<PAGE>   1


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

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q
                        FOR ANNUAL AND TRANSITION REPORTS
                QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
  (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 May 9, 2001, 15,240,218 shares of the Company's common stock, par
value $0.10 per share, were outstanding.

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



                                                                          Page 1

<PAGE>   2



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES



                                      INDEX
<TABLE>
<S>                                                           <C>
PART I - FINANCIAL INFORMATION

Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and
  March 31, 2001............................................   3
Consolidated Statements of Operations and Comprehensive
  Income for the three months ended March 31, 2000 and
  2001......................................................   4
Consolidated Statements of Cash Flows for the three months
  ended March 31, 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.......................   14

Item 3.  Quantitative and Qualitative Disclosure About
  Market Risk...............................................   21

PART II - OTHER INFORMATION

Item 1.  Legal proceedings...................................  22
Item 6.  Exhibits and Reports on Form 8-K....................  22
</TABLE>



                                                                          Page 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 MARCH 31, 2001
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)


<TABLE>
<CAPTION>
                                                             DECEMBER 31,   MARCH 31,
                                                                2000         2001
                                                              ---------   ---------
                                                                         (unaudited)
<S>                                                           <C>         <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $  41,720   $  38,371
  Accounts receivable, net..................................      9,608      13,198
  Inventories, net..........................................     27,493      29,553
  Deferred income tax benefit...............................      4,353       4,675
  Other current assets......................................      2,262       2,111
                                                              ---------   ---------
          Total current assets..............................     85,436      87,908
                                                              ---------   ---------
Restricted cash.............................................        900         900
Property, plant and equipment, net..........................     60,600      61,185
Investments.................................................         48          48
Debt issuance costs, net....................................     13,385      15,909
Other assets................................................      5,029       5,106
                                                              ---------   ---------
          Total assets......................................  $ 165,398   $ 171,056
                                                              =========   =========

                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Book overdrafts payable................ ............. .....  $     --    $    350
  Accounts payable..........................................     17,693      19,088
  Accrued seminars and incentive awards.....................     15,108      13,218
  Royalties payable.........................................      4,527       5,984
  Hostess prepayments.......................................        790         716
  Income taxes payable......................................      1,260          --
  Current maturities of long-term debt and capital
       lease obligations....................................     58,503      59,774
  Other current liabilities.................................     14,162      29,917
                                                              ---------   ---------
          Total current liabilities.........................    112,043     129,047
Long-term debt and capital lease obligations, net of current
  maturities................................................    406,830     397,708
Other liabilities...........................................      8,636       8,665
                                                              ---------   ---------
          Total liabilities.................................    527,509     535,420
                                                              ---------   ---------
Commitments and contingencies Shareholders' deficit:
  Preferred stock, 10,000 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     179,673
  Accumulated deficit.......................................   (542,939)   (545,554)
  Other.....................................................       (320)         (7)
                                                              ---------   ---------
          Total shareholders' deficit.......................   (362,111)   (364,364)
                                                              ---------   ---------
          Total liabilities and shareholders' deficit.......  $ 165,398   $ 171,056
                                                              =========   =========
</TABLE>


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



                                                                          Page 3
<PAGE>   4



                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
               FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                              MARCH 31,
                                                                           2000       2001
                                                                         --------   --------
<S>                                                                      <C>        <C>
Net sales............................................................    $112,090   $ 94,443
Cost of goods sold...................................................      56,133     41,721
                                                                         --------   --------
Gross profit.........................................................      55,957     52,722
Selling, general and administrative:
  Selling............................................................      20,056     20,215
  Freight, warehouse and distribution................................      12,150     10,747
  General and administrative.........................................      10,021     14,693
  Gains on the sale of assets........................................          (2)        (3)
  Stock option expense...............................................         128         48
  Redundant warehouse and distribution...............................          --        308
  Homco restructuring................................................       1,027         --
                                                                         --------   --------
          Total selling, general and administrative..................      43,380     46,008
                                                                         --------   --------
Operating income.....................................................      12,577      6,714
Other income (expense):
  Interest income....................................................         621        642
  Interest expense...................................................     (11,131)   (11,662)
  Other income (expense), net........................................        (593)       212
                                                                         --------   --------
          Other income (expense), net................................     (11,103)   (10,808)
                                                                         --------   --------
Income (loss) before income taxes....................................       1,474     (4,094)
Income taxes.........................................................         577     (1,479)
                                                                         --------   --------
Net income (loss)....................................................         897     (2,615)
Other comprehensive income (loss):
  Cumulative translation adjustment and other........................          32        (29)
  Unrealized gains on derivative swaps at adoption of SFAS No. 133...          --        456
  Amortization to earnings of unrealized gain on derivative
    swap.............................................................                   (114)
                                                                         --------   --------
Comprehensive income (loss)..........................................    $    929   $ (2,302)
                                                                         ========   ========
</TABLE>




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




                                                                          Page 4



<PAGE>   5



                  HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                    MARCH 31,
                                                                2000       2001
                                                              --------   --------
<S>                                                           <C>        <C>
Cash flows from operating activities:
Net income (loss)...........................................  $    897   $ (2,615)
                                                              --------   --------
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
  Depreciation and amortization.............................       976      2,281
  Amortization of debt issuance costs and other.............       776        581
  Provision for doubtful accounts...........................       376        304
  Provision for losses on inventories.......................       198      1,102
  Gains on the sale of assets...............................        (2)        (3)
  Stock option expense......................................       128         48
  Deferred tax expense (benefit)............................       313       (132)
  Minority interest.........................................        59         --
  Changes in assets and liabilities:
    Accounts receivable.....................................      (353)    (3,894)
    Inventories.............................................    (3,764)    (3,162)
    Other current assets....................................     2,981        151
    Other assets............................................      (221)      (159)
    Accounts payable........................................    (1,478)     1,394
    Income taxes payable....................................      (421)       594
    Other accrued liabilities...............................     2,761     10,478
                                                              --------   --------
        Total adjustments...................................     2,329      9,583
                                                              --------   --------
        Net cash provided by operating activities...........     3,226      6,968
                                                              --------   --------
Cash flows from investing activities:
  Purchases of property, plant and equipment................   (17,016)    (2,685)
  Proceeds from the sale of property, plant and equipment...        --          3
  Payments received on notes receivable.....................       189         --
  Decrease in restricted cash...............................    14,590         --
                                                              --------   --------
        Net cash used in investing activities...............    (2,237)    (2,682)
                                                              --------   --------
Cash flows from financing activities:
  Change in book overdrafts payable.........................        --        350
  Capital contribution from the minority owner of Laredo
    Candle..................................................       130         --
  Payments under capital lease obligations..................        --       (432)
  Payments under the Senior Credit Facility.................    (6,193)    (7,419)
  Debt issuance costs.......................................        --       (105)
                                                              --------   --------
        Net cash used in financing activities...............    (6,063)    (7,606)
                                                              --------   --------
Effect of cumulative translation adjustment.................        (8)       (29)
                                                              --------   --------
Net decrease in cash and cash equivalents...................    (5,082)    (3,349)
Cash and cash equivalents at beginning of year..............    32,406     41,720
                                                              --------   --------
Cash and cash equivalents at end of quarter.................  $ 27,324   $ 38,371
                                                              ========   ========
</TABLE>



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



                                                                          Page 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 quarter 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 subsidiaries,
each of which is wholly owned:

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

         -  GIA, Inc. ("GIA") and Homco, Inc. ("Homco") manufacture various
            types of molded plastic products using custom-designed equipment. In
            April, 2000, the Company consolidated its two separate injection
            molding facilities into a single facility at GIA in Grand Island,
            Nebraska and sold the Homco facility in McKinney, Texas.

         -  Laredo Candle Company, L.P. ("Laredo Candle") manufactures candles
            using custom-designed equipment. Laredo Candle is a Texas limited
            partnership formed following the Company's purchase of the remaining
            40% ownership interest in Laredo Candle Company L.L.P. from the
            minority interest holder 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 every quarter consists of thirteen weeks. The last
days of the quarter ended March 31, 2000 and 2001 in the accompanying unaudited
consolidated financial information were April 1, 2000 and March 31, 2001,
respectively.

         The consolidated financial information as of March 31, 2001 and for the
three months ended March 31, 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 March 31, 2001, its operating results and comprehensive
income for the three months ended March 31, 2000 and 2001, and its cash flows
for the three months ended March 31, 2000 and 2001. Certain information and
footnote disclosures normally included in 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.



                                                                          Page 6
<PAGE>   7



         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
March 31, 2001 (in thousands):


<TABLE>
<CAPTION>
                                                           December 31, March 31,
                                                               2000      2001
                                                              -------   -------
<S>                                                           <C>       <C>
Raw materials...............................................  $ 5,697   $ 5,122
Work in process.............................................    1,563     1,927
Finished goods..............................................   25,089    26,799
                                                              -------   -------
                                                               32,349    33,848
Allowance for raw materials.................................   (2,002)   (1,748)
Allowance for finished goods................................   (2,854)   (2,547)
                                                              -------   -------
                                                              $27,493   $29,553
                                                              =======   =======
</TABLE>



4. OTHER CURRENT LIABILITIES

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


<TABLE>
<CAPTION>
                                                           December 31,  March 31,
                                                               2000       2001
                                                              -------    -------
<S>                                                           <C>        <C>
Interest payable............................................  $ 2,300    $ 7,077
Accrued compensation........................................    2,726      3,071
Employee benefit plan contributions.........................    1,030      1,375
Sales taxes payable.........................................    2,354      3,295
Other taxes payable.........................................    1,427        787
Reserve for debt restructuring fees.........................       --      3,000
Deferred revenue............................................       --      8,208
Income taxes payable........................................       --        (95)
Other current liabilities...................................    4,325      3,199
                                                              -------    -------
                                                              $14,162    $29,917
                                                              =======    =======
</TABLE>



5. OTHER LIABILITIES

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


<TABLE>
<CAPTION>
                                                           December 31, March 31,
                                                              2000        2001
                                                             -------     -------
<S>                                                          <C>         <C>
Deferred income tax liability............................... $ 1,854     $ 2,044
Abandoned lease commitments, net............................   4,434       4,363
Other long-term liabilities.................................   2,348       2,258
                                                             -------     -------
                                                             $ 8,636     $ 8,665
                                                             =======     =======
</TABLE>



                                                                          Page 7



<PAGE>   8



6. RESTRUCTURING, REDUNDANCY AND REORGANIZATION

Homco Restructuring

         On April 1, 2000, the Company discontinued operations at Homco's
manufacturing and warehouse facility in McKinney, Texas and transferred
operations to GIA's facility in Grand Island, Nebraska. The Company incurred
approximately $1.0 million of non-recurring costs related to the combination of
Homco's operations into GIA and recorded a non-recurring charge amount in the
statement of operations for the quarter ended March 31, 2000.

Redundant Warehouse and Distribution Cost

         Redundant warehouse and distribution costs for the quarter ended March
31, 2001 were approximately $308,000. These costs consist primarily of costs of
operating certain manual distribution centers longer than anticipated. There
were no costs associated with redundant warehouse and distribution through the
three months ended March 31, 2000.

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 to a subtenant and has accelerated
amortization of the related leasehold improvements.

         Included in general and administrative expenses in the three months
ended March 31, 2001 Consolidated Statements of Operations and Comprehensive
Income is approximately $230,000 of redundant headquarter facility costs
associated with the Company's reorganization plan. There were no costs
associated with reorganization in the three months ended March 31, 2000.


7. LONG TERM DEBT

         Effective March 30, 2001, the Company entered into an amendment to the
Senior Credit Facility which, among other things: (i) reduced the Revolving
Loans available to the Company from $40 million to $30 million; (ii) increased
pricing by 75 basis points above previous levels; (iii) provided for an
amendment fee of 25 basis points immediately payable to the Lenders who executed
the amendment prior to March 31, 2001; (iv) provided for a fee of $3.0 million
payable to the Lenders, with the payment of such fee deferred until September
30, 2001, and which such fee will be forgiven in the event that certain existing
equity holders or their affiliates contribute $40.0 million in equity to the
Borrower prior to September 30, 2001; (v) reset the leverage and interest
coverage ratios applicable through the fiscal quarter ended December 31, 2001;
and (vi) added additional financial covenants with respect to minimum liquidity
and EBITDA. Further limitations related to capital lease obligations, liens,
acquisitions, payment of management fees to affiliates, letters of credit, loans
and advances to suppliers, and asset sales were also added to the Senior Credit
Facility. Additionally, the amendment to the Senior Credit Facility waived
compliance with the minimum interest coverage and maximum leverage ratios of the
Senior Credit Facility for the quarter ended December 31, 2000. Based on its
current projections, management believes that the Company will be able to meet
the revised covenants set forth in the Senior Credit Facility, as amended,
throughout 2001. However, because the Company's leverage and interest coverage
ratios have been reset only through the fiscal year ended December 31, 2001, the
Company anticipates that it will be required to restructure or refinance its
existing indebtedness and/or seek additional sources of equity or debt capital
during 2001 to enable it to continue to satisfy its obligations under the Senior
Credit Facility beyond 2001. There can be no assurance that the Company will be
able to successfully restructure or refinance its existing indebtedness and/or
obtain additional equity or debt financing on terms that are acceptable to it.



                                                                          Page 8



<PAGE>   9



         Included in the Consolidated Balance Sheet, as of March 31, 2001, is
$3.0 million in debt issuance fees of which payment to the Lender is deferred.
Included in general and administrative expenses in the quarter ended March 31,
2001 Consolidated Statements of Operations and Comprehensive Income is
approximately $1.5 million in costs of legal and consulting fees associated with
the Company's amendment to the Senior Credit Facility.

         As of March 31, 2001, a limited partnership that includes Hicks Muse,
certain members of the Carter family, and their respective affiliates held $50.9
million aggregate principal amount of Notes which were purchased in the open
market for approximately $22.1 million.


8. 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 is continuing 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 12 to the Consolidated Financial Statements.

9. 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 Home
            Interiors; 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, recapitalization expenses, reorganization
costs, redundant warehouse and distribution expenses, Homco restructuring,
non-cash (expenses) credit for stock options and gains on sale of assets
("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 quarter ended March 31
(in thousands):


<TABLE>
<CAPTION>
                                      HI      MANUFACTURING   INTERNATIONAL   ELIMINATIONS   CONSOLIDATED
                                   --------   -------------   -------------   ------------   ------------
<S>                                <C>        <C>             <C>             <C>            <C>
            Q1 - 2000
Net sales........................  $111,063      $20,479         $ 2,836        $(22,288)      $112,090
EBITDA...........................    13,946        3,756              66             311         18,079
Total assets.....................   152,868       34,873            (237)        (30,134)       157,370
Capital expenditures.............    16,696          308              12              --         17,016
 .
            Q1 - 2001
Net sales........................  $ 92,159      $25,389         $ 4,482        $(27,587)      $ 94,443
EBITDA...........................     6,760        7,351             212            (186)        14,137
Total assets.....................   146,394       66,133           1,094         (42,565)       171,056
Capital expenditures.............     2,314          361              10              --          2,685
</TABLE>



                                                                          Page 9



<PAGE>   10



         The following table represents a reconciliation of consolidated EBITDA
to income before income taxes for the quarter ended March 31 (in thousands):



<TABLE>
<CAPTION>
                                                          2000       2001
                                                        --------   --------
<S>                                                     <C>        <C>
EBITDA................................................  $18,079    $14,137
Effects of SAB 101....................................   (3,373)    (3,060)
Depreciation and amortization.........................     (976)    (2,281)
Gains on the sale of assets...........................        2          3
Stock option expenses.................................     (128)       (48)
Homco Restructuring...................................   (1,027)        --
Reorganization costs..................................       --       (230)
Redundant warehouse & distribution....................       --       (308)
Senior credit facility amendment fees.................       --     (1,499)
Interest income.......................................      621        642
Interest expense......................................  (11,131)   (11,662)
Other income (expense), net...........................     (593)       212
                                                        --------   --------
Income before income taxes............................  $ 1,474    $(4,094)
                                                        ========   ========
</TABLE>



10. 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"). During 1999, Laredo Candle was not a guarantor.
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 in July 3,
2000. The Company's other subsidiary, Home Interiors de Mexico (the
"Non-Guarantors") has not guaranteed the Notes. Guarantor and Non-Guarantor
financial statements on an individual basis are not significant and have been
omitted. Accordingly, the following presents financial information of the
Guarantors and Non-Guarantors on a consolidating basis (in thousands):

                      CONSOLIDATING STATEMENT OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2000


<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>         <C>            <C>             <C>            <C>
Net sales.........................  $111,063    $20,799        $ 2,516         $(22,288)      $112,090
Cost of good sold.................    60,957     16,078          1,418          (22,320)        56,133
                                    --------    -------        -------         --------       --------
  Gross profit....................    50,106      4,721          1,098               32         55,957
                                    --------    -------        -------         --------       --------
Total selling, general and
  administrative..................    41,240      1,333          1,126             (319)        43,380
                                    --------    -------        -------         --------       --------
  Operating income................     8,866      3,388            (28)             351         12,577
Other income (expense), net.......   (10,874)       179             (7)            (401)       (11,103)
                                    --------    -------        -------         --------       --------
  Income (loss) before income
     taxes........................    (2,008)     3,567            (35)             (50)         1,474
Income taxes......................      (776)     1,353             --               --            577
                                    --------    -------        -------         --------       --------
  Net income (loss)...............  $ (1,232)   $ 2,214        $   (35)         $   (50)      $    897
                                    ========    =======        =======         ========       ========
</TABLE>



                                                                         Page 10
<PAGE>   11



                      CONSOLIDATING STATEMENT OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2001


<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>         <C>            <C>             <C>            <C>
Net sales.........................  $ 92,159    $25,633        $ 4,237         $(27,586)      $ 94,443
Cost of good sold.................    49,254     17,448          2,101          (27,082)        41,721
                                    --------    -------        -------         --------       --------
  Gross profit....................    42,905      8,185          2,136             (504)        52,722
                                    --------    -------        -------         --------       --------
Total selling, general and
  administrative..................    43,013      1,353          1,960             (318)        46,008
                                    --------    -------        -------         --------       --------
  Operating income................      (108)     6,832            176             (186)         6,714
Other income (expense), net.......   (11,205)       421            (24)              --        (10,808)
                                    --------    -------        -------         --------       --------
  Income (loss) before income
     taxes........................   (11,313)     7,253            152             (186)        (4,094)
Income taxes......................    (4,403)     2,924             --               --         (1,479)
                                    --------    -------        -------         --------       --------
  Net income (loss)...............  $ (6,910)   $ 4,329        $   152         $   (186)      $ (2,615)
                                    ========    =======        =======         ========       ========
</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>


                                                                         Page 11


<PAGE>   12



                           CONSOLIDATING BALANCE SHEET
                              AS OF MARCH 31, 2001


<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>         <C>             <C>            <C>            <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents.......  $ 38,130    $  (108)        $  349         $     --       $ 38,371
  Accounts receivable, net........    11,942        389            867               --         13,198
  Inventories.....................    24,870      5,523          1,449           (2,289)        29,553
  Other current assets............     5,324      1,345            117               --          6,786
  Intercompany....................   (26,056)    32,950         (2,325)          (4,569)            --
                                    --------    -------        -------         --------       --------
     Total current assets.........    54,210     40,099            457           (6,858)        87,908
Property, plant and equipment,
  net.............................    44,053     16,777            355               --         61,185
Investment in subsidiaries........    31,993      3,714             --          (35,707)            --
Debt issuance costs and other
  assets..........................    16,138      5,825             --               --         21,963
                                    --------    -------        -------         --------       --------
     Total assets.................  $146,394    $66,415        $   812         $(42,565)      $171,056
                                    ========    =======        =======         ========       ========


                             LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Book overdrafts payable.........  $     --    $   350        $    --         $     --       $    350
  Accounts payable................    18,964      3,728            331           (3,936)        19,087
  Current maturities of long-term
     debt.........................    59,774         --             --               --         59,774
  Other current liabilities.......    43,438      5,744            653               --         49,835
                                    --------    -------        -------         --------       --------
     Total current liabilities....   122,176      9,822            984           (3,936)       129,046
Long-term debt, net of current
  maturities......................   397,708         --             --               --        397,708
Deferred income taxes.............     7,068      1,597             --               --          8,665
                                    --------    -------        -------         --------       --------
     Total liabilities............   526,952     11,419            984           (3,936)       535,419
                                    --------    -------        -------         --------       --------
Commitments and contingencies
Shareholders' equity (deficit):
  Common stock....................     1,524      1,010             14           (1,024)         1,524
  Additional paid-in capital......   179,673     15,469          1,015          (16,484)       179,673
  Retained earnings (accumulated
     deficit).....................  (562,097)    38,517           (852)         (21,121)      (545,553)
  Other...........................       342         --           (349)              --             (7)
                                    --------    -------        -------         --------       --------
     Total shareholders' equity
       (deficit)..................  (380,558)    54,996           (172)         (38,629)      (364,363)
                                    --------    -------        -------         --------       --------
     Total liabilities and
       shareholders' equity
       (deficit)..................  $146,394    $66,415        $   812         $(42,565)      $171,056
                                    ========    =======        =======         ========       ========
</TABLE>



                       CONSOLIDATING CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                         FOR THE THREE MONTHS ENDED MARCH 31, 2000
                                          -------------------------------------------------------------------
                                            HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                          -------   ----------   --------------   ------------   ------------
<S>                                       <C>        <C>              <C>             <C>           <C>
Net cash provided by operating
  activities............................  $15,859    $(12,487)        $ 272           $(418)        $  3,226
Net cash used in investing activities...  (12,988)     10,753            (2)             --           (2,237)
Net cash used in financing activities...  (4,776)      (1,287)           --              --           (6,063)
</TABLE>


<TABLE>
<CAPTION>
                                                         FOR THE THREE MONTHS ENDED MARCH 31, 2001
                                          -------------------------------------------------------------------
                                            HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                          -------   ----------   --------------   ------------   ------------
<S>                                       <C>        <C>              <C>             <C>          <C>
Net cash provided by operating
  activities............................  $ 8,164    $ (1,097)        $(99)           $  --        $  6,968
Net cash used in investing activities...   (2,200)       (472)         (10)              --          (2,682)
Net cash used in financing activities...   (7,956)        350           --               --          (7,606)
</TABLE>



                                                                         Page 12



<PAGE>   13



12. 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 quarter ended March 31, 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 quarter ended March 31,2000:


<TABLE>
<CAPTION>
                                        REVISED
                           PREVIOUSLY   FOR SAB
                            REPORTED      101
                           ----------   -------
<S>                       <C>           <C>
Net sales................ $ 121,121   $ 112,090
Gross profit.............    60,477      55,957
Operating income.........    15,950      12,577
Net income...............     3,005         897
</TABLE>



                                                                         Page 13



<PAGE>   14



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 March 31, 2001,
the Company sold its Products to approximately 57,300 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



                                                                         Page 14



<PAGE>   15



to achieve growth depends upon its ability to attract, train and retain a
significant number of new Displayers each year.

         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 representation. The number of active Displayers dropped
from 65,300 as of March 31, 2000 to 59,300 as of December 31, 2000. As of March
31, 2001, the number of active Displayers was 57,300.

         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, which the
Company plans to close by December 31, 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 $308,000 through the quarter ended March 31,
2001. These costs consist primarily of costs associated with operating certain
manual distribution centers longer than anticipated. There were no costs
associated with redundant warehouse and distribution through the three months
ended March 31, 2000.

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 and has hired consultants to assist in subleasing
the remaining unused



                                                                         Page 15



<PAGE>   16



space to its current subtenant or to another subtenant or to complete a buyout
of the remaining lease obligation by December 31, 2001.

         Included in general and administrative expenses in the three months
ended March 31, 2001 Consolidated Statements of Operations and Comprehensive
Income is approximately $230,000 of redundant headquarter facility costs
associated with the Company's reorganization plan. There were no costs
associated with reorganization in the three months ended March 31, 2000.

RESULTS OF OPERATIONS

The Three Months Ended March 31, 2001 Compared to the Three Months Ended March
31, 2000

         Net sales decreased $17.7 million, or 15.7%, to $94.4 million in the
three months ended March 31, 2001 from $112.1 million in the comparable period
of 2000. The decline was due to a decrease in the average number of active
Displayers, the number of orders shipped and the average order size. The average
number of active Displayers decreased 10.7% to approximately 59,400 in the three
months ended March 31, 2001 from 66,500 in the comparable period of 2000. The
number of orders shipped decreased 14.5% to 169,526 orders in the first quarter
of 2001 from 198,333 orders in the first quarter of 2000, and the average order
size decreased 3.6% to $531 in the three months ended March 31, 2001 as compared
to $551 in the comparable period in 2000. In addition to the decrease in
Displayer productivity, Hostess sales fell by $15.4 million or 60.7% to $10.0
million in the three months ended March 31, 2001 as compared to $25.4 million in
the comparable period of 2000 due to the discontinuation of the Hostess merit
program in March of 2000.

         Gross profit decreased $3.3 million, or 5.8%, to $52.7 million in the
three months ended March 31, 2001 from $56.0 million in the comparable period of
2000. As a percentage of net sales, gross profit increased to 55.8% in the first
quarter of 2001 from 49.9% in the first quarter of 2000. The increase in the
gross profit percentage was due to manufacturing inefficiencies experienced in
the three months ended March 31, 2000 as well as the high sales volume of
low-margin Hostess items related to the change in the Hostess plan in March
2000. Most of the inefficiencies experienced in the first quarter of 2000 were
related to ineffective product mix and low production volumes. The gross profit
percentage in the three months ended March 31, 2001 showed improvements 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 $20.2 million in the three months
ended March 31, 2001 from $20.1 million in the comparable period of 2000. As a
percentage of net sales, selling expense increased to 21.4% in the first quarter
of 2001 as compared to 17.9% in the first quarter of 2000. Selling expense
increased as a percentage of sales primarily due to the $15.4 million reduction
in Hostess sales from the quarter ended March 31, 2001 as compared to the
quarter ended March 31, 2000 in relation to the discontinuation of the Hostess
merit program in March 2000. Hostess merit sales are non-cash transactions that
incur no incremental selling expense.

         Freight, warehouse and distribution expense decreased $1.5 million, or
11.5%, to $10.7 million in the three months ended March 31, 2001 from $12.2
million in the three months ended March 31, 2000. These costs were 11.4% of net
sales in the 2001 period compared to 10.8% in the related 2000 period. This
increase in percentage was primarily due to an increase in the percentage of
heavier products shipped in the 2001 period. Redundant warehouse and
distribution costs of $308,000, 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 $4.7 million, or 46.6%, to
$14.7 million in the three months ended March 31, 2001, from $10.0 million in
the three months ended March 31, 2000. This increase was primarily due to an
increase in credit card fees of $0.4 million in connection with Home Online, the
Company's internet order entry system, and an increase in depreciation expense
of $1.3 million in connection with a higher level of capital expenditures



                                                                         Page 16


<PAGE>   17


and capital leases. Certain additional non-recurring costs of approximately $1.7
million associated with obtaining the waiver and excess facilities are also
included in general and administrative expense for the quarter ended March 31,
2001. There were no non-recurring costs of this nature included in general and
administrative for the quarter ended March 31, 2000.

         Stock option expense of approximately $48,000 was recorded in the three
months ended March 31, 2001 as compared to approximately $128,000 in the
comparable 2000 period, as a result of a decrease in the weighted average fair
value of options outstanding as of March 31, 2001 as compared to March 31, 2000.

         Redundant warehouse and distribution expenses of approximately $308,000
were recorded in the three months ended March 31, 2001 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. There were no redundant warehouse and distribution
related expenses in the three months ended March 31, 2000.

         Homco restructuring expense of approximately $1.0 million was recorded
in the first quarter of 2000 as a result of non-recurring costs related to the
consolidation of Homco's operations into GIA. There were no Homco restructuring
related expenses in the three months ended March 31, 2001.

         Interest expense increased $0.6 million, or 4.8%, to $11.7 million in
the three months ended March 31, 2001 up from $11.1 million in the three months
ended March 31, 2000. This increase was the result of interest due on the Notes
and the Senior Credit Facility which increased as a result of the increase in
the LIBOR rate during the three months ended March 31, 2001. The increase was
also a result of interest on the $30 million of outstanding revolver balance as
of March 31, 2001. There were no draws on the revolver in the comparable period
of 2000.

         Other income (expense) in the three months ended March 31, 2000
includes an adjustment to expense of approximately $406,000 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 $2.1 million to a credit of $1.5 million in the
three months ended March 31, 2001 from $0.6 million of expense in the comparable
period of 2000. Income taxes, as a percentage of income before income taxes, was
36.1% in the three months ended March 31, 2001 compared to 39.1% in the three
months ended March 31, 2000. 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.

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 9
to Consolidated Financial Statements.

The Three Months Ended March 31, 2001 compared to the Three Months Ended March
31, 2000

         Consolidated net sales decreased $17.7 million, or 15.7%, to $94.4
million in the three months ended March 31, 2001 from $112.1 million in
comparable 2000 period primarily due to the $18.9 million decrease in the
Company's domestic direct sales. International sales increased $1.7 million, or
58.0%, to $4.5 million in the three months ended March 31, 2001 from $2.8
million in the three months ended March 31, 2000 due to expansion of the
international Displayer network. Manufacturing related sales increased $4.9
million, or 24.0%, to $25.4 million in the first quarter of



                                                                         Page 17



<PAGE>   18



2001 from $20.5 million in the first quarter of 2000 primarily due to increased
sales of Laredo Candle.

         Consolidated EBITDA decreased $4.0 million, or 21.8%, to $14.1 million
in the three months ended March 31, 2001 from $18.1 million in the comparable
period of 2000 primarily due to decreased sales volume resulting from a less
productive Displayer base, increase in sales in the first quarter of 2000
related to the discontinuance of the Hostess merit program, and to higher
selling, general and administrative costs in the Company's domestic direct sales
business relative to sales. Manufacturing related EBITDA increased $3.6 million,
or 95.7% to $7.4 million in the three months ended March 31, 2001 from $3.8
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.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash provided by operating activities increased $3.7 million during
the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000. This increase was attributable to an increase in other accrued
liabilities of $7.7 million primarily resulting from an accrual for abandoned
lease commitments associated with the relocation of the Company's corporate
headquarters in December 2000. This increase in other accrued liabilities was
offset by a $3.5 million increase in accounts receivable.

         Net cash used in investing activities increased to $2.7 million from
$2.2 million in the three months ended March 31, 2001 and 2000, respectively.
Capital expenditures in the three months ended March 31, 2001 totaled $2.7
million compared to $17.0 million in the three months ended March 31, 2000. The
capital expenditures in 2000 primarily related to the purchase and construction
of the consolidated warehouse and distribution facility.

         The Company has 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 $537,000 for the three months ended March 31, 2001 on e-commerce
related improvements. The second phase of the e-commerce strategy consists of
providing the Displayer's customers the ability to order from the Displayer over
the internet and is expected to be completed in June 2001. The Company expects
to spend approximately $1.2 million for the year ended December 31, 2001 on
e-commerce related improvements.

         Net cash used in financing activities was $7.6 million in the three
months ended March 31, 2001 as compared to $6.1 million in the three months
ended March 31, 2000. This change was primarily as a result of increased
principle payments under the Senior Credit Facility.

         Payments on the 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, which mature on June
30, 2004.



                                                                         Page 18



<PAGE>   19



         As a result of the timing and the magnitude of working capital
requirements and capital expenditures, the Company utilized the Revolving Loans
during the three months period ended march 31, 2001. As of March 31, 2001, $30.0
million was outstanding on the Revolving Loans.

         The Company paid a total of $13.5 million in debt service for the three
months ended March 31, 2001, consisting of principal payments under the Senior
Credit Facility of $7.4 million, interest under the Senior Credit Facility of
approximately $5.4 million and interest of $0.7 million on the Revolving Loans.

         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 interest coverage and maximum
leverage ratios, capital expenditure measurements, liquidity 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 three months ended March 31, 2001 or the
comparable period in 2000.

         Effective March 30, 2001, the Company entered into an amendment to the
Senior Credit Facility which, among other things: (i) reduced the Revolving
Loans available to the Company from $40.0 million to $30.0 million; (ii)
increased pricing by 75 basis points above previous levels; (iii) provided for
an amendment fee of 25 basis points immediately payable to the Lenders who
executed the amendment prior to March 31, 2001; (iv) provided for a fee of $3.0
million payable to the Lenders, with the payment of such fee deferred until
September 30, 2001, and which such fee will be forgiven in the event that
certain existing equity holders or their affiliates contribute $40.0 million in
equity to the Borrower prior to September 30, 2001; (v) reset the leverage and
interest coverage ratios applicable through the fiscal quarter ended December
31, 2001; and (vi) added additional financial covenants with respect to minimum
liquidity and EBITDA. Further limitations related to capital lease obligations,
liens, acquisitions, payment of management fees to affiliates, letters of
credit, loans and advances to suppliers, and asset sales were also added to the
Senior Credit Facility. Additionally, the amendment to the Senior Credit
Facility waived compliance with the minimum interest coverage and maximum
leverage ratios of the Senior Credit Facility for the quarter ended December 31,
2000. Based on its current projections, management believes that the Company
will be able to meet the revised covenants set forth in the Senior Credit
Facility, as amended, throughout 2001. However, because the Company's leverage
and interest coverage ratios have been reset only through the fiscal year ended
December 31, 2001, the Company anticipates that it will be required to
restructure or refinance its existing indebtedness and/or seek additional
sources of equity or debt capital during 2001 to enable it to continue to
satisfy its obligations under the Senior Credit Facility beyond 2001. There can
be no assurance that the Company will be able to successfully restructure or
refinance its existing indebtedness and/or obtain additional equity or debt
financing on terms that are acceptable to it.

         Included in the Consolidated Balance Sheet, as of March 31, 2001, is
$3.0 million in debt issuance fees of which payment to the lender is deferred.
Included in general and administrative expenses in the quarter ended March 31,
2001 Consolidated Statements of Operations and Comprehensive Income is
approximately $1.5 million in costs associated with the fifth amendment to the
Senior Credit Facility dated March 30, 2001.

         The Company's near and long-term operating strategies focus on
strengthening the Displayer base and addressing operational inefficiencies. The
Company has retained financial advisors who are reviewing the financial
alternatives available to the Company, including without limitation a possible
debt restructuring. 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



                                                                         Page 19



<PAGE>   20
conditions and to financial, business and other factors, many of which are
beyond the Company's control.

         Related Party Debt Purchases. The Company has been notified that, in
January 2001, a limited partnership that includes Hicks Muse, certain members of
the Carter family, and their respective affiliates purchased $50.9 million
aggregate principal amount of Notes in the open market for approximately $22.1
million. As a result of these purchases of Notes, the Company anticipates that
it will recognize cancellation of indebtedness income during 2001 which could,
absent any offsetting deductions or credits that may be available to it,
generate an additional income tax liability to the Company for 2001. In addition
to the foregoing purchases there can be no assurance that Hicks Muse, any
members of the Carter family, or any other affiliate of the Company will not
purchase additional Notes or other indebtedness of the Company at a discount in
the future, which purchases could also result in additional cancellation of
indebtedness income and income tax liabilities to the Company during 2001. The
Company is in the process of reviewing the tax implications of these
transactions, both for 2001 and future periods, but in any event believes that
any cancellation of indebtedness income incurred by the Company could
potentially be offset (in whole or in part) by deductions that become available
to the Company in the event the Company engages in a restructuring of its
existing indebtedness and/or raises additional debt or equity capital during
2001. The availability of any such deductions would depend, among other things,
on the manner in which any such restructuring occurs and whether the Hicks Muse
affiliates continue to hold the Notes after giving effect to the restructuring.

         Corporate Headquarters Facility. In February 2001, the Company and a
subtenant signed an agreement to sublease approximately 55% of the corporate
headquarters leased space commencing on February 2001 through January 2, 2010.
The rental rate begins at $67,000 per month and increases over the life of the
lease to $80,000 per month. The Company has also agreed to provide the
subtenant with an allowance for tenant improvements of $150,000. Included in
December 31, 2000 general and administrative expenses in the consolidated
statements of operations and comprehensive income is $6.4 million primarily
related to an accrual for the net present value of estimated future abandoned
lease commitments, as adjusted for future sublease rental income, and deferred
lease incentives, of $3.8 million, and accelerated amortization on related
leasehold improvements of $2.6 million. The Company has hired consultants to
assist in subleasing the remaining unused space to its current subtenant or to
another subtenant or to complete a buyout of the remaining lease obligation by
December 31, 2001.

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.

         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 a fair market
value of $414 at March 31, 2001, has an expiration date of 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.



                                                                         Page 20



<PAGE>   21



         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 quarter ended March 31, 2000 have been
restated herein for the impact of this pronouncement.

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.



                                                                         Page 21



<PAGE>   22



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



         (b) Reports on Form 8-K

             None.



                                                                         Page 22

<PAGE>   23


                                   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: May 9, 2001