other assets ...........      13,465            5,897              --               --           19,362
                                                   ---------        ---------       ---------        ---------        ---------
     Total assets ..............................   $ 144,815        $  62,685       $     339        $ (42,441)       $ 165,398
                                                   =========        =========       =========        =========        =========

   LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable .............................   $  19,937        $   1,669       $      85        $  (3,998)       $  17,693
  Current maturities of long-term debt .........      58,503               --              --               --           58,503
  Other current liabilities ....................      25,946            9,350             551               --           35,847
                                                   ---------        ---------       ---------        ---------        ---------
     Total current liabilities .................     104,386           11,019             636           (3,998)         112,043
Long-term debt, net of current maturities ......     406,830               --              --               --          406,830
Deferred income taxes ..........................       7,638              998              --               --            8,636
                                                   ---------        ---------       ---------        ---------        ---------
     Total liabilities .........................     518,854           12,017             636           (3,998)         527,509
                                                   ---------        ---------       ---------        ---------        ---------
Commitments and contingencies
Shareholders' equity (deficit):
  Common stock .................................       1,524            1,010              14           (1,024)           1,524
  Additional paid-in capital ...................     179,624           15,470           1,014          (16,484)         179,624
  Retained earnings (accumulated deficit) ......    (555,187)          34,188          (1,005)         (20,935)        (542,939)
  Other ........................................          --               --            (320)              --             (320)
                                                   ---------        ---------       ---------        ---------        ---------
     Total shareholders' equity
       (deficit) ...............................    (374,039)          50,668            (297)         (38,443)        (362,111)
                                                   ---------        ---------       ---------        ---------        ---------
     Total liabilities and shareholders'
       equity (deficit) ........................   $ 144,815        $  62,685       $     339        $ (42,441)       $ 165,398
                                                   =========        =========       =========        =========        =========
</Table>

                                       11
<PAGE>   12

                           CONSOLIDATING BALANCE SHEET
                               AS OF JUNE 30, 2001

<Table>
<Caption>
                                                         HI         GUARANTORS     NON-GUARANTORS    ELIMINATIONS      CONSOLIDATED
                                                      ---------     ----------     --------------    ------------      ------------

<S>                                                   <C>           <C>            <C>               <C>               <C>
                        ASSETS

Current assets:
  Cash and cash equivalents ........................  $   5,457      $    (210)       $      78        $      --        $   5,325
  Accounts receivable, net .........................      9,697            534              814               --           11,045
  Inventories ......................................     29,475          7,081            1,465           (2,954)          35,067
  Other current assets .............................      5,172          1,281              147               --            6,600
  Intercompany .....................................    (24,824)        26,668           (1,844)              --               --
                                                      ---------      ---------        ---------        ---------        ---------
     Total current assets ..........................  $  24,977      $  35,354        $     660        $  (2,954)       $  58,037
Property, plant and equipment,
  net ..............................................     45,219         16,582              343               --           62,144
Investment in subsidiaries .........................     32,950            187               --          (33,137)              --
Debt issuance costs and other
  assets ...........................................     15,817          5,743               --               --           21,560
                                                      ---------      ---------        ---------        ---------        ---------
     Total assets ..................................  $ 118,963      $  57,866        $   1,003        $ (36,091)       $ 141,741
                                                      =========      =========        =========        =========        =========

    LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Book overdrafts payable ..........................  $      --      $     133        $      --        $      --        $     133
  Accounts payable .................................     13,682          2,520               51              632           16,885
  Current maturities of long-term
     debt ..........................................     46,053             --               --               --           46,053
  Other current liabilities ........................     35,415          9,300              714               --           45,429
                                                      ---------      ---------        ---------        ---------        ---------
     Total current liabilities .....................  $  95,150      $  11,953        $     765        $     632        $ 108,500
Long-term debt, net of current
  maturities .......................................    384,679             --               --               --          384,679
Deferred income taxes ..............................      7,864          1,530             (207)              --            9,187
                                                      ---------      ---------        ---------        ---------        ---------
     Total liabilities .............................  $ 487,693      $  13,483        $     558        $     632        $ 502,366
Commitments and contingencies
Shareholders' equity (deficit):
  Preferred stock ..................................         --             --               --               --               --
  Common stock .....................................      1,524          1,000               14           (1,014)           1,524
  Additional paid-in capital .......................    179,658         12,486            1,014          (13,521)         179,658
  Retained earnings (accumulated
     deficit) ......................................   (550,160)        30,897             (215)         (22,188)        (541,666)
  Other ............................................        248             --             (368)              --             (141)
                                                      ---------      ---------        ---------        ---------        ---------
     Total shareholders' equity
       (deficit) ...................................  $(368,730)     $  44,383        $     445        $ (36,723)       $(360,625)
                                                      ---------      ---------        ---------        ---------        ---------
     Total liabilities and
       shareholders' equity
       (deficit) ...................................  $ 118,963      $  57,866        $   1,003        $ (36,091)       $ 141,741
                                                      =========      =========        =========        =========        =========
</Table>

                       CONSOLIDATING CASH FLOW INFORMATION

<Table>
<Caption>
                                                                   FOR THE SIX MONTHS ENDED JUNE 30, 2000
                                                  --------------------------------------------------------------------------
                                                    HI           GUARANTORS    NON-GUARANTORS   ELIMINATIONS    CONSOLIDATED
                                                  --------       ----------    --------------   ------------    ------------

<S>                                               <C>            <C>           <C>              <C>             <C>
Net cash provided by (used in) operating
activities ................................       $   (134)       $   (677)       $   (160)       $  1,433        $    462
Net cash provided by (used in) investing
activities ................................        (12,892)          6,614            (174)             --          (6,452)
Net cash provided by (used in) financing
activities ................................         (4,887)         (5,978)            733          (1,851)        (11,983)
</Table>

<Table>
<Caption>
                                                                   FOR THE SIX MONTHS ENDED JUNE 30, 2001
                                                  --------------------------------------------------------------------------
                                                    HI           GUARANTORS    NON-GUARANTORS   ELIMINATIONS    CONSOLIDATED
                                                  --------       ----------    --------------   ------------    ------------
<S>                                               <C>            <C>           <C>              <C>             <C>
Net cash provided by (used in)
operating  activities .....................       $  4,796        $    145        $     (2)       $     --        $  4,939
Net cash used in investing activities .....         (5,243)         (1,232)            (25)             --          (6,500)
Net cash provided by (used in) financing
activities ................................        (34,919)            133              --              --         (34,786)
</Table>

                                       12
<PAGE>   13

10. QUARTERLY RESULTS REVISED FOR SAB 101

     As a result of adopting Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), effective January 1, 2000,
revenue from product sales is recognized upon receipt of the shipment by the
Displayers. Prior to the adoption of SAB 101, revenue was recognized when
products were shipped. Provisions for discounts, returns, and other adjustments
are provided for in the same period the related sales are recorded.

     The adoption of SAB 101 had no impact on the Company's operating results
for the year ended December 31, 2000 as the Company has historically ceased
shipping product to Displayers during the latter part of December. However, the
adoption of SAB 101 did impact the Company's operating results for each of the
quarters in the year ended December 31, 2000. For comparability purposes, the
operating results for the three months and six months ended June 30, 2000 have
been restated herein for the impact of this pronouncement.

     The following table summarizes (in thousands) the effect of SAB 101 on the
previously reported operating results for the three months and six months ended
June 30, 2000:

<Table>
<Caption>
                                                REVISED
THREE MONTHS ENDED              PREVIOUSLY      FOR SAB
  JUNE 30, 2000                  REPORTED         101
                                ----------      --------

<S>                              <C>            <C>
Net sales ................       $104,932       $107,008
Gross profit .............         55,936         57,231
Operating income .........         19,359         20,390
Net income ...............          6,326          6,971
</Table>

<Table>
<Caption>
                                                REVISED
 SIX MONTHS ENDED               PREVIOUSLY      FOR SAB
  JUNE 30, 2000                  REPORTED         101
                                ----------      --------

<S>                              <C>            <C>
Net sales ................       $226,053       $219,098
Gross profit .............        116,413        113,188
Operating income .........         35,309         32,967
Net income ...............          9,330          7,867
</Table>

11. RELATED PARTY DEBT PURCHASES

     Related Party Debt Purchases. In January 2001 the Note Limited Partnership
purchased $50.9 million aggregate principal amount of 10-1/8% Series B Senior
Subordinated Notes due in 2008 in the open market for approximately $23.0
million plus accrued interest. In May 2001, the Debt Limited Partnership
purchased $44.9 million of the Company's senior bank debt for $35.6 million.
These transactions generated income for tax purposes equal to the difference
between the face value of the debt and the debt's purchase price.

12. SUBSEQUENT EVENTS

     On July 16, 2001, a limited partnership owned by Hicks Muse, certain
members of the Carter family, and their respective affiliates (the "Note Limited
Partnership") transferred $50.9 million aggregate principal amount of 10-1/8%
Series B Senior Subordinated Notes due 2008 of the Company that the Note Limited
Partnership had acquired in the open market in January 2001, to the Company in
exchange for a like aggregate liquidation preference of 12.5% Senior Convertible
Preferred Stock, par value $0.01 per share, issued by the Company ("Preferred
Stock"). Concurrently, another limited partnership owned by Hicks Muse, certain
members of the Carter family, and their respective affiliates (the "Debt Limited
Partnership"): (i) transferred its interest in approximately $45 million
aggregate indebtedness of the Company under the Company's existing credit
agreement (the "Credit Agreement") to the Company in exchange for a like
aggregate liquidation preference of Preferred Stock; and (ii) purchased an
additional $231,000 aggregate liquidation preference of Preferred Stock for
cash.

                                       13
<PAGE>   14

     The Company will not report significant net taxable income in respect of
the Debt purchase transactions and the issuance of the Preferred Stock. However,
if tax is found to be due and payable by the Company with respect to such
transactions prior to the termination of the Credit Agreement, the Note Limited
Partnership and the Debt Limited Partnership are required, at their option: (i)
to make a cash contribution to the capital of the Company; (ii) to purchase
shares of common stock of the Company at the then-current market value; or (iii)
to purchase additional shares of Preferred Stock, in each case in an aggregate
amount equal to the net amount of tax paid by the Company.

     Concurrently with the exchanges described above, the Credit Agreement was
amended and restated. Changes resulting from such amendment and restatement
include, among other things, an increase of $10 million in the revolving credit
line, which increase shall be available upon satisfaction by the Company of
certain conditions, and the conversion of approximately $45 million of the Term
A Loans to Term B Loans. In addition, the maturity date of the loans was
extended for an additional six-month period.

     Included in general and administrative expenses in the three months and six
months ended June 30, 2001 Consolidated Statements of Operations and
Comprehensive Income is approximately $476,000 and $2.0 million in costs related
to legal and consulting fees associated with the Company's amendment to the
Senior Credit Facility.

     The following table sets forth the capitalization of the Company on an
actual basis and as adjusted after giving effect to the conversion of debt in
exchange for preferred stock as if such transaction had occurred on June 30,
2001.

<Table>
<Caption>
                                                                            AS
                                                         ACTUAL          ADJUSTED
                                                        ---------        ---------

<S>                                                     <C>              <C>
Long-term debt (including current maturities):
  Revolving Credit Facility .....................       $  11,000        $  11,000
  Senior Credit Facility
    Tranche A Loan due 2004 .....................         117,161           60,000
    Tranche B Loan due 2006 .....................          95,126          107,359
  10-1/8% Senior Subordinated Notes due 2008 ....         200,000          149,100
  Capital leases ................................           7,445            7,445
                                                        ---------        ---------
    Total long-term debt ........................         430,732          334,904
                                                        ---------        ---------

Shareholders' deficit:
  Preferred stock ...............................              --           96,059
  Common stock ..................................           1,524            1,524
  Additional paid-in capital ....................         179,658          179,658
  Accumulated deficit ...........................        (541,666)        (541,897)
  Other .........................................            (141)            (141)
                                                        ---------        ---------
    Total shareholders' deficit .................        (360,625)        (264,797)
                                                        ---------        ---------
    Total capitalization ........................       $  70,107        $  70,107
                                                        =========        =========
</Table>

"As Adjusted" capitalization of the Company excludes impact of non-recurring
fees and expenses associated with the conversion of debt in exchange for
preferred stock.


                                       14
<PAGE>   15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and accompanying notes as of and
for the year ended December 31, 2000, included in its Form 10-K. Unless
otherwise mentioned, all references to the number of Displayers, number of
orders shipped and average order size relate to domestic sales activity only.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report
constitute forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause the Company's
actual results to be materially different from any future results expressed or
implied by such forward-looking statements.

     In some cases, forward-looking statements are identified by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
or other comparable terminology.

     All of these forward-looking statements are based on estimates and
assumptions made by management of the Company which, although believed to be
reasonable, are inherently uncertain. Therefore, undue reliance should not be
placed upon such statements. No assurance can be given that any of such
estimates or statements will be realized and actual results may differ
materially from those contemplated by such forward-looking statements. Factors
that may cause such differences include: (i) loss of Displayers; (ii) loss or
retirement of key members of management; (iii) imposition of state taxes; (iv)
change in status of independent contractors; (v) increased competition; (vi) the
success of the Company's Hostess Program; and (vii) additional unexpected
problems associated with the automated order fulfillment system. Many of these
factors will be beyond the control of the Company.

     Moreover, neither the Company nor any other person assumes responsibility
for the accuracy and completeness of such statements. The Company is under no
duty to update any of the forward-looking statements after the date of this Form
10-Q to conform such statements to actual results.

COMPANY BACKGROUND

     The Company believes it is the largest direct seller of home decorative
accessories in the United States, as measured by sales. As of June 30, 2001, the
Company sold its products to approximately 58,200 active Displayers located in
the United States; the Company is also represented in Mexico and Puerto Rico.
The Company's sales are dependent upon the number of Displayers selling the
Company's products and their resulting productivity. Displayer productivity
fluctuates from time to time based on seasonality and special marketing
programs, which offer Displayers new incentives and discounts timed to generate
additional sales.

     To stimulate sales, the Company offers a variety of discounts and
incentives to Displayers. The amount and timing of discounts and incentives vary
from year to year. The cost of discounts is reflected in the Company's net sales
while the cost of incentives is reflected in selling expense.

     Primarily because of the nature of the direct selling industry, and as a
result of numerous general and economic factors, the Company experienced average
annual Displayer turnover of approximately 58% during the last three years. The
average annual Displayer turnover increased significantly to approximately 71%
for the year ended December 31, 2000. While this recent level of sales
representative turnover is relatively common in the direct sales industry, it is
unusual for the Company. The Company believes that new Displayers are generally
among the least productive Displayers and that the majority of Displayers whose
status as Displayers terminates in any particular year are Displayers recruited
in that year or in the immediately preceding year. The Company's ability to
maintain its sales volume and to achieve growth depends upon its ability to
attract, train and retain a significant number of new Displayers each year.

                                       15
<PAGE>   16

     The Company believes that the increase in Displayer turnover during the
year ended December 31, 2000 is due to the adoption of revised recruiting and
training criteria in early 1999 and, to a lesser extent, a policy change in 2000
that requires a Displayer to place an order at least once in each quarter to be
considered "active." Among other things, the Company increased opportunities for
new Displayers by reducing initial purchase requirements and time commitments
and by lowering certain other barriers to entry. These changes resulted in a
significant increase in the number of newer, less experienced, and therefore,
less productive sales representatives. The number of active Displayers dropped
from 60,900 as of June 30, 2000 to 59,300 as of December 31, 2000. As of June
30, 2001, the number of active Displayers was 58,200.

     In March 2000, the Company implemented a new Hostess Program. The new
Hostess Program enables hostesses to select merchandise from the entire product
line rather than from a limited number of exclusive hostess products offered
under the previous hostess program. Hostesses who meet certain sales thresholds
receive Products in an amount equal to 20% of the sales generated at the show.
Hostesses also qualify for 55% discount bonus buys and can receive additional
gifts for bookings. The exclusive line of hostess products offered under the
previous hostess program represented low-margin, non-commissionable merchandise.
The conversion of these items to retail merchandise will result in higher gross
profit margins for the Company, as well as higher selling expenses, as
essentially all products are commissionable. In addition, as of March 2000, the
Company no longer sells hostess merits, which resulted in an increase in general
and administrative expenses due to a reduction in income from unredeemed Hostess
merits. The Company believes that, in addition to simplifying the reward
process, the new Hostess Program will also benefit Displayers by increasing the
product selection for hostesses and customers.

REORGANIZATION ACTIVITIES

Redundant Warehouse and Distribution Cost

     In 2000, the Company moved into a new warehouse and distribution facility
which allowed the Company to consolidate its previous warehouse and distribution
operations from several smaller facilities into a single larger facility (with
the exception of one facility in Coppell, Texas, at which the Company ceased
shipping operations on June 30, 2001.) In May 2000, the Company implemented an
automated order fulfillment system, which includes a new conveyor system,
special racks and storage bins and a warehouse management software system. The
Company encountered delays and problems associated with the design and
implementation of the automated order fulfillment system and the overall
productivity of the consolidated distribution facility. The Company has
identified and is correcting the identified system design problems and improving
the overall productivity of the consolidated distribution facility. The Company
anticipates that it will incur additional capital expenditures to improve the
operational effectiveness of the automated order fulfillment system.

     Redundant warehouse and distribution costs resulting from the issues
discussed above were approximately $839,000 and $570,000 for the three months
ended June 30, 2001 and 2000, respectively, as well as $1.1 million and $570,000
through the six months ended June 30, 2001 and 2000, respectively. These
expenses consist primarily of costs associated with operating certain manual
distribution centers longer than anticipated.

Reorganization Cost

     During 2000, the Company implemented a corporate reorganization plan that
included among other things, staff reductions and the elimination of excess
facility costs. As part of the reorganization, the Company has downsized various
departments. In December 2000, the Company relocated its corporate headquarters
to the new warehouse and distribution facility. As a result of the move, the
Company was able to sublet 40,000 square feet of the Company's former leased
headquarters to a subtenant. The Company has also hired consultants to assist in
either subleasing the remaining unused space or completing a buyout of the
remaining lease obligation by December 31, 2001.

     Included in general and administrative expenses in the three months ended
June 30, 2001 and June 30, 2000 Consolidated Statements of Operations and
Comprehensive Income is approximately $1.1 million and $574,000, respectively.
In 2001, these expenses are primarily consulting costs associated with the
Company's reorganization plan. Prior year expenses are primarily redundant
headquarters facility costs. These costs totaled $1.2 million and

                                       16
<PAGE>   17

$574,000 for the six months ended June 30, 2001 and 2000, respectively. Selling
expense also includes redundant costs of approximately $130,000 in the three and
six months ended June 30, 2001. There were no related redundant selling costs in
the three or six months ended June 30, 2000.

RESULTS OF OPERATIONS

The Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000

     Net sales decreased $0.9 million, or 0.9%, to $106.1 million in the three
months ended June 30, 2001, from $107.0 million in the comparable period of
2000. The slight decline was due to a decrease in the average number of active
Displayers and the number of orders shipped. The average number of active
Displayers decreased 8.1% to approximately 57,700 in the three months ended June
30, 2001, from 62,800 in the comparable period of 2000. The number of orders
shipped decreased 8.1% to 193,452 orders in the second quarter of 2001, from
210,409 orders in the second quarter of 2000. The average order size increased
5.9% to $521 in the three months ended June 30, 2001, as compared to $492 in the
comparable period in 2000, primarily due to a more focused and productive core
Displayer base.

     Gross profit increased $2.9 million, or 5.0%, to $60.1 million in the three
months ended June 30, 2001 from $57.2 million in the comparable period of 2000.
As a percentage of net sales, gross profit increased to 56.7% in the second
quarter of 2001 from 53.5% in the second quarter of 2000. The increase in the
gross profit percentage was due to an increase in manufacturing efficiencies
over the prior year, introduction of products with higher gross margins and a
larger focus on emphasizing the products of our manufacturing subsidiaries.

     Selling expense decreased slightly to $18.5 million in the three months
ended June 30, 2001 from $18.7 million in the comparable period of 2000. As a
percentage of net sales, selling expense remained flat at 17.5% in the second
quarter of 2001 and 2000. Redundant costs of approximately $130,000 are included
in selling expense for the quarter ended June 30, 2001. There were no related
redundant selling costs in the three months ended June 30, 2000.

     Freight, warehouse and distribution expense decreased $1.3 million, or
10.6%, to $10.5 million in the three months ended June 30, 2001 from $11.8
million in the three months ended June 30, 2000. These costs were 9.9% of net
sales in the 2001 period, as compared to 11.0% in the related 2000 period. This
decrease in percentage was primarily due to a reduction in salaries and wages
related to the consolidation of six manual distribution centers into one
automated center as well as the absence of building rental for the manual
distribution centers that the Company occupied last year. Redundant warehouse
and distribution costs of $839,000 and $570,000 in the second quarter ended June
30, 2001 and 2000, respectively, primarily relating to duplicate facility costs,
have been reclassified to a separate operating expense line item in the
accompanying Consolidated Statements of Operations and Comprehensive Income.

     General and administrative expense increased $4.3 million, or 51.8%, to
$12.6 million in the three months ended June 30, 2001, from $8.3 million in the
three months ended June 30, 2000. This increase was primarily due to an increase
of $1.0 million in salaries and wages related to an increase in key management,
an increase of $1.4 million of employee bonus accrual and an increase in
depreciation expense of $1.2 million in connection with a higher level of
capital expenditures and capital leases. Certain additional non-recurring costs
of approximately $1.4 million and $574,000 associated with non-capitalizable
legal expenses related to obtaining the waiver, excess facilities, and
consulting costs associated with the Company's reorganization plan are also
included in general and administrative expense for the quarter ended June 30,
2001 and 2000, respectively.

     Loss (gain) on the disposition of assets in the six months ended 2000
primarily relates to the sale of a manufacturing and warehouse facility as well
as the sale of another property in May of 2000.

     Stock option income of approximately $14,000 was recorded in the three
months ended June 30, 2001 as compared to approximately $196,000 of expense in
the comparable 2000 period, as a result of a decrease in the weighted average
fair value of options outstanding as of June 30, 2001, as compared to June 30,
2000.

                                       17
<PAGE>   18

     Redundant warehouse and distribution expenses of approximately $839,000 and
$570,000 were recorded in the three months ended June 30, 2001 and 2000,
respectively, and consist primarily of costs associated with operating certain
manual distribution centers longer than anticipated and consolidation of the
manual distribution centers into the new distribution facility.

     Interest expense remained relatively flat at $11.4 million in the three
months ended June 30, 2001, as compared to $11.3 million in the three months
ended June 30, 2000. The decrease in interest related to a lower debt balance
was offset by an increase in interest expense related to the $11.0 million
outstanding revolver balance through June 30, 2001. There were no draws on the
revolver in the comparable period of 2000.

     Other income (expense) net in the three months ended June 30, 2000, as
compared to the same period in 2001, was lower by $1.0 million. Other income
during the three months ended June 30, 2000 includes an adjustment of
approximately $945,000 to adjust to fair market value the knockout and option
provisions of the Company's interest rate swap agreements. Three interest rate
swap agreements were terminated in the second quarter of 2000.

     Income taxes decreased $1.5 million to $2.2 million in the three months
ended June 30, 2001 from $3.7 million in the comparable period of 2000. Income
taxes, as a percentage of income before income taxes, was 36.3% in the three
months ended June 30, 2001, as compared to 34.8% in the three months ended June
30, 2000. The effective income tax rate for the 2000 period was impacted by the
sale of certain assets. The Company believes that the effective income tax rate
in the 2001 period will be consistent with its effective income tax rate for the
year ended December 31, 2001.

The Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30,
2000

     Net sales decreased $18.6 million, or 8.5%, to $200.5 million in the six
months ended June 30, 2001, from $219.1 million in the comparable period of
2000. The decline was primarily due to a decrease in the average number of
active Displayers. The average number of active Displayers decreased 9.9% to
approximately 58,300 in the six months ended June 30, 2001, from 64,700 in the
comparable period of 2000. This decrease in the Displayer base was offset by an
increase in the number of orders shipped by 11.2% to 362,978 in the six months
ended June 30, 2001, from 408,742 orders in the comparable period of 2000. The
average order size increased 1.0% to $526 in the six months ended June 30, 2001,
as compared to $521 in the comparable period in 2000. The drop in the average
number of active Displayers has left the Company primarily due to a more focused
and production-oriented core Displayer base. In addition, Hostess sales
decreased $15.3 million in the six months ended June 30, 2001 from the
comparable period of the prior year as a result of the discontinuation of the
hostess merit program in March 2000.

     Gross profit decreased $0.4 million, or 0.3%, to $112.8 million in the six
months ended June 30, 2001, from $113.2 million in the six months ended June 30,
2000. As a percentage of net sales, gross profit increased to 56.3% in the 2001
period, from 51.7% in 2000. The increase in the gross profit percentage was
primarily due to manufacturing inefficiencies experienced in the six months
ended June 30, 2000 as well as the high sales volume of low-margin hostess items
related to the change in the Hostess Program in March 2000. Most of the
inefficiencies experienced in the first half of 2000 were related to ineffective
product mix and low production volumes. The gross profit percentage in the six
months ended June 30, 2001 showed improvement as a result of the introduction of
products with higher gross margins and a larger focus on emphasizing the
products of our manufacturing subsidiaries.

     Selling expense increased slightly to $38.8 million in the six months ended
June 30, 2001, from $38.7 million in the comparable period of 2000. As a
percentage of net sales, selling expense increased to 19.3% in the six months
ended June 30, 2001, as compared to 17.7% in the comparable period in 2000.
Selling expense increased as a percentage of sales primarily due to the $15.3
million reduction in Hostess sales from the six months ended June 30, 2001, as
compared to the six months ended June 30, 2000, as a result of the
discontinuation of the hostess merit program in March 2000. Hostess merit sales
are non-cash transactions that incur no incremental selling expense. Redundant
costs of approximately $130,000 are included in selling expense for the six
months ended June 30, 2001. There were no related redundant selling costs in the
six months ended June 30, 2000. Selling expense was also impacted by an increase
in promotion related expenses such as incentive trips that are earned by
Displayers based upon their sales production.

                                       18
<PAGE>   19

     Freight, warehouse and distribution expense decreased $2.6 million, or
11.1%, to $21.3 million in the six months ended June 30, 2001, from $23.9
million in the six months ended June 30, 2000. These costs were 10.6% of net
sales in the 2001 period, as compared to 10.9% in the related 2000 period. This
decrease in percentage was primarily due to a reduction in salaries and wages
related to the consolidation of six manual distribution centers into one
automated center as well as the absence of building rental for the separate
distribution centers which the Company occupied last year. Redundant warehouse
and distribution costs of $1.1 million and $570,000 in the six months ended June
30, 2001 and 2000, respectively, primarily relating to duplicate facility costs,
have been reclassified to a separate operating expense line item in the
accompanying Consolidated Statements of Operations and Comprehensive Income.

     General and administrative expense increased $9.0 million, or 49.0%, to
$27.3 million in the six months ended June 30, 2001, from $18.3 million in the
six months ended June 30, 2000. This increase was primarily due to an increase
in salaries and wages of $0.9 million related to an increase in key management,
an increase in employee bonuses of $1.4 million and an increase in depreciation
expense of $2.5 million in connection with a higher level of capital
expenditures and capital leases. Certain additional non-recurring costs of
approximately $3.2 million and $574,000 associated with non-capitalizable legal
fees related to obtaining the waiver to the credit agreement, excess facilities,
and consulting costs associated the Company's reorganization plan are also
included in general and administrative expense for the six months ended June 30,
2001 and 2000, respectively.

     Loss (gain) on the disposition of assets in the six months ended 2000
primarily relates to the sale of a manufacturing and warehouse facility as well
as the sale of another property in May of 2000.

     Stock option expense of approximately $34,000 was recorded in the six
months ended June 30, 2001, as compared to approximately $324,000 in the
comparable 2000 period, as a result of a decrease in the weighted average fair
value of options outstanding as of June 30, 2001, as compared to June 30, 2000.

     Redundant warehouse and distribution expenses of approximately $1.1 million
and $570,000 were recorded in the six months ended June 30, 2001 and 2000,
respectively, and consist primarily of costs associated with operating certain
manual distribution centers longer than anticipated and consolidation of the
manual distribution centers into the new distribution facility.

     Restructuring expenses consist of non-recurring costs related to the
combination of Homco operations into GIA in the six months ended June 30, 2000.

     Interest expense increased $0.7 million, or 3.1%, to $23.1 million in the
six months ended June 30, 2001, from $22.4 million in the six months ended June
30, 2000. This increase was primarily the result of interest expense in 2001
related to the $11 million revolver balance as of June 30, 2001. There were no
draws on the revolver in the comparable period of 2000.

     Other income (expense) net in the six months ended June 30, 2000 includes
an adjustment to income of approximately $520,000 to adjust to fair market value
the knockout and option provisions of the Company's interest rate swap
agreements. Three interest rate swap agreements were terminated in the second
quarter of 2000.

     Income taxes decreased $3.6 million to $0.7 million in the six months ended
June 30, 2001, from $4.3 million in the comparable period of 2000. Income taxes,
as a percentage of income before income taxes, was 36.7% in the six months ended
June 30, 2001 compared to 35.3% in the six months ended June 30, 2000. The
effective income tax rate for the 2000 period was impacted by the sale of
certain assets. The Company believes that the effective income tax rate in the
2001 period will be consistent with its effective income tax rate for the year
ended December 31, 2001.

                                       19
<PAGE>   20

SEGMENT PROFITABILITY

     The Company's reportable segments include its domestic direct sales
business, its manufacturing operations and its international business. The
manufacturing operations sell substantially all of their products to the
Company. As a result, manufacturing sales generally follow the Company's
domestic sales trend. International operations include direct sales by
Displayers in Mexico and Puerto Rico. International sales are directly
attributable to the number of international Displayers the Company has selling
its Products. The Company's chief operating decision-maker monitors each
segment's profitability primarily on the basis of EBITDA performance. See Note 8
to Consolidated Financial Statements.

The Three Months Ended June 30, 2001 compared to the Three Months Ended June 30,
2000

     Consolidated net sales decreased $0.9 million, or 0.9%, to $106.1 million
in the three months ended June 30, 2001, from $107.0 million in the comparable
2000 period. This decrease is primarily due to the $2.1 million decrease in the
Company's domestic direct sales. International sales increased $1.8 million, or
54.1%, to $5.2 million in the three months ended June 30, 2001, from $3.4
million in the three months ended June 30, 2000. This increase is primarily due
to expansion of the international Displayer network. Manufacturing related sales
increased $9.2 million, or 48.5%, to $28.2 million in the second quarter of
2001, from $19.0 million in the second quarter of 2000 primarily due to
increased candle sales of Laredo Candle.

     Consolidated EBITDA increased $2.0 million, or 10.4%, to $21.3 million in
the three months ended June 30, 2001, from $19.3 million in the comparable
period of 2000. This increase is primarily due to an improved gross profit
related to higher margin items in the product line. Manufacturing related EBITDA
increased $4.6 million, or 103.4% to $9.1 million in the three months ended June
30, 2001, from $4.5 million in the comparable period of 2000. This increase is
primarily due to the increased candle sales of Laredo Candle and improved
manufacturing efficiencies.

The Six Months Ended June 30, 2001 compared to the Six Months Ended June 30,
2000

     Consolidated net sales decreased $18.6 million, or 8.5%, to $200.5 million
in the six months ended June 30, 2001, from $219.1 million in comparable 2000
period. This decrease is primarily due to the $21.0 million decrease in the
Company's domestic direct sales. International sales increased $3.5 million, or
55.8%, to $9.7 million in the six months ended June 30, 2001, from $6.2 million
in the six months ended June 30, 2000 due to expansion of the international
Displayer network. Manufacturing related sales increased $14.1 million, or
35.8%, to $53.6 million in the six months ended June 30, 2001, from $39.5
million in the comparable period of 2000 primarily due to increased candle sales
of Laredo Candle.

     Consolidated EBITDA decreased $2.0 million, or 5.2%, to $35.4 million in
the six months ended June 30, 2001 from $37.4 million in the comparable period
of 2000. This decrease is primarily due to decreased sales volume resulting from
fewer active Displayers, and to higher selling, general and administrative costs
in the Company's domestic direct sales business relative to sales. Manufacturing
related EBITDA increased $8.2 million, or 100.0% to $16.4 million in the six
months ended June 30, 2001, from $8.2 million in the comparable period of 2000.
This increase is primarily due to the increased sales of Laredo Candle.

SEASONALITY

     The Company's business is influenced by the Christmas holiday season and by
promotional events. Historically, a higher portion of the Company's sales and
net income have been realized during the fourth quarter, and net sales and net
income have generally been slightly lower during the first quarter as compared
to the second and third quarters. Working capital requirements also fluctuate
during the year. They reach their highest levels during the third and fourth
quarters as the Company increases its inventory for the peak season. In addition
to the Company's peak season fluctuations, quarterly results of operations may
fluctuate depending on the timing of, and amount of sales from, discounts,
incentive promotions and/or the introduction of new products. As a result, the
Company's business activities and results of operations in any quarter are not
necessarily indicative of any future trends in the Company's business.

                                       20
<PAGE>   21

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities increased $4.4 million during the
six months ended June 30, 2001, as compared to the six months ended June 30,
2000. This increase was primarily attributable to a decrease in deferred hostess
merit liability in 2000 related to the discontinuation of the hostess program in
March 2000 as well as a decrease in the Director bonus accrual for 2000 related
to slower sales. Offsetting these decreases is an $8.5 million increase in
inventory balances related to a lower year end balance as a result of increased
inventory management controls in 2000. As part of the Company's credit
agreement, there is a $3.0 million accrued reserve for debt restructuring fees
payable in the third quarter.

     Net cash used in investing activities remained flat at $6.5 million in the
six months ended June 30, 2001 and 2000. Capital expenditures in the six months
ended June 30, 2001 totaled $6.7 million, as compared to $26.6 million in the
six months ended June 30, 2000. The capital expenditures in 2000 primarily
related to the purchase and construction of the consolidated warehouse and
distribution facility. In the six months ended June 30, 2000, restricted cash of
$14.6 million was used to pay for substantially all of the costs associated with
the consolidated distribution facility.

     The Company contracted with an e-commerce consulting firm to assist the
Company in enhancing its internet capabilities, including improvements to the
Home Online order entry system for Displayers. The initial phase of the
e-commerce strategy was completed in February 2001 with the relaunch of the
Company's website and the addition of Displayer webpages. The Company spent
approximately $1.6 million during the six months ended June 30, 2001 on
e-commerce related improvements. The second phase of the e-commerce strategy,
which consists of providing the Displayers' customers the ability to order from
the Displayers over the internet, was launched in June 2001. The Company
believes that it will not have any significant e-commerce related improvement
expenditures for the remainder of the year ended December 31, 2001.

     Net cash used in financing activities was $34.8 million in the six months
ended June 30, 2001, as compared to $12.0 million in the six months ended June
30, 2000. This change was primarily as a result of increased principal payments
under the senior credit facility under the Credit Agreement (the "Senior Credit
Facility") as well as a $19.0 million paydown on the revolver during the six
months ended June 30, 2001.

     Payments on the Company's 10-1/8% Senior Subordinated Notes ("Notes") and
the Senior Credit Facility represent significant cash requirements for the
Company. Interest payments on the Notes commenced in December 1998 and will
continue semi-annually until the Notes mature in 2008. Borrowings under the
Senior Credit Facility require monthly interest payments and quarterly principal
payments. In addition, the Senior Credit Facility includes $30.0 million of
revolving loans ("Revolving Loans"), which mature on June 30, 2004.

     As a result of the timing and the magnitude of working capital requirements
and capital expenditures, the Company utilized the Revolving Loans during the
six month period ended June 30, 2001. As of June 30, 2001, $11.0 million was
outstanding on the Revolving Loans. There were no draws on the revolver in the
comparable period of 2000.

     The Company paid a total of $35.7 million in debt service for the six
months ended June 30, 2001, consisting of principal payments under the Senior
Credit Facility of $14.8 million, interest under the Senior Credit Facility of
approximately $9.9 million, interest of $0.9 million on the outstanding
Revolving Loans and $10.1 million of interest on the Notes.

     The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability to
incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including minimum fixed charge coverage ratios, and
maximum leverage ratios, capital expenditure measurements, and EBITDA
measurements. Subject to the financial ratios and tests, the Company will be
required to make certain mandatory prepayments of the term loans on an annual
basis. No prepayments were made in the six months ended June 30, 2001 or the
comparable period in 2000.

                                       21
<PAGE>   22

     On July 16, 2001, the Note Limited Partnership transferred $50.9 million
aggregate principal amount of 10-1/8% Series B Senior Subordinated Notes due
2008 of the Company that the Note Limited Partnership had acquired in the open
market in January 2001, to the Company in exchange for a like aggregate
liquidation preference of Preferred Stock. Concurrently, the Debt Limited
Partnership: (i) transferred its interest in approximately $45 million aggregate
indebtedness of the Company under the Credit Agreement to the Company in
exchange for a like aggregate liquidation preference of Preferred Stock; and
(ii) purchased an additional $231,000 aggregate liquidation preference of
Preferred Stock for cash.

     Concurrently with the exchanges described above, the Credit Agreement was
amended and restated. Changes resulting from such amendment and restatement
include, among other things, an increase of $10 million in the revolving credit
line, which increase shall be available upon satisfaction by the Company of
certain conditions, and the conversion of approximately $45 million of the Term
A Loans to Term B Loans. In addition, the maturity date of the loans was
extended for an additional six-month period.

     Included in general and administrative expenses in the six months ended
June 30, 2001 Consolidated Statements of Operations and Comprehensive Income is
approximately $2.0 million in non-capitalizable costs associated with the fifth
amendment to the Senior Credit Facility dated March 30, 2001 as well as the
amendment and restatement of the Credit Agreement dated July 16, 2001.

     The Company's near and long-term operating strategies focus on
strengthening the Displayer base and addressing operational inefficiencies. The
Company believes that cash on hand, net cash flow from operations and borrowings
under the Revolving Loans will be sufficient to fund its cash requirements
through the year ended December 31, 2001, which will consist primarily of
payment of principal and interest on outstanding indebtedness, working capital
requirements and capital expenditures. The Company's future operating
performance and ability to service or refinance its current indebtedness will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.

     Related Party Debt Purchases. In January 2001 the Note Limited Partnership
purchased $50.9 million aggregate principal amount of 10-1/8% Series B Senior
Subordinated Notes due in 2008 in the open market for approximately $23.0
million plus accrued interest. In May 2001, the Debt Limited Partnership
purchased $44.9 million of the Company's senior bank debt for $35.6 million.
These transactions generated income for tax purposes equal to the difference
between the face value of the debt and the debt's purchase price.

     As provided above, on July 16, 2001, in exchange for: (i) the
aforementioned $50.9 million aggregate principal amount of the Company's 10-1/8%
Series B Senior Subordinated Notes held by the Note Limited Partnership; (ii)
the aforementioned $44.9 million senior bank debt of the Company held by the
Debt Limited Partnership (collectively with the aforementioned Notes, the
"Debt"); and (iii) $231,000 in cash paid by the Debt Limited Partnership, the
Company issued an aggregate of 96,058.98 shares of 12.5% Senior Convertible
Preferred Stock ($96,058,980 liquidation preference) to the Note Limited
Partnership and the Debt Limited Partnership. The Company will not report
significant net taxable income in respect of the Debt purchase transactions and
the issuance of the Preferred Stock. However, if tax is found to be due and
payable by the Company with respect to such transactions prior to the
termination of the Credit Agreement, the Note Limited Partnership and the Debt
Limited Partnership are required, at their option: (i) to make a cash
contribution to the capital of the Company; (ii) to purchase shares of common
stock of the Company at the then-current market value; or (iii) to purchase
additional shares of Preferred Stock, in each case in an aggregate amount equal
to the net amount of tax paid by the Company.

MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

     The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate risks on changes
in interest rates, the Company uses derivative financial instruments. The
Company does not use derivative financial instruments for speculative or trading
purposes. The Company's international operations are not significant, and as a
result, changes in foreign currency exchange rates do not have a material effect
on the Company.

                                       22
<PAGE>   23

     During 2000, the Company terminated the swap portion of the $75.0 million
interest rate swap and received approximately $1.0 million, which resulted in a
deferred gain of approximately $722,000 on the transaction. The gain has been
recorded as a component of other comprehensive income and is being amortized
over the life of the swap as an adjustment to interest expense. The option
portion of this instrument is still outstanding and had an immaterial fair
market value as of June 30, 2001. The option expires December 2001 and is
included in current liabilities on the Company's Consolidated Balance Sheet.

ADOPTION OF ACCOUNTING STANDARDS

     The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") as of January
1, 2001. Upon adoption of SFAS No. 133, the Company transferred a January 1,
2001 liability balance of approximately $456,000 related to the deferred gain on
the terminated swap portion of an interest rate swap to Accumulated Other
Comprehensive Income. This balance is continuing to be amortized into earnings
as an adjustment to interest expense through December 2001.

     As a result of adopting Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101), effective January 1, 2000,
revenue from product sales is recognized upon receipt of the shipment by the
Displayers. Prior to the adoption of SAB 101, revenue was recognized when
products were shipped. Provisions for discounts, returns, and other adjustments
are provided for in the same period the related sales are recorded.

     The adoption of SAB 101 had no impact on the Company's operating results
for the year ended December 31, 2000 as the Company has historically ceased
shipping product to Displayers during the latter part of December. However, the
adoption of SAB 101 did impact the Company's operating results for each of the
quarters in the year ended December 31, 2000. For comparability purposes, the
operating results for the three months and six months ended June 30, 2000 have
been restated herein for the impact of this pronouncement.

     SFAS No. 141, "Business Combinations" was issued on July 20, 2001. SFAS No.
141 addresses financial accounting and reporting for business combinations. The
provisions of SFAS No. 141 apply to all business combinations initiated after
June 30, 2001, and to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
adopted the provisions of this statement as of July 1, 2001, and there was no
financial accounting impact associated with its adoption.

     SFAS No. 142, "Goodwill and Other Intangible Assets" was issued on July 20,
2001. SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001, and must be applied at the beginning of a fiscal year and to all goodwill
and other intangible assets recognized in the financial statements at that date.
Under the provisions of SFAS No. 142, there will be no amortization of goodwill
or intangible assets with indefinite lives. Impairment of these assets will need
to be assessed annually and in certain circumstances. The Company are currently
reviewing SFAS No. 142 to assess its impact on the financial statements and will
adopt the provisions of this statement on January 1, 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates and currency
exchange in their financial statements. Refer to the information appearing under
the subheading "Market-Sensitive Instruments and Risk Management" under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation," which information is hereby incorporated by reference into this Item
3. All statements other than historical information incorporated into this Item
3 are forward-looking statements. The actual impact of future market changes
could differ materially due to, among other things, the factors discussed in
this report.

                                       23
<PAGE>   24

                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     In the ordinary course of its business, the Company is from time to time
threatened with or named as a defendant in various lawsuits, including product
liability claims. The Company is not currently a party to any material
litigation, and is not aware of any litigation threatened against it that could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company is also subject to certain environmental
proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

                Exhibit Number           Description

                3.1                      Certificate of Designation, Preferences
                                         and Relative, Participating, Options
                                         and Other Special Rights of Preferred
                                         Stock and Qualifications, Limitations,
                                         and Restrictions Thereof (*)

                10.1                     Securities Exchange Agreement dated
                                         July 16, 2001, by and among the
                                         Company, HI Cayman, L.P. and HI Senior
                                         Debt Partners, L.P. (*)

                10.2                     Amended and Restated Credit Agreement
                                         dated June 30, 2001, by and among the
                                         Company, Bank of America, N.A., The
                                         Chase Manhattan Bank, Citicorp USA,
                                         Inc., Societe General and the lenders
                                         named therein (*)

     (b) Reports on Form 8-K

         Report on Form 8-K (Item 9) filed on July 17, 2001, regarding
         Regulation FD Disclosure with respect to a Preferred Stock transaction.

----------

* Filed herewith.

                                       24
<PAGE>   25

                                   SIGNATURES

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

HOME INTERIORS & GIFTS, INC.

By: /s/ KENNETH J. CICHOCKI
    -----------------------------------------------------
    Kenneth J. Cichocki
    Vice President of Finance and Chief Financial Officer
    (principal financial and accounting officer)

Date: August 13, 2001

                                       25
<PAGE>   26

                                  EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER              DESCRIPTION
-------             -----------

<S>                 <C>
  3.1               Certificate of Designation, Preferences and Relative,
                    Participating, Options and Other Special Rights of Preferred
                    Stock and Qualifications, Limitations, and Restrictions
                    Thereof (*)

 10.1               Securities Exchange Agreement dated July 16, 2001, by and
                    among the Company, HI Cayman, L.P. and HI Senior Debt
                    Partners, L.P. (*)

 10.2               Amended and Restated Credit Agreement dated June 30, 2001,
                    by and among the Company, Bank of America, N.A., The Chase
                    Manhattan Bank, Citicorp USA, Inc., Societe General and the
                    lenders named thereto (*)
</Table>

----------

* Filed herewith.

                                       26