##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


|                                            |  |                                                                                             
|------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                  |  |                                                                                             
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|                                           
|For the fiscal year ended December 31, 2004
|                                           
|or                                         
|                                           
|o                                           |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|                                           
|For the fiscal year ended December 31, 2004

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 of
    incorporation or organization)1649 Frankford Road, W
    Carrollton, Texas(Address of principal executive offices) |  | (I.R.S. Employer
    Identification No.)75007(Zip Code)

Registrants telephone number, including area code:


(972) 695-1000


Securities Registered Pursuant to Section 12(b) of the
Act:     None


Securities Registered Pursuant to Section 12(g) of the
Act:     None


þ o


þ


o þ






DOCUMENTS INCORPORATED BY REFERENCE:


None










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##### 



PART I




|        |         
|------- | --------
|Item 1. | Business

General












Company Direct Selling Strategy




Recruit and Retain Active Decorating Consultants.




1



---



##### 





Company Manufacturing and Wholesale Supply Strategy








Products


Product Line.


Prices.


Product Design and Introduction Process.


Direct Sales Method and Organization


Decorating Consultants.


2



---



##### 











Shows.


Hostesses.


Product Brochures.


3



---



##### 





Training and Sales Support


Field Organization.


Recruiting and Training of New Decorating Consultants.








4



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##### 





Ongoing Training and Motivation.






Incentive Programs.


Remuneration.


Product Supply and Manufacturing






5



---



##### 





Product Distribution








International Operations




| |             
| | ------------
| | Direct Sales











| |                         
| | ------------------------
| | Manufacturing Operations



6



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##### 







Financial Information About Segments




Competition






Employees






|        |           
|------- | ----------
|Item 2. | Properties

Owned Properties




|                       |  |                                                             |  |                |         | 
|---------------------- |  | ----------------------------------------------------------- |  | -------------- | ------- | 
|                       |  |                                                             |  | Approximate    |        
|Location               |  | Purpose                                                     |  | Square Footage |        
|                       |  |                                                             |  |                |        
|Carrollton, Texas      |  | Corporate headquarters, warehouse and distribution facility |  |                | 660,000 | 
|Dallas, Texas          |  | Manufacturing facility                                      |  |                | 209,000 | 
|Grand Island, Nebraska |  | Manufacturing facility                                      |  |                | 140,000 | 
|Laredo, Texas          |  | Manufacturing facility                                      |  |                | 103,000 | 
|Monterrey, Mexico      |  | Former Manufacturing facility                               |  |                | 226,000 | 

7



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##### 



Leased Properties




|                       |  |                                                  |  |               |                 |  |                |  |         |    
|---------------------- |  | ------------------------------------------------ |  | ------------- | --------------- |  | -------------- |  | ------- | ---
|                       |  |                                                  |  | Expiration of |                 |  | Approximate    | 
|Location               |  | Purpose                                          |  | Lease Term    |                 |  | Square Footage | 
|                       |  |                                                  |  |               |                 |  |                | 
|Carrollton, Texas      |  | Warehouse space                                  |  |               | July, 2007      |  |                |  | 245,000 |    
|Carrollton, Texas      |  | Warehouse space                                  |  |               | February, 2006  |  |                |  | 205,000 |    
|Carrollton, Texas      |  | Warehouse space                                  |  |               | June, 2005      |  |                |  | 78,000  |    
|Carrollton, Texas      |  | Warehouse space                                  |  |               | June, 2005      |  |                |  | 58,000  |    
|Coppell, Texas         |  | Warehouse space                                  |  |               | July, 2005      |  |                |  | 79,000  |    
|Dallas, Texas          |  | Former corporate headquarters                    |  |               | January, 2010   |  |                |  | 74,000  | (1)
|Grand Island, Nebraska |  | Warehouse space                                  |  |               | June, 2005      |  |                |  | 9,600   |    
|Grand Island, Nebraska |  | Warehouse space                                  |  |               | November, 2005  |  |                |  | 4,800   |    
|Houston, Texas         |  | Sales office                                     |  |               | May, 2008       |  |                |  | 2,500   |    
|Laredo, Texas          |  | Warehouse space                                  |  |               | April, 2006     |  |                |  | 50,000  |    
|Laredo, Texas          |  | Warehouse space                                  |  |               | March, 2005(2)  |  |                |  | 22,000  |    
|Palm Beach, Florida    |  | Retail store                                     |  |               | June, 2007      |  |                |  | 2,500   |    
|Trenton, New Jersey    |  | Manufacturing facility                           |  |               | June, 2005(3)   |  |                |  | 40,000  |    
|Monterrey, Mexico      |  | Distribution facility and corporate office space |  |               | June, 2009      |  |                |  | 164,000 |    
|Monterrey, Mexico      |  | Distribution facility                            |  |               | September, 2007 |  |                |  | 105,000 |    
|Monterrey, Mexico      |  | Warehouse space (Former Manufacturing facility)  |  |               | March, 2005(4)  |  |                |  | 18,000  |    
|Toronto, Canada        |  | Canada Direct Selling office                     |  |               | February, 2009  |  |                |  | 2,500   |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In February 2001, the Company subleased 41,000 square feet
    of the Companys 75,000 square foot former corporate
    headquarters to a subtenant and subleased an additional
    3,000 square feet to the same subtenant in June 2001. In
    2003, the Company subleased an additional 18,000 square
    feet to subsidiary entities, Domistyle, Inc. and EM Boehm,
    Inc., for offices and showroom space. During 2004 the Company
    cancelled a portion of the sublease approximating
    7,000 square feet. The Company is still in possession of
    20,000 square feet.
|   
|(2) | Month-to-month lease established in February 2005 for additional
    warehouse space in Laredo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Leased property is on a calendar quarter-to-quarter basis as of
    March 13, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Leased property is on a month-to-month basis as of
    February 1, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



8



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##### 



PART II




|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters



1 8




Securities Authorized for Issuance Under Equity Compensation
Plans


Equity Compensation Plan Information


|                                                            |                                  |                         |   |           |                   |                      |   |                           |  |  |   |           |           | 
|----------------------------------------------------------- | -------------------------------- | ----------------------- | - | --------- | ----------------- | -------------------- | - | ------------------------- |  |  | - | --------- | --------- | 
|                                                            |                                  |                         |   |           |                   | Number of Securities |  
|                                                            |                                  | Number of Securities to |   |           | Weighted-Average  |                      |   | Remaining Available for   | 
|                                                            |                                  | Be Issued upon          |   |           | Exercise Price of |                      |   | Future Issuance Under     | 
|                                                            |                                  | Exercise of Outstanding |   |           | Outstanding       |                      |   | Equity Compensation Plans | 
|                                                            |                                  | Options, Warrants and   |   |           | Options, Warrants |                      |   | (Excluding Securities     | 
|Plan Category                                               |                                  | Rights                  |   |           | and Rights        |                      |   | Reflected in Column (a))  | 
|                                                            |                                  |                         |   |           |                   |                      |   |                           | 
|                                                            |                                  | (a)                     |   |           | (b)               |                      |   | (c)                       | 
|Equity compensation plans approved by security holders:     |                                  |                         |   |           |                   |                      |   |                           |  |  |   |          
|                                                            | 1998 Independent Contractor Plan |                         |   | 270,506   |                   |                      | $ | 18.65                     |  |  |   | 2,069     |          
|                                                            | 1998 Key Employee Plan           |                         |   | 967,963   |                   |                      | $ | 18.68                     |  |  |   | 385,961   |          
|                                                            | 2002 Key Employee Plan           |                         |   | 3,470,000 |                   |                      | $ | 19.42                     |  |  |   | 2,530,000 |          
|Equity compensation plans not approved by security holders: |                                  |                         |  |           |                   |                      |   |                           |  |  |  |          
|                                                            |                                  |                         |   |           |                   |                      |   |                           | 
|                                                            |                                  | Total                   |   |           | 4,708,469         |                      |   |                           |  |  |   |           | 2,918,030 | 
|                                                            |                                  |                         |   |           |                   |                      |   |                           | 



9



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##### 





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |         | 
|------------------------------------ | ----------------------------------------------------- | ---------------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                     |                                                       | Year Ended December 31,                                    |        
|                                     |                                                       |                                                            |        
|                                     |                                                       | 2000                                                       |         |         | 2001    |   |         | 2002    |         |   | 2003    |         |         | 2004 |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                     |                                                       | (In thousands, except Domestic Decorating Consultant data) |        
|Statement of operations data:        |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Net sales                            |                                                       | $                                                          | 460,440 |         |         | $ | 461,689 |         |         | $ | 574,499 |         |         | $    | 615,483 |         |         | $ | 549,811 |        
|Cost of goods sold(1)                |                                                       |                                                            | 223,514 |         |         |   | 200,889 |         |         |   | 251,748 |         |         |      | 285,410 |         |         |   | 259,075 |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Gross profit                         |                                                       |                                                            | 236,926 |         |         |   | 260,800 |         |         |   | 322,751 |         |         |      | 330,073 |         |         |   | 290,736 |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Selling, general and administrative: |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                     | Selling(1)                                            |                                                            |         | 82,285  |         |   |         | 86,461  |         |   |         | 105,117 |         |      |         | 103,500 |         |   |         | 103,468 |        
|                                     | Freight, warehouse and distribution                   |                                                            |         | 44,896  |         |   |         | 50,599  |         |   |         | 66,597  |         |      |         | 77,763  |         |   |         | 72,150  |        
|                                     | General and administrative(1)                         |                                                            |         | 48,867  |         |   |         | 56,146  |         |   |         | 58,168  |         |      |         | 65,283  |         |   |         | 66,606  |        
|                                     | Loss (gain) on the disposition of assets              |                                                            |         | (2,738  | )       |   |         | 495     |         |   |         | (361    | )       |      |         | 108     |         |   |         | 5,207   |        
|                                     | Stock option expense (credit)                         |                                                            |         | (351    | )       |   |         | (62     | )       |   |         | 1,267   |         |      |         | 4,207   |         |   |         | 4,128   |        
|                                     | Homco restructuring                                   |                                                            |         | 1,027   |         |   |         |        |         |   |         |        |         |      |         |        |         |   |         |        |        
|                                     | Redundant warehouse and distribution                  |                                                            |         | 6,089   |         |   |         | 1,197   |         |   |         |        |         |      |         |        |         |   |         |        |        
|                                     | Loss on debt restructure(2)                           |                                                            |         |        |         |   |         | 2,437   |         |   |         | 7,188   |         |      |         |        |         |   |         | 1,118   |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                     |                                                       | Total selling, general and administrative                  |         |         | 180,075 |   |         |         | 197,273 |   |         |         | 237,976 |      |         |         | 250,861 |   |         |         | 252,677 | 
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Operating income                     |                                                       |                                                            | 56,851  |         |         |   | 63,527  |         |         |   | 84,775  |         |         |      | 79,212  |         |         |   | 38,059  |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Other income (expense):              |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                     | Interest income                                       |                                                            |         | 2,208   |         |   |         | 1,017   |         |   |         | 472     |         |      |         | 357     |         |   |         | 317     |        
|                                     | Interest expense                                      |                                                            |         | (45,496 | )       |   |         | (38,476 | )       |   |         | (27,497 | )       |      |         | (27,503 | )       |   |         | (35,435 | )      
|                                     | Other income (expense), net                           |                                                            |         | 2,116   |         |   |         | 925     |         |   |         | (1,439  | )       |      |         | (953    | )       |   |         | (1,456  | )      
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Other income (expense), net          |                                                       |                                                            | (41,172 | )       |         |   | (36,534 | )       |         |   | (28,464 | )       |         |      | (28,099 | )       |         |   | (36,574 | )      
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                     | Income from continuing operations before income taxes |                                                            |         | 15,679  |         |   |         | 26,993  |         |   |         | 56,311  |         |      |         | 51,113  |         |   |         | 1,485   |        
|Income tax provision                 |                                                       |                                                            | 5,892   |         |         |   | 23,433  |         |         |   | 20,663  |         |         |      | 16,948  |         |         |   | 1,037   |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|                                     | Income from continuing operations                     |                                                            |         | 9,787   |         |   |         | 3,560   |         |   |         | 35,648  |         |      |         | 34,165  |         |   |         | 448     |        
|                                     | Discontinued operations loss, net of taxes(3)         |                                                            |         |        |         |   |         |        |         |   |         |        |         |      |         | 1,804   |         |   |         | 4,373   |        
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Net income (loss)                    |                                                       | $                                                          | 9,787   |         |         | $ | 3,560   |         |         | $ | 35,648  |         |         | $    | 32,361  |         |         | $ | (3,925  | )      
|                                     |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |        
|Other financial data:                |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Gross profit percentage              |                                                       |                                                            | 51.5    | %       |         |   | 56.5    | %       |         |   | 56.2    | %       |         |      | 53.6    | %       |         |   | 52.9    | %      
|Cash flows provided by (used in):    |                                                       |                                                            |         |         |         |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                     | Operating activities                                  |                                                            | $       | 28,001  |         |   | $       | 40,295  |         |   | $       | 44,223  |         |      | $       | 17,524  |         |   | $       | 12,476  |        
|                                     | Investing activities                                  |                                                            |         | (20,625 | )       |   |         | (14,838 | )       |   |         | (13,796 | )       |      |         | (27,438 | )       |   |         | (12,842 | )      
|                                     | Financing activities                                  |                                                            |         | 2,299   |         |   |         | (49,893 | )       |   |         | 20,599  |         |      |         | (21,312 | )       |   |         | (8,256  | )      
|Depreciation and amortization        |                                                       |                                                            | 8,837   |         |         |   | 9,762   |         |         |   | 11,715  |         |         |      | 15,524  |         |         |   | 15,618  |        
|Capital expenditures                 |                                                       |                                                            | 34,135  |         |         |   | 15,088  |         |         |   | 14,168  |         |         |      | 14,561  |         |         |   | 13,622  |        
|Dividends paid(4)                    |                                                       |                                                            |        |         |         |   |        |         |         |   |        |         |         |      |        |         |         |   | 29,541  |        

10



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##### 



|                                                                            |  |                                                            |         |  |      |   |         |      |  |   |         |  |  |      |           |  |  |   |         | 
|--------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | --------- |  |  | - | ------- | 
|                                                                            |  | Year Ended December 31,                                    |        
|                                                                            |  |                                                            |        
|                                                                            |  | 2000                                                       |         |  | 2001 |   |         | 2002 |  |   | 2003    |  |  | 2004 |          
|                                                                            |  |                                                            |         |  |      |   |         |      |  |   |         |  |  |      |          
|                                                                            |  | (In thousands, except Domestic Decorating Consultant data) |        
|Domestic Decorating Consultant data:                                        |  |                                                            |         |  |      |   |         |      |  |   |         |  |  |      |           |  |  |   |         | 
|Number of orders shipped                                                    |  |                                                            | 821,716 |  |      |   | 782,670 |      |  |   | 923,935 |  |  |      | 1,067,982 |  |  |   | 930,560 | 
|Average order size(5)                                                       |  | $                                                          | 542     |  |      | $ | 560     |      |  | $ | 572     |  |  | $    | 492       |  |  | $ | 484     | 
|Active at end of year(6)                                                    |  |                                                            | 59,300  |  |      |   | 59,000  |      |  |   | 64,000  |  |  |      | 70,800    |  |  |   | 68,400  | 
|Average number of active Domestic Decorating Consultants during
    year(6) |  |                                                            | 61,900  |  |      |   | 58,300  |      |  |   | 61,600  |  |  |      | 66,500    |  |  |   | 70,600  | 

|                                             |  |                    |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|-------------------------------------------- |  | ------------------ | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                             |  | As of December 31, |         
|                                             |  |                    |         
|                                             |  | 2000               |          |   | 2001 |   |          | 2002 |  |   | 2003     |   |  | 2004 |         
|                                             |  |                    |          |   |      |   |          |      |  |   |          |   |  |      |         
|                                             |  | (In thousands)     |         
|Balance sheet data:                          |  |                    |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Cash and cash equivalents(7)                 |  | $                  | 41,720   |   |      | $ | 17,247   |      |  | $ | 68,111   |   |  | $    | 36,636   |   |  | $ | 27,820   |  
|Property, plant and equipment, net           |  |                    | 60,600   |   |      |   | 65,164   |      |  |   | 69,482   |   |  |      | 75,191   |   |  |   | 66,466   |  
|Total assets(7)                              |  |                    | 165,398  |   |      |   | 158,083  |      |  |   | 234,593  |   |  |      | 235,923  |   |  |   | 229,268  |  
|Total debt (including current maturities)(4) |  |                    | 465,333  |   |      |   | 317,842  |      |  |   | 344,916  |   |  |      | 323,238  |   |  |   | 466,562  |  
|Shareholders deficit                        |  |                    | (362,111 | ) |      |   | (263,013 | )    |  |   | (227,701 | ) |  |      | (191,382 | ) |  |   | (330,672 | )






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain non-recurring costs of $8.2 million,
    $6.6 million, $2.9 million, $5.8 million and
    $13.5 million in 2000, 2001, 2002, 2003 and 2004
    respectively, associated with the integration and subsequent
    shutdown of the Mexico manufacturing facilities,
    non-capitalizable legal fees related to obtaining the waiver to
    the Senior Credit Facility, staff reductions, excess facilities,
    fees related to the debt restructuring (as defined in
    Liquidity and Capital Resources, below), corporate
    organizational realignment, accelerated amortization of
    leasehold improvements, non-capitalizable costs of a new
    enterprise resource planning (ERP) system, and
    strategic planning expenses are included in cost of goods sold,
    selling, and general and administrative expense.                                                                                       
|   
|(2) | In 2002, the Financial Accounting Standards Board issued
    Statement of Financial Accounting Standards No. 145.
    Rescission of FASB Statements No. 4, 44, and 64,
    Amendment of FASB Statement No. 13, and Technical
    Corrections (SFAS No. 145).
    Previously the Company recognized a loss on a debt restructure
    as an extraordinary loss, net of related tax effect. On
    January 1, 2003, the Company adopted SFAS No. 145
    and in accordance with SFAS No. 145, the Company
    reclassified the extraordinary loss, net of related tax effect,
    to income from operations and income tax expense. The effect of
    adopting SFAS No. 145 decreased operating income from
    previously amounts reported by $2.4 million, as of
    December 31, 2001, and $7.2 million, as of
    December 31, 2002, and income taxes increased by $12.8 for
    2001 and decreased by $2.7 million for 2002.
|   
|(3) | In the first quarter of 2003 the Company acquired 100% of the
    assets of Ceramica y Vidrio de Nuevo Leon, S.A. de C.V.,
    Maquiladora Produr, S.A. de C.V., and Industrias Tromex
    Corporation, S.A. de C.V. (collectively Produr).
    Produr manufactured glass, ceramics, and metal products and is
    located in Monterrey Mexico. In April 2004, the Company decided
    to discontinue the manufacturing of ceramics products. The
    Company has accounted for the shutdown of the manufacturing
    operations of ceramics products as discontinued operations in
    the consolidated statement of operations and comprehensive
    income as of December 31, 2003 and 2004.                                                                                                                                                                                                                                 
|   
|(4) | In March 2004, the Company entered into a New Senior Credit
    Facility with multiple financial institutions for
    $320 million. See Note 11 to the Consolidated
    Financial Statements, which is hereby incorporated by reference.
    The proceeds received from the New Senior Credit Facility were
    used to repurchase all outstanding shares of the Companys
    12.5% Senior Convertible Preferred Stock, to pay off the
    existing credit facility, and to fund related debt issuance
    costs. The terms of the New Senior Credit Facility include
    significant operating and financial restrictions, such as limits
    on the payments of                                                                                                                                                                                                                                                                

11



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##### 



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | dividends. See Item 7. Managements Discussion and
    Analysis of Financial Condition and Results of Operations.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Average order size is calculated based on net sales less outside
    sales and international sales divided by number of orders. For
    purposes of this calculation, outside sales of
    $1.6 million, $9.2 million, $28.4 million, and
    $31.5 million for 2001, 2002, 2003, and 2004 have been
    excluded from net sales, respectively. There were no outside
    sales in 2000. In addition, international sales of approximately
    $15.1 million, $21.9 million, $36.7 million,
    $61.6 million, and $68.0 million for 2000, 2001, 2002,
    2003, and 2004 have been excluded from net sales, respectively.
|   
|(6) | An active Decorating Consultant is a Decorating Consultant who
    has placed an order with the Company within the prior
    14 weeks. The yearly average of active Decorating
    Consultants is calculated based upon the average number of
    active Decorating Consultants for each of the five previous
    quarters beginning with the quarter ended, December 31,
    2004.                                                                                                                                                                                                                                       
|   
|(7) | The Company reclassified book overdrafts to other current
    liabilities. As of December 31, 2002, 2003, and 2004, the
    Company had book overdrafts totaling $4.0 million,
    $4.9 million, and $4.8 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                          



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Special Note Regarding Forward-Looking Statements










Company Direct Selling Strategy






12



---



##### 









Company Manufacturing and Wholesale Supply Strategy








Critical Accounting Policies and Estimates






| |                    
| | -------------------
| | Revenue Recognition



13



---



##### 







| |                         
| | ------------------------
| | Allowances for Bad Debts





| |                   
| | ------------------
| | Inventory Reserves





| |                   
| | ------------------
| | Insurance Reserves





| |             
| | ------------
| | Tax Reserves





| |         
| | --------
| | Goodwill





| |                         
| | ------------------------
| | Stock Compensation Plans



14



---



##### 







| |                  
| | -----------------
| | Reclassifications







Results of Operations




| |                      
| | ---------------------
| | 2004 Compared to 2003

|                                                              |  |                        |           |  |      |        |         |          |            |   |          |   |  |  |       |   
|------------------------------------------------------------- |  | ---------------------- | --------- |  | ---- | ------ | ------- | -------- | ---------- | - | -------- | - |  |  | ----- | --
|                                                              |  |                        |           |  |      | Amount |         |          | Percentage |  
|                                                              |  | 2003                   |           |  | 2004 |        |         | Variance |            |   | Variance |  
|                                                              |  |                        |           |  |      |        |         |          |            |   |          |  
|                                                              |  | (Dollars in thousands) |           |  |     
|Net Sales                                                     |  |                        |           |  |      |        |         |          |            |   |          |   |  |  |       |   
|Domestic direct net sales to non-affiliates                   |  | $                      | 525,480   |  |      | $      | 450,378 |          |            | $ | (75,102  | ) |  |  | (14.3 | )%
|International direct net sales to non-affiliates              |  |                        | 61,629    |  |      |        | 67,979  |          |            |   | 6,350    |   |  |  | 10.3  | % 
|Domistyle net sales to non-affiliates                         |  |                        | 28,374    |  |      |        | 31,454  |          |            |   | 3,080    |   |  |  | 10.9  | % 
|                                                              |  |                        |           |  |      |        |         |          |            |   |          |  
|Net sales                                                     |  | $                      | 615,483   |  |      | $      | 549,811 |          |            | $ | (65,672  | ) |  |  | (10.7 | )%
|                                                              |  |                        |           |  |      |        |         |          |            |   |          |  
|Other Key Domestic Data                                       |  |                        |           |  |      |        |         |          |            |   |          |   |  |  |       |   
|Number of average active Decorating Consultants               |  |                        | 66,500    |  |      |        | 70,600  |          |            |   | 4,100    |   |  |  | 6.2   | % 
|Number of average active international Decorating Consultants |  |                        | 21,000    |  |      |        | 26,500  |          |            |   | 5,500    |   |  |  | 26.2  | % 
|Number of orders shipped                                      |  |                        | 1,067,982 |  |      |        | 930,560 |          |            |   | (137,422 | ) |  |  | (12.9 | )%
|Number of orders per Decorating Consultant                    |  |                        | 16.05     |  |      |        | 13.18   |          |            |   | (2.87    | ) |  |  | (17.9 | )%
|Average order size (actual dollars)                           |  | $                      | 492       |  |      | $      | 484     |          |            | $ | (8       | ) |  |  | (1.6  | )%

Net sales


15



---



##### 





International direct net sales


Domistyle net sales


Gross profit


Selling expense


Freight, warehouse and distribution expense


General and administrative expense




16



---



##### 





Loss on the disposition of assets


Loss on debt restructure


Stock option expense


Interest income


Interest expense


Income taxes


Discontinued operations loss, net of tax




| |                      
| | ---------------------
| | 2003 Compared to 2002

|                                                              |  |                        |         |  |      |        |           |          |            |   |          |   |  |  |       |   
|------------------------------------------------------------- |  | ---------------------- | ------- |  | ---- | ------ | --------- | -------- | ---------- | - | -------- | - |  |  | ----- | --
|                                                              |  |                        |         |  |      | Amount |           |          | Percentage |  
|                                                              |  | 2002                   |         |  | 2003 |        |           | Variance |            |   | Variance |  
|                                                              |  |                        |         |  |      |        |           |          |            |   |          |  
|                                                              |  | (Dollars in thousands) |         |  |     
|Net Sales                                                     |  |                        |         |  |      |        |           |          |            |   |          |   |  |  |       |   
|Domestic direct net sales to non-affiliates                   |  | $                      | 528,589 |  |      | $      | 525,480   |          |            | $ | (3,109   | ) |  |  | (0.6  | )%
|International direct net sales to non-affiliates              |  |                        | 36,723  |  |      |        | 61,629    |          |            |   | 24,906   |   |  |  | 67.8  | % 
|Domistyle net sales to non-affiliates                         |  |                        | 9,187   |  |      |        | 28,374    |          |            |   | 19,187   |   |  |  | 208.8 | % 
|                                                              |  |                        |         |  |      |        |           |          |            |   |          |  
|Net sales                                                     |  | $                      | 574,499 |  |      | $      | 615,483   |          |            | $ | 40,984   |   |  |  | 7.1   | % 
|                                                              |  |                        |         |  |      |        |           |          |            |   |          |  
|Other Key Domestic Data                                       |  |                        |         |  |      |        |           |          |            |   |          |   |  |  |       |   
|Number of average active Decorating Consultants               |  |                        | 61,600  |  |      |        | 66,500    |          |            |   | 4,900    |   |  |  | 8.0   | % 
|Number of average active international Decorating Consultants |  |                        | 13,100  |  |      |        | 21,000    |          |            |   | 7,900    |   |  |  | 60.3  | % 
|Number of orders shipped                                      |  |                        | 923,935 |  |      |        | 1,067,982 |          |            |   | 144,047  |   |  |  | 15.6  | % 
|Number of orders per Decorating Consultant                    |  |                        | 14.99   |  |      |        | 16.05     |          |            |   | 1.06     |   |  |  | 7.1   | % 
|Average order size (actual dollars)                           |  | $                      | 572     |  |      | $      | 492       |          |            | $ | (80      | ) |  |  | (14.0 | )%

Net sales


17



---



##### 





Gross profit


Selling expense


Freight, warehouse and distribution expense


General and administrative expense




Loss on the disposition of assets


Loss on debt restructure


18



---



##### 



Stock option expense


Interest income


Interest expense


Income taxes


Discontinued operations loss, net of tax


Segment Analysis






| |                      
| | ---------------------
| | 2004 Compared to 2003





| |                        
| | -----------------------
| | Direct Selling Domestic





| |                             
| | ----------------------------
| | Direct Selling International



19



---



##### 









| |          
| | ---------
| | Domistyle





| |                      
| | ---------------------
| | 2003 Compared to 2002





| |                        
| | -----------------------
| | Direct Selling Domestic





| |                             
| | ----------------------------
| | Direct Selling International





20



---



##### 





| |          
| | ---------
| | Domistyle



Seasonality




Liquidity and Capital Resources


















| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For an aggregate purchase price of $139.0 million, the
    Company repurchased all of the Companys outstanding shares
    of its 12.5% Senior Convertible Preferred Stock, pursuant
    to a Stock Purchase Agreement, dated March 31, 2004, among
    the Company and certain affiliates of the Companys
    controlling stockholders the Preferred Stock
    Repurchase.

21



---



##### 





| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $169.1 million of the proceeds were used to pay off the
    existing credit facility, which included an outstanding debt
    balance, related partial year interest, commitment fees, and
    outstanding letter of credit fees.         
|
| |  | $9.4 million of the proceeds were used to pay legal and
    advisory fees associated with the Preferred Stock Repurchase and
    the pay off of the existing credit facility, and the New Senior
    Credit Facility debt issuance costs.















22



---



##### 











Contractual Obligations




|                                                             |                               |                        |         |           |        |   |        |           |       |   |           |         |  |         |       |       |  |  |   |   | 
|------------------------------------------------------------ | ----------------------------- | ---------------------- | ------- | --------- | ------ | - | ------ | --------- | ----- | - | --------- | ------- |  | ------- | ----- | ----- |  |  | - | - | 
|                                                             |                               | Payments Due by Period
|                                                             |                               |                       
|                                                             |                               |                        |         | Less than |        |   |        |           | After
|                                                             |                               | Total                  |         |           | 1 Year |   |        | 1-3 Years |       |   | 4-5 Years |         |  | 5 Years
|                                                             |                               |                        |         |           |        |   |        |           |       |   |           |         |  |        
|CONTRACTUAL OBLIGATIONS:                                     |                               |                        |         |           |        |   |        |           |       |   |           |         |  |         |       |       |  |  |   |  
|Long-term debt                                               |                               | $                      | 461,600 |           |        | $ | 13,750 |           |       | $ | 447,850   |         |  | $       |      |       |  |  |  |  
|Capital lease obligations                                    |                               |                        | 4,275   |           |        |   | 1,800  |           |       |   | 2,475     |         |  |         |      |       |  |  |  |  
|Related-party note payable                                   |                               |                        | 687     |           |        |   | 687    |           |       |   |          |         |  |         |      |       |  |  |  |  
|Guaranteed minimum licensing royalty obligation              |                               |                        | 4,700   |           |        |   | 3,650  |           |       |   | 1,050     |         |  |         |      |       |  |  |  |  
|Non-cancelable operating lease obligation (net of subleases) |                               |                        | 12,947  |           |        |   | 4,249  |           |       |   | 7,512     |         |  |         | 1,186 |       |  |  |  |  
|Letters of credit                                            |                               |                        | 4,039   |           |        |   | 4,039  |           |       |   |          |         |  |         |      |       |  |  |  |  
|                                                             |                               |                        |         |           |        |   |        |           |       |   |           |         |  |         |      
|                                                             | Total contractual obligations |                        | $       | 488,248   |        |   | $      | 28,175    |       |   | $         | 458,887 |  |         | $     | 1,186 |  |  | $ |  | 
|                                                             |                               |                        |         |           |        |   |        |           |       |   |           |         |  |         |      







23



---



##### 









Off Balance Sheet Arrangements




Market-Sensitive Instruments and Risk Management








|                      |  |                        |        |   |      |   |        |      |  |   |         |   |  |      |         |  |      |  |   |       |  |  |            |  |  |   |         |  |  |   |         | 
|--------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | - |  | ---- | ------- |  | ---- |  | - | ----- |  |  | ---------- |  |  | - | ------- |  |  | - | ------- | 
|                      |  | Expected Maturity Date |       
|                      |  |                        |       
|                      |  | 2005                   |        |   | 2006 |   |        | 2007 |  |   | 2008    |   |  | 2009 |         |  | 2010 |  |   | Total |  |  | Fair Value | 
|                      |  |                        |        |   |      |   |        |      |  |   |         |   |  |      |         |  |      |  |   |       |  |  |            | 
|                      |  | (In thousands)         |       
|Variable rate debt    |  | $                      | 13,750 |   |      | $ | 15,000 |      |  | $ | 283,750 |   |  |      |        |  |      |  |  |       |  |  |           |  |  | $ | 312,500 |  |  | $ | 312,500 | 
|Average interest rate |  |                        | 7.76   | % |      |   | 8.76   | %    |  |   | 9.10    | % |  |      |        |  |      |  |  |       |  |  |           |  |  |   |        |  |  |   |        | 
|Fixed-rate debt       |  |                        |       |   |      |   |       |      |  |   |        |   |  | $    | 149,100 |  |      |  |  |       |  |  |           |  |  | $ | 149,100 |  |  | $ | 123,008 | 
|Interest rate         |  |                        |       |   |      |   |       |      |  |   |        |   |  |      | 10.125% |  |      |  |  |       |  |  |           |  |  |   |        |  |  |   |        | 

24



---



##### 





|                      |  |                        |       |   |      |   |        |      |  |   |        |   |  |      |   |  |      |   |         |       |  |  |            |  |  |   |         |  |  |   |         | 
|--------------------- |  | ---------------------- | ----- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | - |  | ---- | - | ------- | ----- |  |  | ---------- |  |  | - | ------- |  |  | - | ------- | 
|                      |  | Expected Maturity Date |      
|                      |  |                        |      
|                      |  | 2004                   |       |   | 2005 |   |        | 2006 |  |   | 2007   |   |  | 2008 |   |  | 2009 |   |         | Total |  |  | Fair Value | 
|                      |  |                        |       |   |      |   |        |      |  |   |        |   |  |      |   |  |      |   |         |       |  |  |            | 
|                      |  | (In thousands)         |      
|Variable rate debt    |  | $                      | 8,953 |   |      | $ | 70,643 |      |  | $ | 89,086 |   |  |      |  |  |      |   |        |       |  |  |           |  |  | $ | 168,682 |  |  | $ | 168,682 | 
|Average interest rate |  |                        | 5.93  | % |      |   | 6.26   | %    |  |   | 6.61   | % |  |      |  |  |      |   |        |       |  |  |           |  |  |   |        |  |  |   |        | 
|Fixed-rate debt       |  |                        |      |   |      |   |       |      |  |   |       |   |  |      |  |  |      | $ | 149,100 |       |  |  |           |  |  | $ | 149,100 |  |  | $ | 150,770 | 
|Interest rate         |  |                        |      |   |      |   |       |      |  |   |       |   |  |      |  |  |      |   | 10.125  | %     |  |  |           |  |  |   |        |  |  |   |        | 

Inflation




Recently Issued Statements of Financial Accounting
Standards












25



---



##### 









|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures About Market
    Risk





|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures







26



---



##### 







|         |                   
|-------- | ------------------
|Item 9b. | Other Information.



PART III




|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Directors And Executive Officers




|                            |  |     |    |  |          |                                                                         
|--------------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------------------
|Name                        |  | Age |    |  | Position
|                            |  |     |    |  |         
|Joe Colonnetta(1)           |  |     | 43 |  |          | Chairman of the Board                                                   
|Barbara J. Hammond          |  |     | 74 |  |          | Vice-Chairman and Director                                              
|Christina L. Carter Urschel |  |     | 41 |  |          | Vice-Chairman, Director and National Spokesperson                       
|Sheldon I. Stein(1)         |  |     | 51 |  |          | Director                                                                
|Robert H. Dedman, Jr.       |  |     | 47 |  |          | Director                                                                
|Gretchen M. Williams(1)     |  |     | 48 |  |          | Director                                                                
|Jack D. Furst               |  |     | 46 |  |          | Director                                                                
|Michael D. Kelly(1)         |  |     | 58 |  |          | Director                                                                
|Michael D. Lohner           |  |     | 42 |  |          | President and Chief Executive Officer                                   
|Kenneth J. Cichocki(2)      |  |     | 52 |  |          | Sr. Vice-President of Finance, Chief Financial Officer and
    Secretary
|Eugenia B. Price            |  |     | 39 |  |          | Sr. Vice-President Sales and Marketing                                  
|Mary-Knight Tyler           |  |     | 43 |  |          | Chief Operating Officer                                                 






|    |                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These Directors of the Company also serve as members of the
    Companys Audit Committee. Joe Colonnetta has been
    designated as the Audit Committees financial expert.                                                                                                                                                                                   
|   
|(2) | Mr. Cichocki has recently informed the Company of his
    intention to resign his positions as Senior Vice-President of
    Finance and Chief Financial Officer upon the earlier of his
    finding new employment or upon such time as the Company employs
    a new chief financial officer. See Item 11, Executive
    Employment and Consulting Agreements.



Joe Colonnetta


Barbara J. Hammond


27



---



##### 





Christina L. Carter Urschel


Sheldon I. Stein


Robert H. Dedman, Jr.


Gretchen M. Williams


Michael D. Kelly


Jack D. Furst


Michael D. Lohner


28



---



##### 





Kenneth J. Cichocki


Eugenia B. Price


Mary-Knight Tyler




Compliance with Section 16(a) of the Exchange Act




Code of Ethics for Senior Financial Management




29



---



##### 







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation



|                            |                                             |                     |      |        |     |  |         |         |  |       |     |           |  |  |         |     | 
|--------------------------- | ------------------------------------------- | ------------------- | ---- | ------ | --- |  | ------- | ------- |  | ----- | --- | --------- |  |  | ------- | --- | 
|                            |                                             | Annual Compensation |     
|                            |                                             |                     |     
|                            |                                             |                     |      | Salary |     |  | Bonus   |         |  | Other |    
|Name and Principal Position |                                             | Year                |      |        | ($) |  |         | ($)     |  |       | ($) |          
|                            |                                             |                     |      |        |     |  |         |         |  |       |     |          
|Michael D. Lohner           |                                             |                     | 2004 |        |     |  | 900,000 |         |  |       |    |           |  |  | 118,087 | (1)
|                            | President and Chief                         |                     |      | 2003   |     |  |         | 450,000 |  |       |     | 1,039,916 |  |  |         |    | 
|                            | Executive Officer                           |                     |      | 2002   |     |  |         | 450,000 |  |       |     | 1,181,168 |  |  |         |    | 
|Kenneth J. Cichocki         |                                             |                     | 2004 |        |     |  | 325,000 |         |  |       |    |           |  |  | 69,233  | (2)
|                            | Sr. Vice-President of Finance,              |                     |      | 2003   |     |  |         | 306,250 |  |       |     | 41,351    |  |  |         |    | 
|                            | Chief Financial Officer and Secretary       |                     |      | 2002   |     |  |         | 279,167 |  |       |     | 99,471    |  |  |         |    | 
|Eugenia B. Price            |                                             |                     | 2004 |        |     |  | 300,000 |         |  |       |    |           |  |  | 45,594  | (3)
|                            | Sr. Vice-President Business Development and |                     |      | 2003   |     |  |         | 235,542 |  |       |     | 31,816    |  |  |         |    | 
|                            | International(5)                            |                     |      | 2002   |     |  |         | 190,625 |  |       |     | 77,965    |  |  |         |    | 
|Mary-Knight Tyler           |                                             |                     | 2004 |        |     |  | 190,000 |         |  |       |    |           |  |  | 40,176  | (4)
|                            | Sr. Vice-President of Operations(6)         |                     |      | 2003   |     |  |         | 159,632 |  |       |     | 21,562    |  |  |         |    | 
|                            |                                             |                     |      | 2002   |     |  |         | 143,800 |  |       |     | 81,236    |  |  |         |    | 






|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Other compensation per terms of Mr. Lohners
    Employment Agreement consisted of $29,904 for welfare benefit
    plans, $29,484 for an automobile lease, and $41,581 for
    association and club memberships and dues.
|   
|(2) | Other compensation per terms of Mr. Cichockis
    Employment Agreement consisted of $30,524 for welfare benefits
    plans and $25,257 for an automobile lease.                                                         
|   
|(3) | Other compensation per terms of Ms. Prices Employment
    Agreement consisted of $23,369 for welfare benefit plans and
    $22,225 for an automobile allowance.                                                         
|   
|(4) | Other compensation per terms of Ms. Tylers Employment
    Agreement consisted of $23,369 for welfare benefit plans and
    $16,807 for an automobile allowance.                                                         
|   
|(5) | Ms. Price was appointed Sr. Vice-President of Sales and
    Marketing as of January 1, 2005.                                                                                                                             
|   
|(6) | Ms. Tyler was appointed Chief Operating Officer as of
    January 1, 2005.                                                                                                                                               

Option Grants During 2004




|                  |  |                   |         |  |               |  |      |          |  |            |            |  |  |        |         |  |  |   |      | 
|----------------- |  | ----------------- | ------- |  | ------------- |  | ---- | -------- |  | ---------- | ---------- |  |  | ------ | ------- |  |  | - | ---- | 
|                  |  | Individual Grants |         |  |              
|                  |  |                   |         |  |              
|                  |  | Number of         |         |  | Percentage of |  |      |          |  | Grant Date |           
|                  |  | Securities        |         |  | Total Options |  |      |          |  | Present    |           
|                  |  | Underlying        |         |  | Granted to    |  |      |          |  | Value Per  |           
|                  |  | Options           |         |  | Employees in  |  |      | Exercise |  |            | Expiration |  |  | Share  |        
|Name              |  | Granted           |         |  | Fiscal Year   |  |      | Price    |  |            | Date       |  |  | ($)(1) |        
|                  |  |                   |         |  |               |  |      |          |  |            |            |  |  |        |        
|Michael D. Lohner |  |                   | 300,000 |  |               |  | 84.5 | %        |  | $          | 19.42      |  |  |        | 4/23/14 |  |  | $ | 5.07 | 






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The grant date present value was determined using Minimum Value
    method of option pricing with the following assumptions:
    dividend yield of zero, risk-free interest rate of 3.86%, and
    expected term of six years.

30



---



##### 



Aggregate Option Exercises in Year 2004 and Year-End Option
Values




|                    |  |                        |         |  |               |  |         | 
|------------------- |  | ---------------------- | ------- |  | ------------- |  | ------- | 
|                    |  | Number of Securities   |        
|                    |  | Underlying Unexercised |        
|                    |  | Options at             |        
|                    |  | December 31, 2004      |        
|                    |  |                        |        
|Name                |  | Exercisable            |         |  | Unexercisable | 
|                    |  |                        |         |  |               | 
|Michael D. Lohner   |  |                        | 440,000 |  |               |  | 910,000 | 
|Kenneth J. Cichocki |  |                        | 261,798 |  |               |  | 363,118 | 
|Eugenia B. Price    |  |                        | 209,376 |  |               |  | 300,000 | 
|Mary-Knight Tyler   |  |                        | 27,000  |  |               |  | 158,000 | 

Compensation of Directors






| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | $2,500 for attendance at any meeting of the Board or committee
    of the Board;                                           
|
| |  | $750 for participation by phone of any meeting of the Board or
    committee of the Board;                                 
|
| |  | $1,000 per diem for performance of additional duties, other
    than regular Board activities, as requested by the Company;
|
| |  | Reimbursement for travel and related expenses for attendance at
    Board and committee meetings and;                      
|
| |  | $20,000 annual retainer, paid quarterly in arrears.                                                                        



|                          |  |          |                            |  |                     |   |        | 
|------------------------- |  | -------- | -------------------------- |  | ------------------- | - | ------ | 
|Name                      |  | Position |                            |  | Annual Compensation |  
|                          |  |          |                            |  |                     |  
|Barbara Hammond           |  |          | Vice-Chairman and Director |  |                     | $ | 27,381 | 
|Robert Dedman, Jr.        |  |          | Director                   |  |                     | $ | 29,750 | 
|Michael D. Kelly          |  |          | Director                   |  |                     | $ | 27,135 | 
|Sheldon Stein             |  |          | Director                   |  |                     | $ | 33,000 | 
|Gretchen Minyard Williams |  |          | Director                   |  |                     | $ | 38,000 | 

Compensation Committee Interlocks and Insider
Participation




Executive Employment and Consulting Agreements




31



---



##### 



















32



---



##### 







1998 Stock Option Plan for Key Employees










33



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##### 



2002 Stock Option Plan for Key Employees










Purchase Option




34



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##### 







|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters





|                                                             |                                            |                         |            |      |            |  |      |   | 
|------------------------------------------------------------ | ------------------------------------------ | ----------------------- | ---------- | ---- | ---------- |  | ---- | - | 
|                                                             |                                            | Beneficial Ownership of |           
|                                                             |                                            | Common Stock            |           
|                                                             |                                            |                         |           
|                                                             |                                            | Amount and              |            |      |           
|                                                             |                                            | Nature of               |            |      |           
|                                                             |                                            | Beneficial              |            |      | Percentage | 
|                                                             |                                            | Ownership               |            |      | of Class   | 
|                                                             |                                            |                         |            |      |            | 
|5% Shareholders                                              |                                            |                         |            |      |            |  |      |  
|Christina L. Carter Urschel                                  |                                            |                         | 992,106    | (1)  |            |  | 6.4  | %
|                                                             | 1649 Frankford Road West                   |                         |            |      |            |  |      |   | 
|                                                             | Carrollton, Texas 75007                    |                         |            |      |            |  |      |   | 
|Donald J. Carter                                             |                                            |                         | 942,151    | (2)  |            |  | 6.2  | %
|                                                             | 4757 Frank Luke Road                       |                         |            |      |            |  |      |   | 
|                                                             | Addison, Texas 75001                       |                         |            |      |            |  |      |   | 
|Hicks Muse Shareholders                                      |                                            |                         | 10,111,436 | (3)  |            |  | 66.3 | %
|                                                             | c/o Hicks, Muse, Tate & Furst Incorporated |                         |            |      |            |  |      |   | 
|                                                             | 200 Crescent Court, Suite 1600             |                         |            |      |            |  |      |   | 
|                                                             | Dallas, Texas 75201                        |                         |            |      |            |  |      |   | 
|Directors and Named Executive Officers                       |                                            |                         |            |      |            |  |      |  
|Joe Colonnetta                                               |                                            |                         |           |      |            |  |     |  
|Barbara J. Hammond                                           |                                            |                         | 258,570    | (4)  |            |  | 1.7  | %
|Christina L. Carter Urschel                                  |                                            |                         | 992,106    | (1)  |            |  | 6.4  | %
|Sheldon I. Stein                                             |                                            |                         | 9,990      | (5)  |            |  | *    |  
|Robert H. Dedman, Jr.                                        |                                            |                         | 14,607     | (6)  |            |  | *    |  
|Gretchen M. Williams                                         |                                            |                         | 10,090     | (7)  |            |  | *    |  
|Jack D. Furst                                                |                                            |                         |           | (8)  |            |  |     |  
|Mike Kelly                                                   |                                            |                         |           |      |            |  |     |  
|Michael D. Lohner                                            |                                            |                         | 440,000    | (9)  |            |  | 2.8  | %
|Kenneth J. Cichocki                                          |                                            |                         | 261,798    | (10) |            |  | 1.7  | %
|Eugenia B. Price                                             |                                            |                         | 209,376    | (11) |            |  | 1.4  | %
|Mary-Knight Tyler                                            |                                            |                         | 27,000     | (12) |            |  | *    |  
|All directors and executive officers as a group (12 persons) |                                            |                         | 2,223,537  |      |            |  | 13.4 | %






| |   |              
| | - | -------------
| | * | Less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 174 shares held by Harold Clifton
    Urschel, III, Christina L. Carter Urschels
    husband, and 124 shares held by Christina L. Carter
    Urschel as custodian for her child. Christina L. Carter
    Urschel disclaims beneficial ownership of all shares held by
    Harold Clifton Urschel, III. Also includes,

35



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 45,905 shares held in the name of DMC Non-Exempt
    Partnership, LTD and 9,522 shares held in the name of DMC
    Exempt Partnership, LTD. Christina L. Carter Urschel is one
    of four Directors of David and Mary Crowley Corporation, a Texas
    corporation that is the sole general partner of the DMC
    Non-Exempt Partnership, LTD and the DMC Exempt Partnership, LTD.
    Therefore Ms. Urschel may be deemed to share voting and
    dispositive power with the other Directors. Christina L.
    Carter Urschel disclaims beneficial ownership of all shares held
    in the name of the DMC Non-Exempt Partnership, LTD and the DMC
    Exempt Partnership, LTD. Also includes 338,481 shares of
    common stock subject to presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Includes 33,996 shares held by Linda J. Carter,
    Donald J. Carters wife. Donald J. Carter
    disclaims beneficial ownership of all shares held by
    Linda J. Carter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | Consists of (i) 9,779,081 shares of common stock owned
    of record by HI Equity Partners, L.P. (HIEP), a
    limited partnership whose sole general partner is TOH/ Home
    Interiors LLC (Home Interiors LLC),
    (ii) 55,388 shares of common stock owned of record by
    HM/ SS Investment Partners, L.P., (HMIP), a limited
    partnership whose sole general partner is TOH/ Ranger LLC and
    (iii) 276,967 shares of common stock owned of record
    by HM/ BST Investment Partners, L.P. (HM BST),
    a limited partnership whose sole general partner is TOH/ Home
    Interiors LLC. Thomas O. Hicks, a former member of the
    Board of Directors of the Company, is the sole member of TOH/
    Home Interiors LLC and TOH/ Ranger LLC. Mr. Hicks is also a
    stockholder of Hicks, Muse, Tate & Furst Incorporated.
    Accordingly, Mr. Hicks may be deemed to beneficially own
    all or a portion of the shares beneficially owned by the parties
    described above. In addition, Jack D. Furst is a partner,
    stockholder and member of the management committee of Hicks,
    Muse, Tate & Furst Incorporated and, accordingly, may
    be deemed to beneficially own all or a portion of the shares
    beneficially owned by the parties described above. Each of
    Messrs. Hicks and Mr. Furst disclaims the existence of
    a group and disclaims beneficial ownership of shares of common
    stock not owned of record by him.
|   
|(4) | Consists of 258,570 shares held in the name of
    Barbara J. Hammond and Howard L. Hammond, Trustees of
    the Hammond Family Trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) | Consists of 9,990 shares of common stock subject to
    presently exercisable options. Mr. Stein also holds a
    limited partnership interest in HMIP. Mr. Stein disclaims
    beneficial ownership of common stock owned of record by HMIP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(6) | Includes 9,919 shares of common stock subject to presently
    exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) | Includes 7,320 shares of common stock subject to presently
    exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(8) | Mr. Furst holds indirect minority limited partnership
    interests in HIEP. Mr. Furst disclaims beneficial ownership
    of common stock owned of record by HIEP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(9) | Includes 440,000 shares of common stock subject to
    presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|     |                                                                                      
|---- | -------------------------------------------------------------------------------------
|(10) | Includes 261,798 shares of common stock subject to
    presently exercisable options.
|    
|(11) | Includes 209,376 shares of common stock subject to
    presently exercisable options.
|    
|(12) | Includes 27,000 shares of common stock subject to presently
    exercisable options. 

The Shareholders Agreement






36



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##### 









|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions



Executive Employment Agreement with Donald J. Carter




Certain Other Transactions




37



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##### 







|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

Audit Fees.


Audit-Related Fees.


Tax Fees.


All Other Fees.






| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | the independent auditing firm, which firm is ultimately
    accountable to the Audit Committee;                               
|
| |  | pre-approve all auditing and non-auditing services to be
    performed by the Companys independent auditor; and              
|
| |  | approve the fees to be paid to the Companys independent
    auditor, as well as any other advisors employed by the committee.

PART IV




|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K

Financial Statements


Financial Statements Schedules




| |                                                                                
| | -------------------------------------------------------------------------------
| | See Index to Consolidated Financial Statements and
    Schedules on page F-1.

38



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##### 



Exhibits


|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 2  | .1   |  |            |  | Agreement and Plan of Merger, dated April 13, 1998, merging
    Crowley Investments, Inc. into the Company (incorporated by
    reference to Exhibit 2.1 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                           
|        | 2  | .2   |  |            |  | Articles of Merger, dated June 4, 1998 (incorporated by
    reference to Exhibit 2.2 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                               
|        | 3  | .1   |  |            |  | Articles of Incorporation of the Company (incorporated by
    reference to Exhibit 3.1 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                             
|        | 3  | .2   |  |            |  | Bylaws of the Company (incorporated by reference to
    Exhibit 3.2 of the Companys Registration Statement on
    Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                
|        | 4  | .1   |  |            |  | Indenture, dated as of June 4, 1998, among the Company, as
    issuer, the Guarantors named therein and United States Trust
    Company of New York (incorporated by reference to
    Exhibit 4.1 of the Companys Registration Statement on
    Form S-4, No. 333-62021).                                                                                                                                                                  
|        | 4  | .2   |  |            |  | First Supplemental Indenture dated as of July 3, 2000 among
    Home Interiors & Gifts, Inc., Laredo Candle Company,
    L.L.P. and United States Trust Company of New York (incorporated
    by reference to Exhibit 10.6 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on
    August 14, 2000).                                                                                                                
|        | 4  | .3   |  |            |  | Second Supplemental Indenture dated as of December 31, 2002
    among Home Interiors & Gifts, Inc., Brenda
    Buell & Associates, Inc. and The Bank of New York, as
    successor in interest to the corporate trust business of United
    States Trust Company of New York, as Successor Trustee
    (incorporated by reference to Exhibit 4.4 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).
|        | 4  | .4   |  |            |  | Third Supplemental Indenture dated as of March 14, 2003
    among Home Interiors & Gifts, Inc., EM Boehm, Inc. and
    The Bank of New York, as successor in interest to the corporate
    trust business of United States Trust Company of New York, as
    Successor Trustee (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on
    Form 10-Q, No. 333-62021, filed on May 12, 2003).                    
|        | 10 | .1   |  |            |  | Financial Advisory Agreement, dated June 4, 1998, between
    the Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc.,
    Homco Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de
    Mexico, S.A. de C.V., and Hicks, Muse & Co. Partners,
    L.P. (incorporated by reference to Exhibit 10.2 of the
    Companys Registration Statement on Form S-4,
    No. 333-62021).                                                     
|        | 10 | .1.1 |  |            |  | First Amendment to Financial Advisory Agreement dated as of
    March 30, 2001, between the Company, Dallas Woodcraft, Inc,
    GIA, Inc., Homco, Inc., Homco Puerto Rico, Inc., Spring Valley
    Scents, Inc., Homco de Mexico, S.A. de C.V., and Hicks,
    Muse & Co. Partners, L.P. (incorporated by reference to
    Exhibit 10.2.1 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed April 4, 2001).             
|        | 10 | .2   |  |            |  | Monitoring and Oversight Agreement, dated June 4, 1998
    between the Company, Dallas Woodcraft, Inc., GIA, Inc., Homco,
    Inc., Homco Puerto Rico, Inc., Spring Valley Scents, Inc., Homco
    de Mexico, S.A. de C.V., and Hicks, Muse & Co.
    Partners, L.P. (incorporated by reference to Exhibit 10.3
    of the Companys Registration Statement on Form S-4,
    No. 333- 62021).                                               
|        | 10 | .2.1 |  |            |  | First Amendment to Monitoring and Oversight Agreement dated as
    of March 30, 2001, between the Company, Dallas Woodcraft,
    Inc, GIA, Inc., Homco, Inc., Homco Puerto Rico, Inc., Spring
    Valley Scents, Inc., Homco de Mexico, S.A. de C.V., and Hicks,
    Muse & Co. Partners, L.P. (incorporated by reference to
    Exhibit 10.3.1 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed April 4, 2001).       
|        | 10 | .3   |  |            |  | Home Interiors & Gifts, Inc. 1998 Stock Option Plan for
    Key Employees, dated June 4, 1998 (incorporated by
    reference to Exhibit 10.5 of the Companys Annual
    Report on Form 10-K, No. 333-62021, filed
    March 16, 1999).                                                                                                                                                                                                     

39



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##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .4    |  |  |             | Executive Employment Agreement, dated June 4, 1998, between
    the Company and Christina L. Carter Urschel (incorporated by
    reference to Exhibit 10.9 of the Companys
    Registration Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .5    |  |  |             | Second Amended and Restated Employment Agreement, dated
    December 26, 2001 between Christina L. Carter Urschel and
    the Company (incorporated by reference to Exhibit 10.7.1 of
    the Companys Annual Report on Form 10-K,
    No. 333-62021 filed March 26, 2002).                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .6    |  |  |             | Home Interiors & Gifts, Inc., 1998 Stock Option Plan
    for Unit Directors, Branch Directors and Certain Other
    Independent Contractors (incorporated by reference to
    Exhibit 10.10 of the Companys Registration Statement
    on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .7    |  |  |             | Home Interiors & Gifts, Inc. 1998 Stock Option Trust,
    dated June 4, 1998 (incorporated by reference to
    Exhibit 10.11 of the Companys Registration Statement
    on Form S-4, No. 333- 62021).                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .8    |  |  |             | Agreement, dated February 26, 1997, by and between the
    Company and Distribution Architects International, Inc
    (incorporated by reference to Exhibit 10.12 of the
    Companys Registration Statement on Form S-4,
    No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .9    |  |  |             | Shareholders Agreement, as of June 4, 1998 between the
    Company, Adkins Family Partnership, LTD., M. Douglas Adkins,
    Estate of Fern Ardinger, Ardinger Family Partnership, LTD.,
    Donald J. Carter, Jr., Linda J. Carter, Ronald Lee Carter,
    Donald J. Carter, William J. Hendrix, as Independent Special
    Trustee of the Carter 1997 Charitable Remainder Unit Trust,
    Howard L. Hammond and Barbara J. Hammond, Trustees of the
    Hammond Family Trust and Christina Carter Urschel (incorporated
    by reference to Exhibit 10.14 of the Companys
    Registration Statement on Form S-4, No. 333-62021).
|        | 10 | .10   |  |  |             | Granite Tower at the Centre Office Lease dated August 17,
    1999, between 520 Partners, Ltd. and the Company (incorporated
    by reference to Exhibit 10.22 of the Companys Annual
    Report on Form 10-K, No. 333-62021, filed March 14,
    2000).                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .11   |  |  |             | Amended and Restated Employment Agreement, dated
    November 10, 2000, between Kenneth J. Cichocki and the
    Company (incorporated by reference to Exhibit 10.27.1 of
    the Companys Annual Report on Form 10-K,
    No. 333-62021, filed April 4, 2001).                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .11.1 |  |  |             | Second Amended and Restated Employment Agreement, dated
    November 1, 2001, between Kenneth J. Cichocki and the
    Company (incorporated by reference to Exhibit 10.15.1 of
    the Companys Annual Report on Form 10-K,
    No. 333-62021, filed March 26, 2002).                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .11.2 |  |  |             | Amendment to Second Amended and Restated Employment Agreement
    between Kenneth J. Cichocki and the Company, entered into as of
    November 15, 2002 and effective as of November 1, 2002
    (incorporated by reference to Exhibit 10.15.2 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).                                                                                                                                                                                                                                                                                           
|        | 10 | .11.3 |  |  |             | Letter Agreement dated March 4, 2005, between Home
    Interiors & Gifts, Inc. and Kenneth J. Cichocki
    (incorporated by reference to Exhibit 10.1 of the
    Companys Current Report on Form 8-K, No. 333-62021,
    filed March 10, 2005).                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .12   |  |  |             | Lease Schedule No. 1000101377, dated May 5, 2000,
    between the Company and Banc One Leasing Corporation
    (incorporated by reference to Exhibit 10.32 of the
    Companys Annual Report on Form 10-K, No. 333-62021
    filed on March 14, 2000).                                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .13   |  |  |             | Industrial Lease dated August 10, 2000 between Parker
    Metropolitan, L.P. and Home Interiors & Gifts, Inc.
    (for building and facilities located in Coppell, Texas)
    (incorporated by reference to Exhibit 10.8 of the
    Companys Quarterly Report on Form 10-Q,
    No. 333-62021, filed on August 14, 2000).                                                                                                                                                                                                                                                                                                          
|        | 10 | .14   |  |  |             | Master Lease Agreement dated as of December 30, 1999
    between Bank One Leasing Corporation and Home
    Interiors & Gifts, Inc. (incorporated by reference to
    Exhibit 10.9 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed on August 14, 2000).                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .15   |  |  |             | Commercial lease dated May 21, 2002, between H.T.
    Ardinger & Son, co. and the Company (for building and
    facilities located in Carrollton, Texas) (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021, filed August 13,
    2002).                                                                                                                                                                                                                                                                                                                              

40



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##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----- |  | - | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .16   |  |  |             | Lease Agreement dated April 10, 2002, between GSG, S.A. de
    S.V. and Home Interiors de Mexico S. de R.L. de C.V. (for
    building and facilities located in San Nicolas de Los
    Garza, Mexico) (incorporated by reference to Exhibit 10.2
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed August 13, 2002).                      
|        | 10 | .17   |  |  |             | Consulting Agreement dated July 15, 2002, between PWC
    Consulting and the Company (incorporated by reference to
    Exhibit 10.3 of the Companys Quarterly Reporting
    Form 10-Q, No. 333-62021 filed August 13, 2002).                                                                                                                                       
|        | 10 | .18   |  |  |             | Multi-Tenant Industrial Net Lease dated July 29, 2002,
    between CalWest Industrial Holdings Texas, L.P. and the Company
    (incorporated by reference to Exhibit 10.4 of the
    Companys Quarterly Reporting Form 10-Q, No. 333-62021
    filed August 13, 2002).                                                                                             
|        | 10 | .19   |  |  |             | Home Interiors & Gifts, Inc. 2002 Stock Option Plan for
    Key Employees dated August 14, 2002 (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002).                                                                                                                      
|        | 10 | .20   |  |  |             | Home Interiors & Gifts, Inc. 2002 Form of Tier 1
    Option Agreement (incorporated by reference to Exhibit 10.2
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed November 12, 2002).                                                                                                                                                    
|        | 10 | .20.1 |  |  |             | Form of Amendment, dated November 11, 2004, to Tier 1
    and Tier 2 Option Agreements under the Home
    Interiors & Gifts 2002 Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021 filed
    November 15, 2004).                                                                   
|        | 10 | .21   |  |  |             | Home Interiors & Gifts, Inc. 2002 Form of Tier 2
    Option Agreement (incorporated by reference to Exhibit 10.3
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed November 12, 2002).                                                                                                                                                    
|        | 10 | .21.1 |  |  |             | Form of Amendment, dated November 11, 2004, to Tier 1
    and Tier 2 Option Agreements under the Home
    Interiors & Gifts 2002 Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021 filed
    November 15, 2004).                                                                   
|        | 10 | .22   |  |  |             | Industrial real estate lease dated September 13, 2002
    between Argent Frankford, L.P. and the Company (incorporated by
    reference to Exhibit 10.4 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002).                                                                                                             
|        | 10 | .23   |  |  |             | Commercial lease dated August 15, 2002 between H.T.
    Ardinger & Son, Co. and the Company (for building and
    facilities located in Carrollton, Texas) (incorporated by
    reference to Exhibit 10.5 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002.)                                                           
|        | 10 | .24   |  |  |             | Employment Agreement, dated January 1, 2003, between
    Eugenia Price and the Company (incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 14, 2003).                                                                                                                                       
|        | 10 | .25   |  |  |             | Stock Purchase Agreement dated December 31, 2002 among
    Brenda Buell & Associates, Inc., Brenda Buell, and the
    Company (incorporated by reference to Exhibit 10.32 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).                                                                                                
|        | 10 | .27   |  |  |             | Asset Purchase Agreement dated January 25, 2003 among
    Tempus Corporation, S.A. de C.V., Miguel Angel Pachur Salgado,
    Oscar Guadalupe de Leon Ulloa and HI Metals, S.A. de C.V.
    (incorporated by reference to Exhibit 10.33 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    March 14, 2003).                                   
|        | 10 | .28   |  |  |             | Intangible Asset Purchase Agreement dated January 25, 2003
    between Miguel Angel Pachur Salgado and Oscar Guadalupe de Leon
    Ulloa and the Company (incorporated by reference to
    Exhibit 10.34 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 14, 2003).                                                                     
|        | 10 | .35   |  |  |             | Asset Purchase Agreement dated January 24, 2003 among
    Ceramica y Vidrio de Nuevo Leon, S.A. de C.V., Maquiladora
    Produr, S.A. de C.V., Industrias Tromex Corporation, S.A. de
    C.V., and HI Ceramics, S.A. de C.V. (incorporated by reference
    to Exhibit 10.35 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed March 14, 2003).

41



---



##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .29   |  |  |             | Asset Purchase Agreement dated March 5, 2003 among Edward
    Marshall Boehm, Inc., Douglas Lorie, Inc., Helen F. Boehm and EM
    Boehm, Inc. (incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021, filed on May 12, 2003).                                                                                                                                                                                                                                                  
|        | 10 | .30   |  |  |             | Credit Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., the several banks and other
    financial institutions or entities parties thereto, Bear Sterns
    Corporate Lending Inc. and JPMorgan Chase Bank (incorporated by
    reference to Exhibit 99.1 of the Companys Current
    Report on Form 8-K, No. 333-62021, filed on April 2,
    2004).                                                                                                                                                            
|        | 10 | .30.1 |  |  |             | First Amendment, dated December 6, 2004 to the Credit
    Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., a Texas corporation, the
    several banks and other financial institutions from time to time
    parties thereto, Bear Stearns Corporate Lending Inc., as
    syndication agent, and JPMorgan Chase Bank, N.A., as
    administrative agent for the Lenders (incorporated by reference
    to Exhibit 10.1 of the Companys Current Report on
    Form 8-K, No. 333-62021, filed on December 9, 2004).
|        | 10 | .31   |  |  |             | Stock Purchase Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., HI Cayman, L.P. and HI Senior
    Debt Partners, L.P. (incorporated by reference to
    Exhibit 99.2 of the Companys Current Report on Form
    8-K, No. 333-62021, filed on April 2, 2004).                                                                                                                                                                                                                                                     
|        | 10 | .32   |  |  |             | Termination and Mutual Release, dated as of March 31, 2004,
    by and between Home Interiors & Gifts, Inc., a Texas
    corporation, on the one hand, and HI Cayman, L.P., a Cayman
    Islands exempted limited partnership, and HI Senior Debt
    Partners, L.P., a Texas limited partnership (incorporated by
    reference to Exhibit 99.3 of the Companys Current
    Report on Form 8-K, No. 333-62021, filed on April 2,
    2004).                                                                                             
|        | 10 | .33   |  |  |             | Employment and Non-Compete Agreement, effective as of
    January 1, 2004, between Home Interiors & Gifts,
    Inc., a Texas corporation and Mary-Knight Tyler (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Report on Form 10-Q, No. 333-62021, filed on
    August 12, 2004).                                                                                                                                                                                                                           
|        | 10 | .34   |  |  |             | Executive Employment Agreement, executed June 23, 2004, to
    be effective as of January 1, 2004, made and entered into
    by and between Home Interiors & Gifts, Inc., a Texas
    corporation and Michael D. Lohner (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 12, 2004).                                                                                                                                                                         
|        | 10 | .34.1 |  |  |             | Letter of agreement referring to the Executive Employment
    Agreement, dated as of June 23, 2004, by and between Home
    Interiors & Gifts, Inc., a Texas corporation and
    Michael D. Lohner (incorporated by reference to
    Exhibit 10.3 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 12, 2004).                                                                                                                                                                                              
|        | 14 | .1    |  |  |             | Home Interiors & Gifts, Inc. Code of Ethics for Senior
    Financial Management (incorporated by reference to
    Exhibit 14.1 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 22, 2004).                                                                                                                                                                                                                                                                                                                     
|        | 21 | .1*   |  |  |             | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 31 | .1*   |  |  |             | Certification of Chief Executive Officer of the Company pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 31 | .2*   |  |  |             | Certification of Chief Financial Officer of the Company pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 32 | .1*   |  |  |             | Certification of Chief Executive Officer of the Company pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 32 | .2*   |  |  |             | Certification of Chief Financial Officer of the Company pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    






|  |                
|- | ---------------
|* | Filed herewith.

42



---



##### 



Reports on Form 8-K:




| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 12, 2004, the Company filed a current report on
    Form 8-K with respect to an issued press release announcing
    that the Company had appointed Mike Lohner as CEO, effective
    January 1, 2004.                                                                      
|
| | On February 27, 2004, the Company filed a current report on
    Form 8-K with respect to entering into a commitment letter
    with two financial institutions pursuant to which the Company
    intends to refinance loans outstanding under its existing senior
    credit facility.
|
| | On April 2, 2004, the Company filed a current report on
    Form 8-K with respect to entering into the following
    agreements:                                                                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Credit Agreement, dated March 31, 2004 among Home
    Interiors & Gifts, Inc., the several banks and other
    financial institutions or entities parties thereto, Bear Sterns
    Corporate Lending Inc. and JPMorgan Chase Bank.                                                                
|
| |  | Stock Purchase Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., HI Cayman, L.P. and HI Senior
    Debt Partners, L.P.                                                                                                                                                     
|
| |  | Termination and Mutual Release, dated as of March 31, 2004,
    by and between Home Interiors & Gifts, Inc., a Texas
    corporation, on the one hand, and HI Cayman, L.P., a Cayman
    Islands exempted limited partnership, and HI Senior Debt
    Partners, L.P., a Texas limited partnership.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 9, 2004, the Company filed current report on
    Form 8-K with respect to entering into the First Amendment,
    dated December 6, 2004 to the Credit Agreement, dated
    March 31, 2004, among Home Interiors & Gifts,
    Inc., a Texas corporation, the several banks and other financial
    institutions from time to time parties thereto, Bear Stearns
    Corporate Lending Inc., as syndication agent, and JPMorgan Chase
    Bank, N.A., as administrative agent for the Lenders.

43



---



##### 



SIGNATURES






| |                                 
| | --------------------------------
| | Home Interiors &
    Gifts, Inc.



| |     |                      
| | --- | ---------------------
| | By: | /s/ Michael D. Lohner

| |                                      
| | -------------------------------------
| |                                      
| | Michael D. Lohner                    
| | President and Chief Executive Officer





|                                                                   |  |                                                                                                                                |  |                |  | 
|------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                                                          |  | Title                                                                                                                          |  | Date          
|                                                                   |  |                                                                                                                                |  |               
|                                                                  
|/s/ Joe ColonnettaJoe
    Colonnetta                               |  | Chairman of the Board                                                                                                          |  | March 23, 2005
|                                                                  
|/s/ Barbara J. HammondBarbara
    J. Hammond                       |  | Director and Vice Chairman                                                                                                     |  | March 23, 2005
|                                                                  
|/s/ Christina L. Carter
    UrschelChristina
    L. Carter Urschel |  | Director and Vice Chairman                                                                                                     |  | March 23, 2005
|                                                                  
|/s/ Michael D. LohnerMichael
    D. Lohner                         |  | President and Chief Executive Officer                                                                                          |  | March 23, 2005
|                                                                  
|/s/ Kenneth J. CichockiKenneth
    J. Cichocki                     |  | Sr. Vice-President of Finance,
    Chief Financial Officer, and Secretary
    (principal financial and accounting
    officer) |  | March 23, 2005
|                                                                  
|/s/ Jack D. FurstJack
    D. Furst                                 |  | Director                                                                                                                       |  | March 23, 2005
|                                                                  
|/s/ Sheldon I. SteinSheldon
    I. Stein                           |  | Director                                                                                                                       |  | March 23, 2005
|                                                                  
|/s/ Gretchen M.
    WilliamsGretchen
    M. Williams               |  | Director                                                                                                                       |  | March 23, 2005
|                                                                  
|/s/ Robert H. Dedman,
    Jr.Robert
    H. Dedman, Jr.             |  | Director                                                                                                                       |  | March 23, 2005
|                                                                  
|/s/ Michael D. KellyMichael
    D. Kelly                           |  | Director                                                                                                                       |  | March 23, 2005

44



---



##### 



Supplemental Information to Be Furnished with Reports Filed
Pursuant to Section 15(d) of the Exchange Act by
Registrants, Which Have Not Registered Securities Pursuant to
Section 12 of the Exchange Act.




45



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##### 










HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                                            |  |     
|--------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public
    Accounting Firm                                                                 |  | F-2 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                                            |  | F-3 
|Consolidated Statements of Operations and
    Comprehensive Income for the years ended December 31, 2002,
    2003 and 2004 |  | F-4 
|Consolidated Statement of
    Shareholders Deficit for the years ended December 31,
    2002, 2003 and 2004                |  | F-5 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2002, 2003 and 2004                              |  | F-6 
|Notes to Consolidated Financial
    Statements                                                                              |  | F-7 
|Schedule II Valuation and Qualifying
    Accounts                                                                           |  | F-39



F-1



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








PricewaterhouseCoopers
LLP






F-2



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


As of December 31, 2003 and 2004


|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |   |         |          |          |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                                                            |                                                                                                                                                                                                                                                                                                                        | 2003                                        |         |          | 2004     |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | (In thousands, except                       |        
|                                                                            |                                                                                                                                                                                                                                                                                                                        | share information)                          |        
|ASSETS                                                                     
|Current assets:                                                             |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |   |         |         
|                                                                            | Cash                                                                                                                                                                                                                                                                                                                   |                                             | $       | 36,636   |          |   | $       | 27,820   |         
|                                                                            | Accounts receivable, net                                                                                                                                                                                                                                                                                               |                                             |         | 22,027   |          |   |         | 26,081   |         
|                                                                            | Inventories, net                                                                                                                                                                                                                                                                                                       |                                             |         | 73,135   |          |   |         | 71,801   |         
|                                                                            | Deferred income tax asset                                                                                                                                                                                                                                                                                              |                                             |         | 6,006    |          |   |         | 6,111    |         
|                                                                            | Other current assets                                                                                                                                                                                                                                                                                                   |                                             |         | 3,444    |          |   |         | 5,507    |         
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total current assets                        |         |          | 141,248  |   |         |          | 137,320  |  
|Property, plant and equipment, net                                          |                                                                                                                                                                                                                                                                                                                        |                                             | 75,191  |          |          |   | 66,466  |         
|Debt issuance costs, net                                                    |                                                                                                                                                                                                                                                                                                                        |                                             | 3,956   |          |          |   | 10,593  |         
|Goodwill                                                                    |                                                                                                                                                                                                                                                                                                                        |                                             | 14,519  |          |          |   | 13,703  |         
|Other assets, net                                                           |                                                                                                                                                                                                                                                                                                                        |                                             | 1,009   |          |          |   | 1,186   |         
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total assets                                |         | $        | 235,923  |   |         | $        | 229,268  |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                           
|LIABILITIES AND SHAREHOLDERS DEFICIT                                      
|Current liabilities:                                                        |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |   |         |         
|                                                                            | Accounts payable                                                                                                                                                                                                                                                                                                       |                                             | $       | 30,757   |          |   | $       | 26,156   |         
|                                                                            | Accrued seminars and incentive awards                                                                                                                                                                                                                                                                                  |                                             |         | 15,592   |          |   |         | 9,732    |         
|                                                                            | Royalties payable to decorating consultants                                                                                                                                                                                                                                                                            |                                             |         | 8,109    |          |   |         | 5,416    |         
|                                                                            | Accrued compensation                                                                                                                                                                                                                                                                                                   |                                             |         | 4,796    |          |   |         | 2,448    |         
|                                                                            | Income taxes payable                                                                                                                                                                                                                                                                                                   |                                             |         | 2,934    |          |   |         | 15,273   |         
|                                                                            | Current maturity of related party note payable                                                                                                                                                                                                                                                                         |                                             |         | 675      |          |   |         | 687      |         
|                                                                            | Current maturities of long-term debt and capital lease
    obligations                                                                                                                                                                                                                                                 |                                             |         | 10,099   |          |   |         | 15,550   |         
|                                                                            | Other current liabilities                                                                                                                                                                                                                                                                                              |                                             |         | 20,213   |          |   |         | 24,930   |         
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total current liabilities                   |         |          | 93,175   |   |         |          | 100,192  |  
|Long-term related party note payable, net of current maturity               |                                                                                                                                                                                                                                                                                                                        |                                             | 687     |          |          |   |        |         
|Long-term debt and capital lease obligations, net of current
    maturities |                                                                                                                                                                                                                                                                                                                        |                                             | 311,777 |          |          |   | 450,325 |         
|Deferred income tax liability                                               |                                                                                                                                                                                                                                                                                                                        |                                             | 2,586   |          |          |   | 2,812   |         
|Other liabilities                                                           |                                                                                                                                                                                                                                                                                                                        |                                             | 19,080  |          |          |   | 6,611   |         
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total liabilities                           |         |          | 427,305  |   |         |          | 559,940  |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|Commitments and contingencies (Note 17)                                     |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |   |         |         
|                                                                            | Shareholders deficit:                                                                                                                                                                                                                                                                                                 |                                             |         |          |          |   |         |          |         
|                                                                            | Preferred stock, par value $0.01 per share
    10,000,000 shares authorized 96,058.98 shares
    designated as cumulative 12.5% Senior Convertible Preferred
    Stock at a liquidation value of $1,000 per share, 96,058.98
    and 0 shares issued and outstanding as of December 31,
    2003 and 2004 respectively |                                             |         | 94,196   |          |   |         |         |         
|                                                                            | Common stock, par value $0.10 per share,
    75,000,000 shares authorized, 15,240,218 shares issued
    and outstanding as of December 31, 2003 and 2004                                                                                                                                                               |                                             |         | 1,524    |          |   |         | 1,524    |         
|                                                                            | Additional paid-in capital                                                                                                                                                                                                                                                                                             |                                             |         | 185,036  |          |   |         | 144,061  |         
|                                                                            | Accumulated deficit                                                                                                                                                                                                                                                                                                    |                                             |         | (471,370 | )        |   |         | (475,295 | )       
|                                                                            | Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                   |                                             |         | (768     | )        |   |         | (962     | )       
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total shareholders deficit                 |         |          | (191,382 | ) |         |          | (330,672 | )
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        | Total liabilities and shareholders deficit |         | $        | 235,923  |   |         | $        | 229,268  |  
|                                                                            |                                                                                                                                                                                                                                                                                                                        |                                             |         |          |          |  



F-3



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##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME


For the Years Ended December 31, 2002, 2003 and 2004


|                                                      |                                                             |                                           |         |         |         |   |         |         |         |   |         |         |         |  
|----------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                      |                                                             | 2002                                      |         |         | 2003    |   |         | 2004    |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|                                                      |                                                             | (In thousands)                            |        
|Net sales                                             |                                                             | $                                         | 574,499 |         |         | $ | 615,483 |         |         | $ | 549,811 |        
|Cost of goods sold                                    |                                                             |                                           | 251,748 |         |         |   | 285,410 |         |         |   | 259,075 |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Gross profit                                          |                                                             |                                           | 322,751 |         |         |   | 330,073 |         |         |   | 290,736 |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Selling, general and administrative:                  |                                                             |                                           |         |         |         |   |         |         |         |   |         |        
|                                                      | Selling                                                     |                                           |         | 105,117 |         |   |         | 103,500 |         |   |         | 103,468 |        
|                                                      | Freight, warehouse and distribution                         |                                           |         | 66,597  |         |   |         | 77,763  |         |   |         | 72,150  |        
|                                                      | General and administrative                                  |                                           |         | 58,168  |         |   |         | 65,283  |         |   |         | 66,606  |        
|                                                      | Loss (gain) on disposition of assets                        |                                           |         | (361    | )       |   |         | 108     |         |   |         | 5,207   |        
|                                                      | Stock option expense                                        |                                           |         | 1,267   |         |   |         | 4,207   |         |   |         | 4,128   |        
|                                                      | Loss on debt restructure                                    |                                           |         | 7,188   |         |   |         |        |         |   |         | 1,118   |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|                                                      |                                                             | Total selling, general and administrative |         |         | 237,976 |   |         |         | 250,861 |   |         |         | 252,677 |  
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Operating income                                      |                                                             |                                           | 84,775  |         |         |   | 79,212  |         |         |   | 38,059  |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Other income (expense):                               |                                                             |                                           |         |         |         |   |         |         |         |   |         |        
|                                                      | Interest income                                             |                                           |         | 472     |         |   |         | 357     |         |   |         | 317     |        
|                                                      | Interest expense                                            |                                           |         | (27,497 | )       |   |         | (27,503 | )       |   |         | (35,435 | )      
|                                                      | Other income (expense), net                                 |                                           |         | (1,439  | )       |   |         | (953    | )       |   |         | (1,456  | )      
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|                                                      |                                                             | Other income (expense), net               |         |         | (28,464 | ) |         |         | (28,099 | ) |         |         | (36,574 | )
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Income from continuing operations before income taxes |                                                             |                                           | 56,311  |         |         |   | 51,113  |         |         |   | 1,485   |        
|Income tax provision                                  |                                                             |                                           | 20,663  |         |         |   | 16,948  |         |         |   | 1,037   |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Income from continuing operations                     |                                                             |                                           | 35,648  |         |         |   | 34,165  |         |         |   | 448     |        
|Discontinued operations (Note 14):                    |                                                             |                                           |         |         |         |   |         |         |         |   |         |        
|                                                      | Loss from operations of discontinued ceramics manufacturing |                                           |         |        |         |   |         | 1,804   |         |   |         | 4,373   |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|                                                      | Discontinued operations loss, net of tax                    |                                           |         |        |         |   |         | 1,804   |         |   |         | 4,373   |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Net income (loss)                                     |                                                             |                                           | 35,648  |         |         |   | 32,361  |         |         |   | (3,925  | )      
|Other comprehensive loss:                             |                                                             |                                           |         |         |         |   |         |         |         |   |         |        
|                                                      | Cumulative translation adjustment                           |                                           |         | 162     |         |   |         | 249     |         |   |         | 194     |        
|                                                      |                                                             |                                           |         |         |         |   |         |         |        
|Comprehensive income (loss)                           |                                                             | $                                         | 35,486  |         |         | $ | 32,112  |         |         | $ | (4,119  | )      
|                                                      |                                                             |                                           |         |         |         |   |         |         |        



F-4



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##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIT


For the Years Ended December 31, 2002, 2003 and 2004


|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |        |   |   |      |      |   |   |          |          |  
|-------------------------- | --------------------------------- | ---------------------------------------- | --------- | ---------- | --------- | - | ------ | ------- | - | ---------- | ---------- |  |  | ------- | ----- |  | ----------- | - | ------- | ------- | - | - | -------- | ------ | - | - | ---- | ---- | - | - | -------- | -------- | -
|                           |                                   |                                          |           |            |           |   |        |         |   | Additional |            |  |  |         |       |  |            
|                           |                                   | Preferred                                |           |            | Preferred |   |        | Common  |   |            | Common     |  |  | Paid-In |       |  | Accumulated |   |         |         |   |  
|                           |                                   | Shares                                   |           |            | Stock     |   |        | Shares  |   |            | Stock      |  |  | Capital |       |  | Deficit     |   |         | Other   |   |   | Total    |       
|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |       
|                           |                                   | (In thousands, except share information) |          
|Balance, December 31, 2001 |                                   |                                          | 96,058.98 |            |           | $ | 95,637 |         |   |            | 15,240,218 |  |  | $       | 1,524 |  |             | $ | 179,562 |         |   | $ | (539,379 | )      |   | $ | (357 | )    |   | $ | (263,013 | )       
|                           | Net income                        |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          | 35,648 |   |   |      |      |   |   |          | 35,648   |  
|                           | Preferred stock issuance costs    |                                          |           |            |           |   |        | (1,441  | ) |            |            |  |  |         |       |  |             |   |         |         |   |   |          |        |   |   |      |      |   |   |          | (1,441   | )
|                           | Cumulative translation adjustment |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |        |   |   |      | (162 | ) |   |          | (162     | )
|                           | Stock option expense              |                                          |           |           |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         | 1,267   |   |   |          |        |   |   |      |      |   |   |          | 1,267    |  
|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |       
|Balance, December 31, 2002 |                                   |                                          | 96,058.98 |            |           |   | 94,196 |         |   |            | 15,240,218 |  |  |         | 1,524 |  |             |   | 180,829 |         |   |   | (503,731 | )      |   |   | (519 | )    |   |   | (227,701 | )       
|                           | Net income                        |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          | 32,361 |   |   |      |      |   |   |          | 32,361   |  
|                           | Cumulative translation adjustment |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |        |   |   |      | (249 | ) |   |          | (249     | )
|                           | Stock option expense              |                                          |           |           |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         | 4,207   |   |   |          |        |   |   |      |      |   |   |          | 4,207    |  
|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |       
|Balance, December 31, 2003 |                                   |                                          | 96,058.98 |            |           |   | 94,196 |         |   |            | 15,240,218 |  |  |         | 1,524 |  |             |   | 185,036 |         |   |   | (471,370 | )      |   |   | (768 | )    |   |   | (191,382 | )       
|                           | Net loss                          |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          | (3,925 | ) |   |      |      |   |   |          | (3,925   | )
|                           | Repurchase of Preferred stock     |                                          |           | (96,058.98 | )         |   |        | (94,196 | ) |            |            |  |  |         |       |  |             |   |         | (45,103 | ) |   |          |        |   |   |      |      |   |   |          | (139,299 | )
|                           | Cumulative translation adjustment |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |        |   |   |      | (194 | ) |   |          | (194     | )
|                           | Stock option expense              |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         | 4,128   |   |   |          |        |   |   |      |      |   |   |          | 4,128    |  
|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |       
|Balance, December 31, 2004 |                                   |                                          |          |            |           | $ |       |         |   |            | 15,240,218 |  |  | $       | 1,524 |  |             | $ | 144,061 |         |   | $ | (475,295 | )      |   | $ | (962 | )    |   | $ | (330,672 | )       
|                           |                                   |                                          |           |            |           |   |        |         |   |            |            |  |  |         |       |  |             |   |         |         |   |   |          |       



F-5



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2002, 2003 and 2004


|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |          |         |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | -------- | ------- | ------- | -
|                                                                                      |                                                                   | 2002                                                                               |                                                     |         | 2003    |         |         | 2004    |        
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|                                                                                      |                                                                   | (In thousands)                                                                     |                                                    
|Cash flows from operating activities:                                                 |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |         
|Net income (loss)                                                                     |                                                                   | $                                                                                  | 35,648                                              |         |         | $       | 32,361  |         |         | $       | (3,925 | )       
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |         
|                                                                                      | Impairment of goodwill                                            |                                                                                    |                                                     |        |         |         |         |        |         |         |        | 619      |        
|                                                                                      | Impairment of property, plant and equipment                       |                                                                                    |                                                     |        |         |         |         |        |         |         |        | 2,510    |        
|                                                                                      | Depreciation and amortization                                     |                                                                                    |                                                     | 11,715  |         |         |         | 15,524  |         |         |        | 15,618   |        
|                                                                                      | Amortization of debt issuance costs and other                     |                                                                                    |                                                     | 1,953   |         |         |         | 1,111   |         |         |        | 2,630    |        
|                                                                                      | Goodwill write-off                                                |                                                                                    |                                                     |        |         |         |         |        |         |         |        | 1,090    |        
|                                                                                      | Provision for doubtful accounts                                   |                                                                                    |                                                     | 2,370   |         |         |         | 3,134   |         |         |        | 3,222    |        
|                                                                                      | Provision for losses on inventories                               |                                                                                    |                                                     | 6,720   |         |         |         | (606    | )       |         |        | 1,493    |        
|                                                                                      | Loss on debt restructure                                          |                                                                                    |                                                     | 7,188   |         |         |         |        |         |         |        | 1,118    |        
|                                                                                      | Loss (gain) on disposition of assets                              |                                                                                    |                                                     | (361    | )       |         |         | 108     |         |         |        | 5,207    |        
|                                                                                      | Stock option expense                                              |                                                                                    |                                                     | 1,267   |         |         |         | 4,207   |         |         |        | 4,128    |        
|                                                                                      | Deferred tax expense (benefit)                                    |                                                                                    |                                                     | (1,038  | )       |         |         | 1,846   |         |         |        | (166     | )      
|                                                                                      | Changes in assets and liabilities:                                |                                                                                    |                                                     |         |         |         |         |         |         |         |        |          |        
|                                                                                      |                                                                   | Accounts receivable                                                                |                                                     |         | (3,290  | )       |         |         | (11,971 | )       |        |          | (7,276  | )      
|                                                                                      |                                                                   | Inventories                                                                        |                                                     |         | (21,386 | )       |         |         | (15,530 | )       |        |          | (204    | )      
|                                                                                      |                                                                   | Other current assets                                                               |                                                     |         | (1,807  | )       |         |         | (671    | )       |        |          | (2,063  | )      
|                                                                                      |                                                                   | Other assets                                                                       |                                                     |         | (103    | )       |         |         | (403    | )       |        |          | (177    | )      
|                                                                                      |                                                                   | Accounts payable                                                                   |                                                     |         | 469     |         |         |         | 1,073   |         |        |          | (5,292  | )      
|                                                                                      |                                                                   | Income taxes payable                                                               |                                                     |         | (2,770  | )       |         |         | 2,934   |         |        |          | 12,626  |        
|                                                                                      |                                                                   | Other current liabilities                                                          |                                                     |         | 7,648   |         |         |         | (15,593 | )       |        |          | (18,682 | )      
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|                                                                                      |                                                                   |                                                                                    | Total adjustments                                   |         |         | 8,575   |         |         |         | (14,837 | )      |          |         | 16,401  |  
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|                                                                                      |                                                                   |                                                                                    | Net cash provided by operating activities           |         |         | 44,223  |         |         |         | 17,524  |        |          |         | 12,476  |  
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|Cash flows from investing activities:                                                 |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |         
|                                                                                      | Purchases of property, plant and equipment                        |                                                                                    |                                                     | (14,168 | )       |         |         | (14,561 | )       |         |        | (13,622  | )      
|                                                                                      | Business acquisitions, net of cash acquired                       |                                                                                    |                                                     | (192    | )       |         |         | (13,474 | )       |         |        |         |        
|                                                                                      | Proceeds from the sale of property, plant and equipment and other |                                                                                    |                                                     | 564     |         |         |         | 597     |         |         |        | 780      |        
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|                                                                                      |                                                                   |                                                                                    | Net cash used in investing activities               |         |         | (13,796 | )       |         |         | (27,438 | )      |          |         | (12,842 | )
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|Cash flows from financing activities:                                                 |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |         
|                                                                                      | Book overdraft                                                    |                                                                                    |                                                     | 460     |         |         |         | 918     |         |         |        | (75      | )      
|                                                                                      | Payments of principal under capital lease obligations             |                                                                                    |                                                     | (1,531  | )       |         |         | (1,810  | )       |         |        | (1,641   | )      
|                                                                                      | Proceeds from borrowings under Senior Credit Facility             |                                                                                    |                                                     | 35,000  |         |         |         |        |         |         |        |         |        
|                                                                                      | Proceeds from borrowings under New Senior Credit Facility         |                                                                                    |                                                     |        |         |         |         |        |         |         |        | 320,000  |        
|                                                                                      | Payments of principal under Senior Credit Facility                |                                                                                    |                                                     | (9,170  | )       |         |         | (19,007 | )       |         |        | (168,681 | )      
|                                                                                      | Payments of principal under New Senior Credit Facility            |                                                                                    |                                                     |        |         |         |         |        |         |         |        | (7,500   | )      
|                                                                                      | Debt issuance costs                                               |                                                                                    |                                                     | (4,160  | )       |         |         |        |         |         |        | (10,385  | )      
|                                                                                      | Payment of principal of other bank debt                           |                                                                                    |                                                     |        |         |         |         | (750    | )       |         |        |         |        
|                                                                                      | Payment of principal of related party note payable                |                                                                                    |                                                     |        |         |         |         | (663    | )       |         |        | (675     | )      
|                                                                                      | Payments of preferred stock dividends                             |                                                                                    |                                                     |        |         |         |         |        |         |         |        | (29,541  | )      
|                                                                                      | Payment of preferred stock repurchase                             |                                                                                    |                                                     |        |         |         |         |        |         |         |        | (109,459 | )      
|                                                                                      | Preferred stock issuance costs                                    |                                                                                    |                                                     |        |         |         |         |        |         |         |        | (299     | )      
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|                                                                                      |                                                                   |                                                                                    | Net cash provided by (used in) financing activities |         |         | 20,599  |         |         |         | (21,312 | )      |          |         | (8,256  | )
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|Effect of cumulative translation adjustment                                           |                                                                   |                                                                                    | (162                                                | )       |         |         | (249    | )       |         |         | (194   | )       
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|Net increase (decrease) in cash                                                       |                                                                   |                                                                                    | 50,864                                              |         |         |         | (31,475 | )       |         |         | (8,816 | )       
|Cash at beginning of year                                                             |                                                                   |                                                                                    | 17,247                                              |         |         |         | 68,111  |         |         |         | 36,636 |         
|                                                                                      |                                                                   |                                                                                    |                                                     |         |         |         |         |         |        
|Cash at end of year                                                                   |                                                                   | $                                                                                  | 68,111                                              |         |         | $       | 36,636  |         |         | $       | 27,820 |         
|Supplemental disclosures:                                                             |                                                                   |                                                                                    |                                                     |         |         |         |         |         |         |         |        |         
|                                                                                      | Cash payments during the year for:                                |                                                                                    |                                                     |         |         |         |         |         |         |         |        |          |        
|                                                                                      |                                                                   | Income taxes paid                                                                  |                                                     | $       | 25,048  |         |         | $       | 16,428  |         |        | $        | 5,479   |        
|                                                                                      |                                                                   | Interest paid                                                                      |                                                     |         | 25,406  |         |         |         | 25,750  |         |        |          | 32,466  |        
|                                                                                      | Non-cash investing and financing activities:                      |                                                                                    |                                                     |         |         |         |         |         |         |         |        |          |        
|                                                                                      |                                                                   | Converted Tranche A Loan to Tranche B Loan in
    connection with Debt Restructure |                                                     |         | 31,000  |         |         |         |        |         |        |          |        |        
|                                                                                      |                                                                   | Execution of note payable for acquisition                                          |                                                     |         | 2,025   |         |         |         |        |         |        |          |        |        



F-6



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                            
|-- | ---------------------------
|1. | Organization and Background









|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |                                                 
| | ------------------------------------------------
| | Principles of Consolidation and Use of Estimates







| |                      
| | ---------------------
| | Financial Instruments





F-7



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




| |            
| | -----------
| | Inventories





| |                              
| | -----------------------------
| | Property, Plant and Equipment





| |         
| | --------
| | Goodwill





| |               
| | --------------
| | Self Insurance





| |             
| | ------------
| | Income Taxes





| |                    
| | -------------------
| | Revenue Recognition





| |                      
| | ---------------------
| | Shipping and Handling



F-8



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)






| |                             
| | ----------------------------
| | Foreign Currency Translation





| |                  
| | -----------------
| | Reclassifications









| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |              
| | -------------
| | Benefit Plans



| |                       
| | ----------------------
| | Employee Benefit Plans



F-9



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




| |                               
| | ------------------------------
| | Stock-Based Compensation Plans





| |                                         
| | ----------------------------------------
| | Independent Contractor Stock Option Plan





| |                                    
| | -----------------------------------
| | 1998 Key Employee Stock Option Plan





| |                                    
| | -----------------------------------
| | 2002 Key Employee Stock Option Plan



F-10



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)






|                                            |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          |  |            |           |   |   |       |       | 
|------------------------------------------- | ----------------------- | ------------ | ---------- | ---------- | -------- | - | ----- | ------------ |  |  | ---------- | -------- | - | ------------ | ----- | ----- | -------- |  | ---------- | --------- | - | - | ----- | ----- | 
|                                            |                         | Independent  |            |            | Weighted |   |       | 1998 Key     |  |  | Weighted   |          |   | 2002 Key     |       |       | Weighted | 
|                                            |                         | Contractor   |            |            | Average  |   |       | Employee     |  |  | Average    |          |   | Employee     |       |       | Average  | 
|                                            |                         | Stock Option |            |            | Exercise |   |       | Stock Option |  |  | Exercise   |          |   | Stock Option |       |       | Exercise | 
|                                            |                         | Plan         |            |            | Price    |   |       | Plan         |  |  | Price      |          |   | Plan         |       |       | Price    | 
|                                            |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          | 
|Options outstanding as of December 31, 2001 |                         |              | 299,471    |            |          | $ | 18.68 |              |  |  | 959,087    |          |   | $            | 18.17 |       |          |  |            |           |   |   |       |      
|                                            | Granted                 |              |            |           |          |   |       |              |  |  |            | 55,125   |   |              | $     | 18.90 |          |  |            | 3,500,000 |   |   | $     | 19.42 | 
|                                            | Exercised               |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   |       |       | 
|                                            | Forfeited               |              |            | (9,690     | )        |   | $     | 19.08        |  |  |            | (10,540  | ) |              | $     | 18.05 |          |  |            |          |   |   |       |       | 
|                                            | Expired                 |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   |       |       | 
|                                            |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          | 
|Options outstanding as of December 31, 2002 |                         |              | 289,781    |            |          | $ | 18.67 |              |  |  | 1,003,672  |          |   | $            | 18.21 |       |          |  | 3,500,000  |           |   | $ | 19.42 |      
|                                            | Granted                 |              |            |           |          |   |       |              |  |  |            | 23,000   |   |              | $     | 20.39 |          |  |            | 200,000   |   |   | $     | 19.42 | 
|                                            | Exercised               |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   |       |       | 
|                                            | Forfeited               |              |            | (10,798    | )        |   | $     | 18.74        |  |  |            |         |   |              |       |       |          |  |            | (100,000  | ) |   | $     | 19.42 | 
|                                            | Expired                 |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   |       |       | 
|                                            |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          | 
|Options outstanding as of December 31, 2003 |                         |              | 278,983    |            |          | $ | 18.50 |              |  |  | 1,026,672  |          |   | $            | 18.26 |       |          |  | 3,600,000  |           |   | $ | 19.42 |      
|                                            | Granted                 |              |            |           |          |   |       |              |  |  |            | 300,000  |   |              | $     | 19.42 |          |  |            | 55,000    |   |   | $     | 19.42 | 
|                                            | Exercised               |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   |       |       | 
|                                            | Forfeited               |              |            | (8,477     | )        |   | $     | 19.62        |  |  |            | (358,709 | ) |              | $     | 18.10 |          |  |            | (185,000  | ) |   | $     | 19.42 | 
|                                            | Expired                 |              |            |           |          |   |       |              |  |  |            |         |   |              |       |       |          |  |            |          |   |   | $     | 19.42 | 
|                                            |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          | 
|Options outstanding as of December 31, 2004 |                         |              | 270,506    |            |          | $ | 18.65 |              |  |  | 967,963    |          |   | $            | 18.68 |       |          |  | 3,470,000  |           |   | $ | 19.42 |      
|Options exercisable as of December 31, 2004 |                         |              | 262,129    |            |          | $ | 18.56 |              |  |  | 602,518    |          |   | $            | 18.26 |       |          |  | 1,344,000  |           |   | $ | 19.42 |      
|Weighted average remaining contractual life |                         |              | 5.80 years |            |          |   |       |              |  |  | 5.87 years |          |   |              |       |       |          |  | 7.79 years |           |   |   |       |      
|Valuation assumptions:                      |                         |              |            |            |          |   |       |              |  |  |            |          |   |              |       |       |          |  |            |           |   |   |       |      
|                                            | Expected term           |              |            | 2.69 years |          |   |       |              |  |  |            | 6 years  |   |              |       |       |          |  |            | 6 years   |   |   |       |       | 
|                                            | Expected dividend yield |              |            | 0.0        | %        |   |       |              |  |  |            | 0.0      | % |              |       |       |          |  |            | 0.0       | % |   |       |       | 
|                                            | Expected volatility     |              |            | 50.12      | %        |   |       |              |  |  |            | 0.0      | % |              |       |       |          |  |            | 0.0       | % |   |       |       | 
|                                            | Risk-free interest rate |              |            | 3.65       | %        |   |       |              |  |  |            | 3.86     | % |              |       |       |          |  |            | 3.99      | % |   |       |       | 

F-11



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




| |                    
| | -------------------
| | Compensation Charge



|                                                                                                                                                    |  |                        |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                    |  | Year Ended December 31 |       
|                                                                                                                                                    |  |                        |       
|                                                                                                                                                    |  | 2002                   |        |   | 2003 |   |        | 2004 | 
|                                                                                                                                                    |  |                        |        |   |      |   |        |      | 
|Net income (loss), as reported                                                                                                                      |  | $                      | 35,648 |   |      | $ | 32,361 |      |  | $ | (3,925 | )
|Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects                                      |  |                        | 494    |   |      |   | 2,023  |      |  |   | 1,837  |  
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |  |                        | (2,560 | ) |      |   | (2,386 | )    |  |   | (2,072 | )
|                                                                                                                                                    |  |                        |        |   |      |   |        |      | 
|Pro forma net income (loss)                                                                                                                         |  | $                      | 33,582 |   |      | $ | 31,998 |      |  | $ | (4,160 | )
|                                                                                                                                                    |  |                        |        |   |      |   |        |      | 

3.     Acquisitions




| |                  
| | -----------------
| | 2003 Acquisitions







F-12



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)








|   |                         
|-- | ------------------------
|4. | Accounts Receivable, Net



|                                |  |      |        |   |      |   |        |  
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                |  | 2003 |        |   | 2004 |  
|                                |  |      |        |   |      |  
|Trade receivables               |  | $    | 19,028 |   |      | $ | 22,310 |  
|Other                           |  |      | 5,443  |   |      |   | 6,547  |  
|                                |  |      |        |   |      |  
|                                |  |      | 24,471 |   |      |   | 28,857 |  
|Allowance for doubtful accounts |  |      | (2,444 | ) |      |   | (2,776 | )
|                                |  |      |        |   |      |  
|                                |  | $    | 22,027 |   |      | $ | 26,081 |  
|                                |  |      |        |   |      |  



|   |                 
|-- | ----------------
|5. | Inventories, Net



|                    |  |      |        |   |      |   |        |  
|------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                    |  | 2003 |        |   | 2004 |  
|                    |  |      |        |   |      |  
|Raw materials       |  | $    | 9,364  |   |      | $ | 8,184  |  
|Work in process     |  |      | 2,458  |   |      |   | 2,231  |  
|Finished goods      |  |      | 66,212 |   |      |   | 67,559 |  
|                    |  |      |        |   |      |  
|                    |  |      | 78,034 |   |      |   | 77,974 |  
|Inventory allowance |  |      | (4,899 | ) |      |   | (6,173 | )
|                    |  |      |        |   |      |  
|                    |  | $    | 73,135 |   |      | $ | 71,801 |  
|                    |  |      |        |   |      |  

F-13



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|   |                                   
|-- | ----------------------------------
|6. | Property, Plant and Equipment, Net



|                                                            |  |             |            |  |      |   |         |      |  |   |         |  
|----------------------------------------------------------- |  | ----------- | ---------- |  | ---- | - | ------- | ---- |  | - | ------- | -
|                                                            |  | Estimated   |            |  |      |   |        
|                                                            |  | Useful Life |            |  | 2003 |   |         | 2004 | 
|                                                            |  |             |            |  |      |   |         |      | 
|Land                                                        |  |             |            |  |      | $ | 5,765   |      |  | $ | 5,895   |  
|Buildings and improvements                                  |  |             | 5-40 years |  |      |   | 37,495  |      |  |   | 41,323  |  
|Computer hardware and software                              |  |             | 3-5 years  |  |      |   | 29,530  |      |  |   | 39,632  |  
|Equipment, furniture and fixtures                           |  |             | 3-10 years |  |      |   | 53,714  |      |  |   | 55,024  |  
|                                                            |  |             |            |  |      |   |         |      | 
|                                                            |  |             |            |  |      |   | 126,504 |      |  |   | 141,874 |  
|Accumulated depreciation                                    |  |             |            |  |      |   | (52,325 | )    |  |   | (75,898 | )
|                                                            |  |             |            |  |      |   |         |      | 
|                                                            |  |             |            |  |      |   | 74,179  |      |  |   | 65,976  |  
|Equipment, software and hardware implementations in process |  |             |            |  |      |   | 1,012   |      |  |   | 490     |  
|                                                            |  |             |            |  |      |   |         |      | 
|                                                            |  |             |            |  |      | $ | 75,191  |      |  | $ | 66,466  |  
|                                                            |  |             |            |  |      |   |         |      | 





|   |         
|-- | --------
|7. | Goodwill



|                                                           |  |   |        |  
|---------------------------------------------------------- |  | - | ------ | -
|Balance as of December 31, 2003                            |  | $ | 14,519 |  
|Goodwill impairment                                        |  |   | (619   | )
|Goodwill write-off for discontinued ceramics manufacturing |  |   | (1,090 | )
|Goodwill acquired through earn out                         |  |   | 893    |  
|                                                           |  |   |       
|Balance as of December 31, 2004                            |  | $ | 13,703 |  
|                                                           |  |   |       



F-14



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|   |             
|-- | ------------
|8. | Income Taxes



|         |  |      |        |  |      |   |        |      |  |   |         |  
|-------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------- | -
|         |  | 2002 |        |  | 2003 |   |        | 2004 | 
|         |  |      |        |  |      |   |        |      | 
|Domestic |  | $    | 54,692 |  |      | $ | 54,001 |      |  | $ | 12,995  |  
|Foreign  |  |      | 1,619  |  |      |   | (2,888 | )    |  |   | (11,510 | )
|         |  |      |        |  |      |   |        |      | 
|         |  | $    | 56,311 |  |      | $ | 51,113 |      |  | $ | 1,485   |  
|         |  |      |        |  |      |   |        |      | 



|              |  |      |        |   |      |   |        |      |  |   |       |  
|------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|              |  | 2002 |        |   | 2003 |   |        | 2004 | 
|              |  |      |        |   |      |   |        |      | 
|Current:      |  |      |        |   |      |   |        |      |  |   |       |  
|Federal       |  | $    | 20,215 |   |      | $ | 19,516 |      |  | $ | (144  | )
|Foreign       |  |      | 352    |   |      |   | 8      |      |  |   | 1,170 |  
|State         |  |      | 1,134  |   |      |   | (4,422 | )    |  |   | 177   |  
|              |  |      |        |   |      |   |        |      | 
|              |  |      | 21,701 |   |      |   | 15,102 |      |  |   | 1,203 |  
|Deferred, net |  |      | (1,038 | ) |      |   | 1,846  |      |  |   | (166  | )
|              |  |      |        |   |      |   |        |      | 
|              |  | $    | 20,663 |   |      | $ | 16,948 |      |  | $ | 1,037 |  
|              |  |      |        |   |      |   |        |      | 



|                                                                        |  |      |        |  |      |   |        |      |  |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                        |  | 2002 |        |  | 2003 |   |        | 2004 | 
|                                                                        |  |      |        |  |      |   |        |      | 
|Federal statutory rate applied to income before income taxes
    income |  | $    | 19,709 |  |      | $ | 17,890 |      |  | $ | 520    |  
|State income taxes, net of federal benefit                              |  |      | 929    |  |      |   | (2,874 | )    |  |   | 115    |  
|U.S. benefit of Mexico Manufacturing losses                             |  |      |       |  |      |   |       |      |  |   | (5,461 | )
|Valuation allowance                                                     |  |      |       |  |      |   | 2,354  |      |  |   | 6,308  |  
|Other                                                                   |  |      | 25     |  |      |   | (422   | )    |  |   | (445   | )
|                                                                        |  |      |        |  |      |   |        |      | 
|                                                                        |  | $    | 20,663 |  |      | $ | 16,948 |      |  | $ | 1,037  |  
|                                                                        |  |      |        |  |      |   |        |      | 

F-15



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                                               |  |      |        |   |      |   |        |  
|-------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                               |  | 2003 |        |   | 2004 |  
|                                                               |  |      |        |   |      |  
|Inventories                                                    |  | $    | 2,290  |   |      | $ | 3,184  |  
|Allowance for doubtful accounts                                |  |      | 771    |   |      |   | 881    |  
|Debt issuance costs and stock options                          |  |      | 2,451  |   |      |   | 3,999  |  
|Accrued expenses                                               |  |      | 1,014  |   |      |   | 1,002  |  
|Investments                                                    |  |      |       |   |      |   | 466    |  
|Accrued employee benefits and Decorating Consultant incentives |  |      | 2,974  |   |      |   | 2,984  |  
|Net operating loss carry forwards                              |  |      | 2,236  |   |      |   | 8,989  |  
|Other                                                          |  |      | 5,799  |   |      |   | 3,547  |  
|                                                               |  |      |        |   |      |  
|Gross deferred tax assets                                      |  |      | 17,535 |   |      |   | 25,052 |  
|Valuation allowance                                            |  |      | (2,236 | ) |      |   | (8,543 | )
|                                                               |  |      |        |   |      |  
|Gross deferred tax assets, net of valuation allowance          |  |      | 15,299 |   |      |   | 16,509 |  
|Deferred gain on sale of facilities                            |  |      | (4,909 | ) |      |   | (4,772 | )
|Property, plant and equipment                                  |  |      | (4,291 | ) |      |   | (5,668 | )
|Other                                                          |  |      | (2,679 | ) |      |   | (2,770 | )
|                                                               |  |      |        |   |      |  
|Net deferred tax asset                                         |  |      | 3,420  |   |      |   | 3,299  |  
|Less current deferred tax asset                                |  |      | 6,006  |   |      |   | 6,111  |  
|                                                               |  |      |        |   |      |  
|Non-current deferred income tax liability                      |  | $    | 2,586  |   |      | $ | 2,812  |  
|                                                               |  |      |        |   |      |  





|   |                                       
|-- | --------------------------------------
|9. | Former Corporate Headquarters Facility





F-16



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)










|    |                          
|--- | -------------------------
|10. | Other Current Liabilities



|                                  |  |      |        |  |      |   |        | 
|--------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                  |  | 2003 |        |  | 2004 |  
|                                  |  |      |        |  |      |  
|Interest                          |  | $    | 1,258  |  |      | $ | 1,258  | 
|Book overdraft                    |  |      | 4,913  |  |      |   | 4,838  | 
|Accrued employee benefits         |  |      | 4,443  |  |      |   | 2,997  | 
|Sales taxes                       |  |      | 3,498  |  |      |   | 3,872  | 
|Other taxes                       |  |      | 1,535  |  |      |   | 1,743  | 
|Deferred revenue                  |  |      | 2,033  |  |      |   | 4,482  | 
|Related parties                   |  |      | 600    |  |      |   | 748    | 
|Accrued product license royalties |  |      |       |  |      |   | 1,439  | 
|Other                             |  |      | 1,933  |  |      |   | 3,553  | 
|                                  |  |      |        |  |      |  
|                                  |  | $    | 20,213 |  |      | $ | 24,930 | 
|                                  |  |      |        |  |      |  



|    |                                             
|--- | --------------------------------------------
|11. | Long-Term Debt and Capital Lease Obligations



| |               
| | --------------
| | Long-Term Debt





| |                      
| | ---------------------
| | Debt Restructure 2002





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company converted $31.0 million of $50.0 million
    Tranche A Loans into Tranche B Loans of the
    Companys Senior Credit Facility.                                                                                                                                                                                                                                                                                       
|
| |  | The Company received a $35.0 million cash infusion from the
    Companys lenders under the Senior Credit Facility in
    exchange for additional Tranche B Loans.                                                                                                                                                                                                                                                               
|
| |  | The Companys Senior Credit Facility was amended and
    restated to provide for, among other items, increased interest
    rates for consenting lenders, 150 basis points over the
    interest rates then paid to the non-consenting lenders, modified
    quarterly principal and interest payments, and modification to
    the Companys required compliance thresholds of the minimum
    Adjusted EBITDA covenant, maximum

F-17



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




| |  |                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | leverage ratio covenant (including senior leverage) and minimum
    fixed charge ratio covenant. The maturity dates of the loans
    were not extended.





| |                                
| | -------------------------------
| | 2004 New Senior Credit Facility







| |   |                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For an aggregate purchase price of $139.0 million, the
    Company repurchased all of the Companys outstanding shares
    of its 12.5% Senior Convertible Preferred Stock, pursuant
    to a Stock Purchase Agreement, dated March 31, 2004, among
    the Company and certain affiliates of the Companys
    controlling stockholders the Preferred Stock
    Repurchase.
|
| |  | $169.1 million of the proceeds were used to pay off the
    existing Senior Credit Facility, which included an outstanding
    debt balance, related partial year interest, commitment fees,
    and outstanding letter of credit fees.                                                                                                                                       
|
| |  | $9.4 million of the proceeds were used to pay legal and
    advisory fees associated with the Preferred Stock Repurchase and
    to pay off the existing Senior Credit Facility, and the New
    Senior Credit Facility debt issuance costs.                                                                                                                                  







F-18



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
















F-19



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)






| |               
| | --------------
| | Capital Leases



|                                           |  |   |        |  
|------------------------------------------ |  | - | ------ | -
|Years Ending December 31:                  |  |  
|                                           |  |  
|2005                                       |  | $ | 2,063  |  
|2006                                       |  |   | 2,031  |  
|2007                                       |  |   | 648    |  
|2008                                       |  |   |       |  
|2009                                       |  |   |       |  
|Thereafter                                 |  |   |       |  
|                                           |  |   |       
|Total minimum lease obligations            |  |   | 4,742  |  
|Less: amounts representing interest        |  |   | (467   | )
|                                           |  |   |       
|Present value of minimum lease obligations |  |   | 4,275  |  
|Less: current maturities                   |  |   | (1,800 | )
|                                           |  |   |       
|Long-term capital lease obligations        |  | $ | 2,475  |  
|                                           |  |   |       



|                                                                                                |  |      |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                |  | 2003 |         |   | 2004 |  
|                                                                                                |  |      |         |   |      |  
|Notes, interest at 10.125% with semi-annual interest payments
    due on June 1 and December 1  |  | $    | 149,100 |   |      | $ | 149,100 |  
|Term Loans interest at LIBOR plus an applicable margin (7.17%)                                  |  |      |        |   |      |   | 312,500 |  
|Tranche A Loan, interest at Base Rate plus an applicable
    margin (6.5%)                      |  |      | 8,953   |   |      |   |        |  
|Tranche B Loan, Interest at Base Rate plus an applicable
    margin (7.5%)                      |  |      | 159,729 |   |      |   |        |  
|Capitalized lease obligations, collateralized by certain
    equipment, furniture, and fixtures |  |      | 4,094   |   |      |   | 4,275   |  
|                                                                                                |  |      |         |   |      |  
|                                                                                                |  |      | 321,876 |   |      |   | 465,875 |  
|Less current maturities                                                                         |  |      | (10,099 | ) |      |   | (15,550 | )
|                                                                                                |  |      |         |   |      |  
|                                                                                                |  | $    | 311,777 |   |      | $ | 450,325 |  
|                                                                                                |  |      |         |   |      |  

F-20



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|           |  |   |         | 
|---------- |  | - | ------- | 
|2005       |  | $ | 15,550  | 
|2006       |  |   | 16,890  | 
|2007       |  |   | 19,335  | 
|2008       |  |   | 414,100 | 
|2009       |  |   |        | 
|Thereafter |  |   |        | 
|           |  |   |        
|           |  | $ | 465,875 | 
|           |  |   |        



|    |                                         
|--- | ----------------------------------------
|12. | 12.5% Senior Convertible Preferred Stock









|                                                    |  |      |        |  |      |   |        |      |  |   |        |  
|--------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                    |  | 2002 |        |  | 2003 |   |        | 2004 | 
|                                                    |  |      |        |  |      |   |        |      | 
|Net income (loss), as reported                      |  | $    | 35,648 |  |      | $ | 32,361 |      |  | $ | (3,925 | )
|Less: 12.5% cumulative preferred stock dividends    |  |      | 12,007 |  |      |   | 12,007 |      |  |   | 2,961  |  
|                                                    |  |      |        |  |      |   |        |      | 
|Net income (loss) applicable to common shareholders |  | $    | 23,641 |  |      | $ | 20,354 |      |  | $ | (6,886 | )
|                                                    |  |      |        |  |      |   |        |      | 



|    |                 
|--- | ----------------
|13. | Operating Leases



F-21



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                         |  |                          |       |  |             |   |       |             |  |   |        | 
|------------------------ |  | ------------------------ | ----- |  | ----------- | - | ----- | ----------- |  | - | ------ | 
|                         |  | Former Corporate         |       |  |             |   |      
|Year Ending December 31, |  | Offices, Net of Sublease |       |  | Other Rents |   |       | Total Rents | 
|                         |  |                          |       |  |             |   |       |             | 
|2005                     |  | $                        | 765   |  |             | $ | 3,198 |             |  | $ | 3,963  | 
|2006                     |  |                          | 744   |  |             |   | 2,547 |             |  |   | 3,291  | 
|2007                     |  |                          | 722   |  |             |   | 1,934 |             |  |   | 2,656  | 
|2008                     |  |                          | 700   |  |             |   | 1,029 |             |  |   | 1,729  | 
|2009                     |  |                          | 678   |  |             |   | 507   |             |  |   | 1,185  | 
|Thereafter               |  |                          |      |  |             |   |      |             |  |   |       | 
|                         |  |                          |       |  |             |   |       |             | 
|                         |  | $                        | 3,609 |  |             | $ | 9,215 |             |  | $ | 12,824 | 
|                         |  |                          |       |  |             |   |       |             | 



|    |                        
|--- | -----------------------
|14. | Discontinued Operations







F-22



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                     |                             |                                           |        |      |      |   |        |       |       | 
|------------------------------------ | --------------------------- | ----------------------------------------- | ------ | ---- | ---- | - | ------ | ----- | ----- | 
|                                     |                             | Years Ended                               |       
|                                     |                             | December 31,                              |       
|                                     |                             |                                           |       
|                                     |                             | 2003                                      |        |      | 2004 |  
|                                     |                             |                                           |        |      |      |  
|Net sales                            |                             | $                                         | 2,179  |      |      | $ | 823    |      
|Cost of goods sold                   |                             |                                           | 3,041  |      |      |   | 1,868  |      
|                                     |                             |                                           |        |      |      |  
|Gross profit                         |                             |                                           | (862   | )    |      |   | (1,045 | )    
|                                     |                             |                                           |        |      |      |  
|Selling, general and administrative: |                             |                                           |        |      |      |   |        |      
|                                     | General and administrative  |                                           |        | 766  |      |   |        | 3,400 |      
|                                     |                             |                                           |        |      |      |  
|                                     |                             | Total selling, general and administrative |        |      | 766  |   |        |       | 3,400 | 
|                                     |                             |                                           |        |      |      |  
|Operating loss                       |                             |                                           | (1,628 | )    |      |   | (4,445 | )    
|Other income (expense):              |                             |                                           |        |      |      |   |        |      
|                                     | Interest income             |                                           |        | 1    |      |   |        |      |      
|                                     | Interest expense            |                                           |        | (3   | )    |   |        |      |      
|                                     | Other income (expense), net |                                           |        | (174 | )    |   |        | 72    |      
|                                     |                             |                                           |        |      |      |  
|                                     |                             | Other income (expense), net               |        |      | (176 | ) |        |       | 72    | 
|                                     |                             |                                           |        |      |      |  
|Loss before income taxes             |                             |                                           | (1,804 | )    |      |   | (4,373 | )    
|Income tax benefit                   |                             |                                           |       |      |      |   |       |      
|Loss on discontinued operations      |                             | $                                         | (1,804 | )    |      | $ | (4,373 | )    
|                                     |                             |                                           |        |      |      |  



|    |                                             
|--- | --------------------------------------------
|15. | Restructuring, Redundancy and Reorganization



| |                    
| | -------------------
| | Reorganization Cost







F-23



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                                                            |  |      |       |  |      |   |       |      |  |   |        | 
|--------------------------------------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ------ | 
|                                                                            |  | 2002 |       |  | 2003 |   |       | 2004 | 
|                                                                            |  |      |       |  |      |   |       |      | 
|Staff reductions, excess facilities cost, and other                         |  | $    | 786   |  |      | $ | 1,982 |      |  | $ | 2,867  | 
|Non-capitalized computer system implementation costs                        |  |      | 2,106 |  |      |   |      |      |  |   |       | 
|Integration and shutdown costs of international manufacturing
    companies |  |      |      |  |      |   | 3,447 |      |  |   | 7,779  | 
|Compliance costs, Sarbanes-Oxley Act 2002                                   |  |      |      |  |      |   | 378   |      |  |   | 759    | 
|Strategic planning costs                                                    |  |      |      |  |      |   |      |      |  |   | 2,077  | 
|                                                                            |  |      |       |  |      |   |       |      | 
|                                                                            |  | $    | 2,892 |  |      | $ | 5,807 |      |  | $ | 13,482 | 
|                                                                            |  |      |       |  |      |   |       |      | 



|    |                           
|--- | --------------------------
|16. | Related Party Transactions











F-24



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


















|    |                              
|--- | -----------------------------
|17. | Commitments and Contingencies









F-25



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)










|    |                  
|--- | -----------------
|18. | Segment Reporting





| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct Selling Domestic  direct seller of home
    decorative accessories in the United States;                                                                                                                                                           
|
| |  | Direct Selling International  direct seller of home
    decorative accessories in Mexico, Canada and Puerto
    Rico; and                                                                                                                                 
|
| |  | Domistyle  wholesale supply operation that
    manufactures, imports, and distributes candles, framed artwork,
    mirrors, various types of molded plastic, metal, glass, and
    ceramic products for affiliates and other non-affiliated
    resellers.



F-26



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                            |  |          |         |  |               |   |        |           |  |   |              |  |  |              |          |   |  |   |         | 
|--------------------------- |  | -------- | ------- |  | ------------- | - | ------ | --------- |  | - | ------------ |  |  | ------------ | -------- | - |  | - | ------- | 
|                            |  | Direct   |         |  | Direct        |   |        |           |  |   |              | 
|                            |  | Selling  |         |  | Selling       |   |        |           |  |   |              | 
|                            |  | Domestic |         |  | International |   |        | Domistyle |  |   | Eliminations |  |  | Consolidated |         
|                            |  |          |         |  |               |   |        |           |  |   |              |  |  |              |         
|2002                        |  |          |         |  |               |   |        |           |  |   |              |  |  |              |          |   |  |   |         | 
|Net sales to non-affiliates |  | $        | 528,589 |  |               | $ | 36,723 |           |  | $ | 9,187        |  |  | $            |         |   |  | $ | 574,499 | 
|Net sales to affiliates     |  |          | 17,173  |  |               |   |       |           |  |   | 136,149      |  |  |              | (153,322 | ) |  |   |        | 
|Modified EBITDA             |  |          | 56,227  |  |               |   | 2,435  |           |  |   | 46,826       |  |  |              | (454     | ) |  |   | 105,034 | 
|Total assets                |  |          | 208,492 |  |               |   | 6,328  |           |  |   | 97,934       |  |  |              | (78,161  | ) |  |   | 234,593 | 
|Goodwill                    |  |          |        |  |               |   |       |           |  |   | 11,126       |  |  |              |         |   |  |   | 11,126  | 
|Capital expenditures        |  |          | 11,194  |  |               |   | 73     |           |  |   | 2,901        |  |  |              |         |   |  |   | 14,168  | 
|                           
|2003                        |  |          |         |  |               |   |        |           |  |   |              |  |  |              |          |   |  |   |         | 
|Net sales to non-affiliates |  | $        | 525,480 |  |               | $ | 61,629 |           |  | $ | 28,374       |  |  | $            |         |   |  | $ | 615,483 | 
|Net sales to affiliates     |  |          | 28,950  |  |               |   |       |           |  |   | 145,582      |  |  |              | (174,532 | ) |  |   |        | 
|Modified EBITDA             |  |          | 56,022  |  |               |   | 5,079  |           |  |   | 44,665       |  |  |              | (1,468   | ) |  |   | 104,298 | 
|Total assets                |  |          | 218,621 |  |               |   | 11,379 |           |  |   | 75,407       |  |  |              | (69,484  | ) |  |   | 235,923 | 
|Goodwill                    |  |          |        |  |               |   |       |           |  |   | 14,519       |  |  |              |         |   |  |   | 14,519  | 
|Capital expenditures        |  |          | 6,885   |  |               |   | 495    |           |  |   | 7,181        |  |  |              |         |   |  |   | 14,561  | 
|                           
|2004                        |  |          |         |  |               |   |        |           |  |   |              |  |  |              |          |   |  |   |         | 
|Net sales to non-affiliates |  | $        | 450,378 |  |               | $ | 67,979 |           |  | $ | 31,454       |  |  | $            |         |   |  | $ | 549,811 | 
|Net sales to affiliates     |  |          | 26,223  |  |               |   |       |           |  |   | 128,673      |  |  |              | (154,896 | ) |  |   |        | 
|Modified EBITDA             |  |          | 33,687  |  |               |   | 8,332  |           |  |   | 35,624       |  |  |              | 175      |   |  |   | 77,818  | 
|Total assets                |  |          | 204,559 |  |               |   | 21,579 |           |  |   | 72,831       |  |  |              | (69,701  | ) |  |   | 229,268 | 
|Goodwill                    |  |          |        |  |               |   |       |           |  |   | 13,703       |  |  |              |         |   |  |   | 13,703  | 
|Capital expenditures        |  |          | 7,331   |  |               |   | 1,192  |           |  |   | 5,099        |  |  |              |         |   |  |   | 13,622  | 

F-27



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                     |  |      |         |   |      |   |         |      |  |   |        |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                     |  | 2002 |         |   | 2003 |   |         | 2004 | 
|                                     |  |      |         |   |      |   |         |      | 
|Net income (loss)                    |  | $    | 35,648  |   |      | $ | 32,361  |      |  | $ | (3,925 | )
|Discontinued operations              |  |      |        |   |      |   | 1,804   |      |  |   | 4,373  |  
|Effect of SAB 101                    |  |      | (1,003  | ) |      |   | 393     |      |  |   | (184   | )
|Depreciation and amortization        |  |      | 11,715  |   |      |   | 15,524  |      |  |   | 15,618 |  
|Loss on debt restructure             |  |      | 7,188   |   |      |   |        |      |  |   | 1,118  |  
|(Gain) loss on disposition of assets |  |      | (361    | ) |      |   | 108     |      |  |   | 5,207  |  
|Stock option expense                 |  |      | 1,267   |   |      |   | 4,207   |      |  |   | 4,128  |  
|Reorganization costs                 |  |      | 2,892   |   |      |   | 5,807   |      |  |   | 13,482 |  
|Interest income                      |  |      | (472    | ) |      |   | (357    | )    |  |   | (317   | )
|Interest expense                     |  |      | 27,497  |   |      |   | 27,503  |      |  |   | 35,435 |  
|Realized gain on derivatives         |  |      |        |   |      |   |        |      |  |   | (16    | )
|Unrealized loss on derivatives       |  |      |        |   |      |   |        |      |  |   | 1,243  |  
|Goodwill impairment                  |  |      |        |   |      |   |        |      |  |   | 619    |  
|Income tax provision                 |  |      | 20,663  |   |      |   | 16,948  |      |  |   | 1,037  |  
|                                     |  |      |         |   |      |   |         |      | 
|Modified EBITDA                      |  | $    | 105,034 |   |      | $ | 104,298 |      |  | $ | 77,818 |  
|                                     |  |      |         |   |      |   |         |      | 

F-28



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|    |                         
|--- | ------------------------
|19. | Guarantor Financial Data



Condensed Consolidating Statement of Operations and
Comprehensive Income (Loss)


For the Year Ended December 31, 2002


|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |          |         |   |   |         |         | 
|----------------------------------------------------------- | --------------------------------- | -------- | ------- | ------- | ---------- | - | ------- | -------------- |  | - | ------------ | ------ |  | ------------ | -------- | ------- | - | - | ------- | ------- | 
|                                                            |                                   | Borrower |         |         | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |        |  | Consolidated |         
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|Net sales                                                   |                                   | $        | 549,576 |         |            | $ | 148,192 |                |  | $ | 30,175       |        |  | $            | (153,444 | )       |   | $ | 574,499 |        
|Cost of good sold                                           |                                   |          | 292,318 |         |            |   | 96,140  |                |  |   | 16,325       |        |  |              | (153,035 | )       |   |   | 251,748 |        
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|                                                            | Gross profit                      |          |         | 257,258 |            |   |         | 52,052         |  |   |              | 13,850 |  |              |          | (409    | ) |   |         | 322,751 | 
|Total selling, general and administrative                   |                                   |          | 218,990 |         |            |   | 7,412   |                |  |   | 11,574       |        |  |              |         |         |   |   | 237,976 |        
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|                                                            | Operating income (loss)           |          |         | 38,268  |            |   |         | 44,640         |  |   |              | 2,276  |  |              |          | (409    | ) |   |         | 84,775  | 
|Other income (expense), net                                 |                                   |          | (28,174 | )       |            |   | 461     |                |  |   | (705         | )      |  |              | (46      | )       |   |   | (28,464 | )      
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|                                                            | Income (loss) before income taxes |          |         | 10,094  |            |   |         | 45,101         |  |   |              | 1,571  |  |              |          | (455    | ) |   |         | 56,311  | 
|Income tax provision                                        |                                   |          | (4,305  | )       |            |   | (15,950 | )              |  |   | (408         | )      |  |              |         |         |   |   | (20,663 | )      
|Equity in income (loss) of affiliated companies, net of tax |                                   |          | 30,314  |         |            |   | 12      |                |  |   |             |        |  |              | (30,326  | )       |   |   |        |        
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|                                                            | Net income (loss)                 |          |         | 36,103  |            |   |         | 29,163         |  |   |              | 1,163  |  |              |          | (30,781 | ) |   |         | 35,648  | 
|Other comprehensive loss                                    |                                   |          | 11      |         |            |   |        |                |  |   | (173         | )      |  |              |         |         |   |   | (162    | )      
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         
|                                                            | Comprehensive income (loss)       |          | $       | 36,114  |            |   | $       | 29,163         |  |   | $            | 990    |  |              | $        | (30,781 | ) |   | $       | 35,486  | 
|                                                            |                                   |          |         |         |            |   |         |                |  |   |              |        |  |              |         

F-29



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Statement of Operations and
Comprehensive Income (Loss)


For the Year Ended December 31, 2003


|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |          |         |   |   |         |         | 
|----------------------------------------------------------- | ---------------------------------------- | -------- | ------- | ------- | ---------- | - | ------- | -------------- |  | - | ------------ | ------ | - | ------------ | -------- | ------- | - | - | ------- | ------- | 
|                                                            |                                          | Borrower |         |         | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |        |   | Consolidated |         
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|Net sales                                                   |                                          | $        | 562,862 |         |            | $ | 168,646 |                |  | $ | 63,602       |        |   | $            | (179,627 | )       |   | $ | 615,483 |        
|Cost of good sold                                           |                                          |          | 307,084 |         |            |   | 112,356 |                |  |   | 44,170       |        |   |              | (178,200 | )       |   |   | 285,410 |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Gross profit                             |          |         | 255,778 |            |   |         | 56,290         |  |   |              | 19,432 |   |              |          | (1,427  | ) |   |         | 330,073 | 
|Total selling, general and administrative                   |                                          |          | 218,383 |         |            |   | 11,732  |                |  |   | 20,746       |        |   |              |         |         |   |   | 250,861 |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Operating income (loss)                  |          |         | 37,395  |            |   |         | 44,558         |  |   |              | (1,314 | ) |              |          | (1,427  | ) |   |         | 79,212  | 
|Other income (expense), net                                 |                                          |          | (26,945 | )       |            |   | 459     |                |  |   | (1,573       | )      |   |              | (40      | )       |   |   | (28,099 | )      
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Income (loss) before income taxes        |          |         | 10,450  |            |   |         | 45,017         |  |   |              | (2,887 | ) |              |          | (1,467  | ) |   |         | 51,113  | 
|Income tax provision                                        |                                          |          | (687    | )       |            |   | (15,923 | )              |  |   | (699         | )      |   |              | 361      |         |   |   | (16,948 | )      
|Equity in income (loss) of affiliated companies, net of tax |                                          |          | 23,703  |         |            |   | (7,127  | )              |  |   |             |        |   |              | (16,576  | )       |   |   |        |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Income (loss) from continuing operations |          |         | 33,466  |            |   |         | 21,967         |  |   |              | (3,586 | ) |              |          | (17,682 | ) |   |         | 34,165  | 
|Discontinued operations loss, net of tax                    |                                          |          |        |         |            |   |        |                |  |   | 1,804        |        |   |              |         |         |   |   | 1,804   |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Net income (loss)                        |          |         | 33,466  |            |   |         | 21,967         |  |   |              | (5,390 | ) |              |          | (17,682 | ) |   |         | 32,361  | 
|Other comprehensive loss                                    |                                          |          | (14     | )       |            |   |        |                |  |   | (235         | )      |   |              |         |         |   |   | (249    | )      
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         
|                                                            | Comprehensive income (loss)              |          | $       | 33,452  |            |   | $       | 21,967         |  |   | $            | (5,625 | ) |              | $        | (17,682 | ) |   | $       | 32,112  | 
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |        |   |              |         

F-30



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Statement of Operations and
Comprehensive Income (Loss)


For the Year Ended December 31, 2004


|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |          |        |  |   |         |         |  
|----------------------------------------------------------- | ---------------------------------------- | -------- | ------- | ------- | ---------- | - | ------- | -------------- |  | - | ------------ | ------- | - | ------------ | -------- | ------ |  | - | ------- | ------- | -
|                                                            |                                          | Borrower |         |         | Guarantors |   |         | Non-Guarantors |  |   | Eliminations |         |   | Consolidated |         
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|Net sales                                                   |                                          | $        | 485,933 |         |            | $ | 156,500 |                |  | $ | 64,605       |         |   | $            | (157,227 | )      |  | $ | 549,811 |        
|Cost of good sold                                           |                                          |          | 260,221 |         |            |   | 112,230 |                |  |   | 44,517       |         |   |              | (157,893 | )      |  |   | 259,075 |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Gross profit                             |          |         | 225,712 |            |   |         | 44,270         |  |   |              | 20,088  |   |              |          | 666    |  |   |         | 290,736 |  
|Total selling, general and administrative                   |                                          |          | 208,890 |         |            |   | 12,653  |                |  |   | 31,134       |         |   |              |         |        |  |   | 252,677 |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Operating income (loss)                  |          |         | 16,822  |            |   |         | 31,617         |  |   |              | (11,046 | ) |              |          | 666    |  |   |         | 38,059  |  
|Other income (expense), net                                 |                                          |          | (36,520 | )       |            |   | 902     |                |  |   | (464         | )       |   |              | (492     | )      |  |   | (36,574 | )      
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Income (loss) before income taxes        |          |         | (19,698 | )          |   |         | 32,519         |  |   |              | (11,510 | ) |              |          | 174    |  |   |         | 1,485   |  
|Income tax benefit (provision)                              |                                          |          | 7,441   |         |            |   | (6,874  | )              |  |   | (1,337       | )       |   |              | (267     | )      |  |   | (1,037  | )      
|Equity in income (loss) of affiliated companies, net of tax |                                          |          | 8,424   |         |            |   | (19,831 | )              |  |   |             |         |   |              | 11,407   |        |  |   |        |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Income (loss) from continuing operations |          |         | (3,833  | )          |   |         | 5,814          |  |   |              | (12,847 | ) |              |          | 11,314 |  |   |         | 448     |  
|Discontinued operations loss, net of tax                    |                                          |          |        |         |            |   |        |                |  |   | 4,373        |         |   |              |         |        |  |   | 4,373   |        
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Net income (loss)                        |          |         | (3,833  | )          |   |         | 5,814          |  |   |              | (17,220 | ) |              |          | 11,314 |  |   |         | (3,925  | )
|Other comprehensive income (loss)                           |                                          |          | 8       |         |            |   |        |                |  |   | (202         | )       |   |              |         |        |  |   | (194    | )      
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         
|                                                            | Comprehensive income (loss)              |          | $       | (3,825  | )          |   | $       | 5,814          |  |   | $            | (17,422 | ) |              | $        | 11,314 |  |   | $       | (4,119  | )
|                                                            |                                          |          |         |         |            |   |         |                |  |   |              |         |   |              |         

F-31



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Balance Sheet


As of December 31, 2003


|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |          |          |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------- | ------- | -------- | ---------- | - | ------ | -------------- | ------ |  | ------------- | ------- | ------ | ------------ | ------- | -------- | ------------ | - | ------- | ------- | ------- | - | ------- | -------- | -------- | -
|                                                                            |                                                                        | Borrower                                             |         |          | Guarantors |   |        | Non-Guarantors |        |  | Consolidating |         |        | Eliminations |         |          | Consolidated |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|ASSETS                                                                     
|Current assets:                                                             |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Cash                                                                   |                                                      | $       | 34,222   |            |   | $      | 176            |        |  | $             | 2,238   |        |              | $       | 36,636   |              |   | $       |        |         |   | $       | 36,636   |         
|                                                                            | Accounts receivable, net                                               |                                                      |         | 10,487   |            |   |        | 5,116          |        |  |               | 6,424   |        |              |         | 22,027   |              |   |         |        |         |   |         | 22,027   |         
|                                                                            | Inventories, net                                                       |                                                      |         | 55,935   |            |   |        | 13,174         |        |  |               | 8,818   |        |              |         | 77,927   |              |   |         | (4,792  | )       |   |         | 73,135   |         
|                                                                            | Other current assets                                                   |                                                      |         | 5,844    |            |   |        | 1,447          |        |  |               | 713     |        |              |         | 8,004    |              |   |         | 1,446   |         |   |         | 9,450    |         
|                                                                            | Due from (due to) affiliated companies                                 |                                                      |         | 508      |            |   |        | 15,782         |        |  |               | (16,290 | )      |              |         |         |              |   |         |        |         |   |         |         |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total current assets                                 |         |          | 106,996    |   |        |                | 35,695 |  |               |         | 1,903  |              |         |          | 144,594      |   |         |         | (3,346  | ) |         |          | 141,248  |  
|Property, plant and equipment, net                                          |                                                                        |                                                      | 43,774  |          |            |   | 19,791 |                |        |  | 11,626        |         |        |              | 75,191  |          |              |   |        |         |         |   | 75,191  |         
|Investment in affiliates                                                    |                                                                        |                                                      | 66,128  |          |            |   | 4,208  |                |        |  |              |         |        |              | 70,336  |          |              |   | (70,336 | )       |         |   |        |         
|Debt issuance costs and other assets, net                                   |                                                                        |                                                      | 4,544   |          |            |   | 13,475 |                |        |  | 1,465         |         |        |              | 19,484  |          |              |   |        |         |         |   | 19,484  |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total assets                                         |         | $        | 221,442    |   |        | $              | 73,169 |  |               | $       | 14,994 |              |         | $        | 309,605      |   |         | $       | (73,682 | ) |         | $        | 235,923  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                           
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                             
|Current liabilities:                                                        |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Accounts payable                                                       |                                                      | $       | 26,135   |            |   | $      | 2,258          |        |  | $             | 1,732   |        |              | $       | 30,125   |              |   | $       | 632     |         |   | $       | 30,757   |         
|                                                                            | Current maturity of related party note payable                         |                                                      |         | 675      |            |   |        |               |        |  |               |        |        |              |         | 675      |              |   |         |        |         |   |         | 675      |         
|                                                                            | Current maturities of long-term debt and capital lease
    obligations |                                                      |         | 10,096   |            |   |        | 3              |        |  |               |        |        |              |         | 10,099   |              |   |         |        |         |   |         | 10,099   |         
|                                                                            | Other current liabilities                                              |                                                      |         | 40,485   |            |   |        | 6,826          |        |  |               | 4,333   |        |              |         | 51,644   |              |   |         |        |         |   |         | 51,644   |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total current liabilities                            |         |          | 77,391     |   |        |                | 9,087  |  |               |         | 6,065  |              |         |          | 92,543       |   |         |         | 632     |   |         |          | 93,175   |  
|Long-term related party note payable, net of current maturity               |                                                                        |                                                      | 687     |          |            |   |       |                |        |  |              |         |        |              | 687     |          |              |   |        |         |         |   | 687     |         
|Long-term debt and capital lease obligations, net of current
    maturities |                                                                        |                                                      | 311,777 |          |            |   |       |                |        |  |              |         |        |              | 311,777 |          |              |   |        |         |         |   | 311,777 |         
|Other liabilities                                                           |                                                                        |                                                      | 18,225  |          |            |   | 2,549  |                |        |  | 892           |         |        |              | 21,666  |          |              |   |        |         |         |   | 21,666  |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total liabilities                                    |         |          | 408,080    |   |        |                | 11,636 |  |               |         | 6,957  |              |         |          | 426,673      |   |         |         | 632     |   |         |          | 427,305  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|Commitments and contingencies (Note 17)                                     |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|Shareholders equity (deficit):                                             |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Preferred stock                                                        |                                                      |         | 94,196   |            |   |        |               |        |  |               |        |        |              |         | 94,196   |              |   |         |        |         |   |         | 94,196   |         
|                                                                            | Common stock                                                           |                                                      |         | 1,524    |            |   |        | 1,001          |        |  |               | 29      |        |              |         | 2,554    |              |   |         | (1,030  | )       |   |         | 1,524    |         
|                                                                            | Additional paid-in capital                                             |                                                      |         | 185,036  |            |   |        | 3,031          |        |  |               | 12,331  |        |              |         | 200,398  |              |   |         | (15,362 | )       |   |         | 185,036  |         
|                                                                            | Retained earnings (accumulated deficit)                                |                                                      |         | (467,391 | )          |   |        | 57,501         |        |  |               | (3,558  | )      |              |         | (413,448 | )            |   |         | (57,922 | )       |   |         | (471,370 | )       
|                                                                            | Accumulated other comprehensive income (loss)                          |                                                      |         | (3       | )          |   |        |               |        |  |               | (765    | )      |              |         | (768     | )            |   |         |        |         |   |         | (768     | )       
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total shareholders equity (deficit)                 |         |          | (186,638   | ) |        |                | 61,533 |  |               |         | 8,037  |              |         |          | (117,068     | ) |         |         | (74,314 | ) |         |          | (191,382 | )
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total liabilities and shareholders equity (deficit) |         | $        | 221,442    |   |        | $              | 73,169 |  |               | $       | 14,994 |              |         | $        | 309,605      |   |         | $       | (73,682 | ) |         | $        | 235,923  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  

F-32



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Balance Sheet


As of December 31, 2004


|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |          |          |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------- | ------- | -------- | ---------- | - | ------ | -------------- | ------ |  | ------------- | ------- | ------ | ------------ | ------- | -------- | ------------ | - | ------- | ------- | ------- | - | ------- | -------- | -------- | -
|                                                                            |                                                                        | Borrower                                             |         |          | Guarantors |   |        | Non-Guarantors |        |  | Consolidating |         |        | Eliminations |         |          | Consolidated |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|ASSETS                                                                     
|Current assets:                                                             |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Cash                                                                   |                                                      | $       | 27,177   |            |   | $      | 46             |        |  | $             | 597     |        |              | $       | 27,820   |              |   | $       |        |         |   | $       | 27,820   |         
|                                                                            | Accounts receivable, net                                               |                                                      |         | 13,290   |            |   |        | 7,860          |        |  |               | 4,931   |        |              |         | 26,081   |              |   |         |        |         |   |         | 26,081   |         
|                                                                            | Inventories, net                                                       |                                                      |         | 53,313   |            |   |        | 15,538         |        |  |               | 7,567   |        |              |         | 76,418   |              |   |         | (4,617  | )       |   |         | 71,801   |         
|                                                                            | Other current assets                                                   |                                                      |         | 5,203    |            |   |        | 1,810          |        |  |               | 3,427   |        |              |         | 10,440   |              |   |         | 1,178   |         |   |         | 11,618   |         
|                                                                            | Due from (due to) affiliated companies                                 |                                                      |         | (8,358   | )          |   |        | 22,358         |        |  |               | (14,000 | )      |              |         |         |              |   |         |        |         |   |         |         |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total current assets                                 |         |          | 90,625     |   |        |                | 47,612 |  |               |         | 2,522  |              |         |          | 140,759      |   |         |         | (3,439  | ) |         |          | 137,320  |  
|Property, plant and equipment, net                                          |                                                                        |                                                      | 41,252  |          |            |   | 19,037 |                |        |  | 6,177         |         |        |              | 66,466  |          |              |   |        |         |         |   | 66,466  |         
|Investment in subsidiaries                                                  |                                                                        |                                                      | 66,248  |          |            |   | (7,449 | )              |        |  |              |         |        |              | 58,799  |          |              |   | (58,799 | )       |         |   |        |         
|Debt issuance costs and other assets, net                                   |                                                                        |                                                      | 11,431  |          |            |   | 13,868 |                |        |  | 183           |         |        |              | 25,482  |          |              |   |        |         |         |   | 25,482  |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total assets                                         |         | $        | 209,556    |   |        | $              | 73,068 |  |               | $       | 8,882  |              |         | $        | 291,506      |   |         | $       | (62,238 | ) |         | $        | 229,268  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                             
|Current liabilities:                                                        |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Accounts payable                                                       |                                                      | $       | 21,111   |            |   | $      | 3,594          |        |  | $             | 819     |        |              | $       | 25,524   |              |   | $       | 632     |         |   | $       | 26,156   |         
|                                                                            | Current maturity of related party note payable                         |                                                      |         | 687      |            |   |        |               |        |  |               |        |        |              |         | 687      |              |   |         |        |         |   |         | 687      |         
|                                                                            | Current maturities of long-term debt and capital lease
    obligations |                                                      |         | 15,129   |            |   |        | 232            |        |  |               | 189     |        |              |         | 15,550   |              |   |         |        |         |   |         | 15,550   |         
|                                                                            | Other current liabilities                                              |                                                      |         | 42,682   |            |   |        | 6,519          |        |  |               | 8,598   |        |              |         | 57,799   |              |   |         |        |         |   |         | 57,799   |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total current liabilities                            |         |          | 79,609     |   |        |                | 10,345 |  |               |         | 9,606  |              |         |          | 99,560       |   |         |         | 632     |   |         |          | 100,192  |  
|Long-term related party note payable, net of current maturity               |                                                                        |                                                      |        |          |            |   |       |                |        |  |              |         |        |              |        |          |              |   |        |         |         |   |        |         
|Long-term debt and capital lease obligations, net of current
    maturities |                                                                        |                                                      | 449,784 |          |            |   | 248    |                |        |  | 293           |         |        |              | 450,325 |          |              |   |        |         |         |   | 450,325 |         
|Other liabilities                                                           |                                                                        |                                                      | 5,798   |          |            |   | 3,430  |                |        |  | 195           |         |        |              | 9,423   |          |              |   |        |         |         |   | 9,423   |         
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total liabilities                                    |         |          | 535,191    |   |        |                | 14,023 |  |               |         | 10,094 |              |         |          | 559,308      |   |         |         | 632     |   |         |          | 559,940  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|Commitments and contingencies (Note 17)                                     |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|Shareholders equity (deficit):                                             |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |   |         |         |         |   |         |         
|                                                                            | Preferred stock                                                        |                                                      |         |         |            |   |        |               |        |  |               |        |        |              |         |         |              |   |         |        |         |   |         |         |         
|                                                                            | Common stock                                                           |                                                      |         | 1,524    |            |   |        | 1,001          |        |  |               | 29      |        |              |         | 2,554    |              |   |         | (1,030  | )       |   |         | 1,524    |         
|                                                                            | Additional paid-in capital                                             |                                                      |         | 144,061  |            |   |        | 58,830         |        |  |               | 20,504  |        |              |         | 223,395  |              |   |         | (79,334 | )       |   |         | 144,061  |         
|                                                                            | Retained earnings (accumulated deficit)                                |                                                      |         | (471,224 | )          |   |        | (786           | )      |  |               | (20,779 | )      |              |         | (492,789 | )            |   |         | 17,494  |         |   |         | (475,295 | )       
|                                                                            | Accumulated comprehensive income (loss)                                |                                                      |         | 4        |            |   |        |               |        |  |               | (966    | )      |              |         | (962     | )            |   |         |        |         |   |         | (962     | )       
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total shareholders equity (deficit)                 |         |          | (325,635   | ) |        |                | 59,045 |  |               |         | (1,212 | )            |         |          | (267,802     | ) |         |         | (62,870 | ) |         |          | (330,672 | )
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  
|                                                                            |                                                                        | Total liabilities and shareholders equity (deficit) |         | $        | 209,556    |   |        | $              | 73,068 |  |               | $       | 8,882  |              |         | $        | 291,506      |   |         | $       | (62,238 | ) |         | $        | 229,268  |  
|                                                                            |                                                                        |                                                      |         |          |            |   |        |                |        |  |               |         |        |              |         |          |              |  

F-33



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Cash Flow Statement


|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |   |   |   |   |        |         |         |  
|----------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------ | ------- | ---------- | - | ----- | -------------- | ------ | - | ------------ | ---- | ------------ | - | - | - | - | - | ------ | ------- | ------- | -
|                                          |                                                                        | For the Year Ended December 31, 2002      |       
|                                          |                                                                        |                                           |       
|                                          |                                                                        | Borrower                                  |        |         | Guarantors |   |       | Non-Guarantors |        |   | Eliminations |      | Consolidated |  
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |  
|Net cash provided by operating activities |                                                                        | $                                         | 40,965 |         |            | $ | 2,490 |                |        | $ | 768          |      |              | $ |  |   |   | $ | 44,223 |        
|Cash flows from investing activities:     |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |   |   |   |   |        |        
|                                          | Purchases of property, plant and equipment                             |                                           |        | (11,194 | )          |   |       | (2,901         | )      |   |              | (73  | )            |   |   |  |   |   |        | (14,168 | )      
|                                          | Payment for acquisition, net of cash acquired                          |                                           |        | (192    | )          |   |       |               |        |   |              |     |              |   |   |  |   |   |        | (192    | )      
|                                          | Proceeds from the sale of property, plant and equipment, and
    other |                                           |        | 564     |            |   |       |               |        |   |              |     |              |   |   |  |   |   |        | 564     |        
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|                                          |                                                                        | Net cash used in investing activities     |        |         | (10,822    | ) |       |                | (2,901 | ) |              |      | (73          | ) |   |   |  |   |        |         | (13,796 | )
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|Cash flows from financing activities      |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |   |   |   |   |        |        
|                                          | Cash overdraft.                                                        |                                           |        | (130    | )          |   |       | 590            |        |   |              |     |              |   |   |  |   |   |        | 460     |        
|                                          | Payments of principal under capital lease obligations                  |                                           |        | (1,531  | )          |   |       |               |        |   |              |     |              |   |   |  |   |   |        | (1,531  | )      
|                                          | Payments of principal under Senior Credit Facility                     |                                           |        | (9,170  | )          |   |       |               |        |   |              |     |              |   |   |  |   |   |        | (9,170  | )      
|                                          | Proceeds from borrowings under Senior Credit Facility                  |                                           |        | 35,000  |            |   |       |               |        |   |              |     |              |   |   |  |   |   |        | 35,000  |        
|                                          | Debt issuance costs                                                    |                                           |        | (4,160  | )          |   |       |               |        |   |              |     |              |   |   |  |   |   |        | (4,160  | )      
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|                                          |                                                                        | Net cash provided by financing activities |        |         | 20,009     |   |       |                | 590    |   |              |      |             |   |   |   |  |   |        |         | 20,599  |  
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|                                          | Effect of cumulative translation adjustment                            |                                           |        | 11      |            |   |       |               |        |   |              | (173 | )            |   |   |  |   |   |        | (162    | )      
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|Net increase in cash                      |                                                                        |                                           | 50,163 |         |            |   | 179   |                |        |   | 522          |      |              |   |  |   |   |   | 50,864 |        
|Cash at beginning of year                 |                                                                        |                                           | 16,612 |         |            |   | 138   |                |        |   | 497          |      |              |   |  |   |   |   | 17,247 |        
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  
|Cash at end of year                       |                                                                        | $                                         | 66,775 |         |            | $ | 317   |                |        | $ | 1,019        |      |              | $ |  |   |   | $ | 68,111 |        
|                                          |                                                                        |                                           |        |         |            |   |       |                |        |   |              |      |              |   |  

F-34



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Cash Flow Statement


|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |   |   |   |   |         |         |         |  
|--------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ------- | ------- | ---------- | - | ------ | -------------- | ------- | - | ------------ | ------ | ------------ | - | - | - | - | - | ------- | ------- | ------- | -
|                                                    |                                                         | For the Year Ended December 31, 2003                |        
|                                                    |                                                         |                                                     |        
|                                                    |                                                         | Borrower                                            |         |         | Guarantors |   |        | Non-Guarantors |         |   | Eliminations |        | Consolidated |  
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |  
|Net cash provided by (used in) operating activities |                                                         | $                                                   | (2,707  | )       |            | $ | 15,381 |                |         | $ | 4,850        |        |              | $ |  |   |   | $ | 17,524  |        
|Cash flows from investing activities:               |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |   |   |   |   |         |        
|                                                    | Purchases of property, plant and equipment              |                                                     |         | (6,886  | )          |   |        | (4,275         | )       |   |              | (3,400 | )            |   |   |  |   |   |         | (14,561 | )      
|                                                    | Payment for acquisition, net of cash acquired           |                                                     |         | (1,798  | )          |   |        | (11,676        | )       |   |              |       |              |   |   |  |   |   |         | (13,474 | )      
|                                                    | Proceeds from the sale of property, plant and equipment |                                                     |         | 581     |            |   |        | 12             |         |   |              | 4      |              |   |   |  |   |   |         | 597     |        
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|                                                    |                                                         | Net cash used in investing activities               |         |         | (8,103     | ) |        |                | (15,939 | ) |              |        | (3,396       | ) |   |   |  |   |         |         | (27,438 | )
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|Cash flows from financing activities                |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |   |   |   |   |         |        
|                                                    | Cash overdraft                                          |                                                     |         | (249    | )          |   |        | 1,167          |         |   |              |       |              |   |   |  |   |   |         | 918     |        
|                                                    | Payments of principal under capital lease obligations   |                                                     |         | (1,810  | )          |   |        |               |         |   |              |       |              |   |   |  |   |   |         | (1,810  | )      
|                                                    | Payments of principal under Senior Credit Facility      |                                                     |         | (19,007 | )          |   |        |               |         |   |              |       |              |   |   |  |   |   |         | (19,007 | )      
|                                                    | Payment of principal of other bank debt                 |                                                     |         |        |            |   |        | (750           | )       |   |              |       |              |   |   |  |   |   |         | (750    | )      
|                                                    | Payment of principal of related party note payable      |                                                     |         | (663    | )          |   |        |               |         |   |              |       |              |   |   |  |   |   |         | (663    | )      
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|                                                    |                                                         | Net cash provided by (used in) financing activities |         |         | (21,729    | ) |        |                | 417     |   |              |        |             |   |   |   |  |   |         |         | (21,312 | )
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|                                                    | Effect of cumulative translation adjustment             |                                                     |         | (14     | )          |   |        |               |         |   |              | (235   | )            |   |   |  |   |   |         | (249    | )      
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|Net increase (decrease) in cash                     |                                                         |                                                     | (32,553 | )       |            |   | (141   | )              |         |   | 1,219        |        |              |   |  |   |   |   | (31,475 | )      
|Cash at beginning of year                           |                                                         |                                                     | 66,775  |         |            |   | 317    |                |         |   | 1,019        |        |              |   |  |   |   |   | 68,111  |        
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  
|Cash at end of year                                 |                                                         | $                                                   | 34,222  |         |            | $ | 176    |                |         | $ | 2,238        |        |              | $ |  |   |   | $ | 36,636  |        
|                                                    |                                                         |                                                     |         |         |            |   |        |                |         |   |              |        |              |   |  

F-35



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


Condensed Consolidating Cash Flow Statement


|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |   |   |   |   |         |          |        |  
|------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------ | -------- | ---------- | - | ------ | -------------- | ---- | - | ------------ | ------ | ------------ | - | - | - | - | - | ------- | -------- | ------ | -
|                                                        |                                                           | For the Year Ended December 31, 2004  |       
|                                                        |                                                           |                                       |       
|                                                        |                                                           | Borrower                              |        |          | Guarantors |   |        | Non-Guarantors |      |   | Eliminations |        | Consolidated |  
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |  
|Net cash provided by operating activities               |                                                           | $                                     | 7,027  |          |            | $ | 3,330  |                |      | $ | 2,119        |        |              | $ |  |   |   | $ | 12,476  |         
|Cash flows from investing activities:                   |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |   |   |   |   |         |         
|Purchases of property, plant and equipment              |                                                           |                                       | (7,331 | )        |            |   | (2,601 | )              |      |   | (3,690       | )      |              |   |  |   |   |   | (13,622 | )       
|Proceeds from the sale of property, plant and equipment |                                                           |                                       | 543    |          |            |   | 6      |                |      |   | 231          |        |              |   |  |   |   |   | 780     |         
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|                                                        | Net cash used in investing activities                     |                                       |        | (6,788   | )          |   |        | (2,595         | )    |   |              | (3,459 | )            |   |   |  |   |   |         | (12,842  | )     
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|Cash flows from financing activities:                   |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |   |   |   |   |         |         
|                                                        | Book overdraft.                                           |                                       |        | 568      |            |   |        | (643           | )    |   |              |       |              |   |   |  |   |   |         | (75      | )     
|                                                        | Payments of principal under capital lease obligations     |                                       |        | (1,320   | )          |   |        | (222           | )    |   |              | (99    | )            |   |   |  |   |   |         | (1,641   | )     
|                                                        | Payments of principal under Senior Credit Facility        |                                       |        | (168,681 | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (168,681 | )     
|                                                        | Proceeds from borrowings under New Senior Credit Facility |                                       |        | 320,000  |            |   |        |               |      |   |              |       |              |   |   |  |   |   |         | 320,000  |       
|                                                        | Payment of principal of related party note payable        |                                       |        | (675     | )          |   |        |                |      |   |              |        |              |   |   |   |   |   |         | (675     | )     
|                                                        | Debt issuance costs                                       |                                       |        | (10,385  | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (10,385  | )     
|                                                        | Payment of preferred stock repurchase                     |                                       |        | (109,459 | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (109,459 | )     
|                                                        | Payment of preferred stock dividends                      |                                       |        | (29,541  | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (29,541  | )     
|                                                        | Payment of principal under New Senior Credit Facility     |                                       |        | (7,500   | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (7,500   | )     
|                                                        | Preferred stock repurchase costs                          |                                       |        | (299     | )          |   |        |               |      |   |              |       |              |   |   |  |   |   |         | (299     | )     
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|                                                        |                                                           | Net cash used in financing activities |        |          | (7,292     | ) |        |                | (865 | ) |              |        | (99          | ) |   |   |  |   |         |          | (8,256 | )
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|                                                        | Effect of cumulative translation adjustment               |                                       |        | 8        |            |   |        |               |      |   |              | (202   | )            |   |   |  |   |   |         | (194     | )     
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|Net decrease in cash                                    |                                                           |                                       | (7,045 | )        |            |   | (130   | )              |      |   | (1,641       | )      |              |   |  |   |   |   | (8,816  | )       
|Cash at beginning of year                               |                                                           |                                       | 34,222 |          |            |   | 176    |                |      |   | 2,238        |        |              |   |  |   |   |   | 36,636  |         
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  
|Cash at end of year                                     |                                                           | $                                     | 27,177 |          |            | $ | 46     |                |      | $ | 597          |        |              | $ |  |   |   | $ | 27,820  |         
|                                                        |                                                           |                                       |        |          |            |   |        |                |      |   |              |        |              |   |  

F-36



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|    |                              
|--- | -----------------------------
|20. | Quarterly Results (unaudited)



|                                  |  |          |         |  |         |   |         |              |  |   |             |  |  |       |         |  |  |   |         | 
|--------------------------------- |  | -------- | ------- |  | ------- | - | ------- | ------------ |  | - | ----------- |  |  | ----- | ------- |  |  | - | ------- | 
|                                  |  | March 31 |         |  | June 30 |   |         | September 30 |  |   | December 31 |  |  | Total |        
|                                  |  |          |         |  |         |   |         |              |  |   |             |  |  |       |        
|Net sales                         |  | $        | 118,020 |  |         | $ | 146,704 |              |  | $ | 125,673     |  |  | $     | 184,102 |  |  | $ | 574,499 | 
|Gross profit                      |  |          | 66,548  |  |         |   | 84,063  |              |  |   | 69,673      |  |  |       | 102,467 |  |  |   | 322,751 | 
|Operating income                  |  |          | 19,554  |  |         |   | 26,426  |              |  |   | 10,109      |  |  |       | 28,686  |  |  |   | 84,775  | 
|Income from continuing operations |  |          | 8,189   |  |         |   | 11,142  |              |  |   | 2,381       |  |  |       | 13,936  |  |  |   | 35,648  | 
|Net income                        |  |          | 8,189   |  |         |   | 11,142  |              |  |   | 2,381       |  |  |       | 13,936  |  |  |   | 35,648  | 



|                                  |  |          |         |  |         |   |         |              |  |   |             |  |  |       |         |  |  |   |         | 
|--------------------------------- |  | -------- | ------- |  | ------- | - | ------- | ------------ |  | - | ----------- |  |  | ----- | ------- |  |  | - | ------- | 
|                                  |  | March 31 |         |  | June 30 |   |         | September 30 |  |   | December 31 |  |  | Total |        
|                                  |  |          |         |  |         |   |         |              |  |   |             |  |  |       |        
|Net sales                         |  | $        | 125,966 |  |         | $ | 150,818 |              |  | $ | 146,629     |  |  | $     | 192,070 |  |  | $ | 615,483 | 
|Gross profit                      |  |          | 71,584  |  |         |   | 84,933  |              |  |   | 70,705      |  |  |       | 102,851 |  |  |   | 330,073 | 
|Operating income                  |  |          | 19,022  |  |         |   | 22,743  |              |  |   | 5,972       |  |  |       | 31,475  |  |  |   | 79,212  | 
|Income from continuing operations |  |          | 7,550   |  |         |   | 10,430  |              |  |   | 2,386       |  |  |       | 13,799  |  |  |   | 34,165  | 
|Net income                        |  |          | 7,233   |  |         |   | 9,853   |              |  |   | 2,126       |  |  |       | 13,149  |  |  |   | 32,361  | 



|                                         |  |          |         |  |         |   |         |              |  |   |             |   |  |       |         |  |  |   |         |  
|---------------------------------------- |  | -------- | ------- |  | ------- | - | ------- | ------------ |  | - | ----------- | - |  | ----- | ------- |  |  | - | ------- | -
|                                         |  | March 31 |         |  | June 30 |   |         | September 30 |  |   | December 31 |   |  | Total |        
|                                         |  |          |         |  |         |   |         |              |  |   |             |   |  |       |        
|Net sales                                |  | $        | 130,916 |  |         | $ | 132,875 |              |  | $ | 123,675     |   |  | $     | 162,345 |  |  | $ | 549,811 |  
|Gross profit                             |  |          | 72,347  |  |         |   | 71,640  |              |  |   | 62,937      |   |  |       | 83,812  |  |  |   | 290,736 |  
|Operating income                         |  |          | 8,745   |  |         |   | 6,772   |              |  |   | 8,088       |   |  |       | 14,454  |  |  |   | 38,059  |  
|Income (loss) from continuing operations |  |          | 1,345   |  |         |   | (520    | )            |  |   | (956        | ) |  |       | 579     |  |  |   | 448     |  
|Net income (loss)                        |  |          | 898     |  |         |   | (3,781  | )            |  |   | (1,146      | ) |  |       | 104     |  |  |   | (3,925  | )



|    |                                     
|--- | ------------------------------------
|21. | Recently Issued Accounting Standards





F-37



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)












F-38



---



##### 



HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES


SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS


|                                 |                              |                        |  |       |                    |  |  |                  |  |  |               |   |            |               |  |        |   |  |  |       | 
|-------------------------------- | ---------------------------- | ---------------------- |  | ----- | ------------------ |  |  | ---------------- |  |  | ------------- | - | ---------- | ------------- |  | ------ | - |  |  | ----- | 
|Column A                         |                              | Column B               |  |       | Column C Additions |  |  | Column D         |  |  | Column E      |  
|                                 |                              |                        |  |       |                    |  |  |                  |  |  |               |  
|                                 |                              | Balance at             |  |       | Charged to         |  |  |                  |  |  |               |  
|                                 |                              | Beginning of           |  |       | Costs and          |  |  | Charged to Other |  |  |               |   | Balance at |              
|                                 |                              | Period                 |  |       | Expenses(1)        |  |  | Accounts(2)      |  |  | Deductions(3) |   |            | End of Period | 
|                                 |                              |                        |  |       |                    |  |  |                  |  |  |               |   |            |               | 
|                                 |                              | (Amounts in thousands) | 
|Allowance for doubtful accounts: |                              |                        |  |       |                    |  |  |                  |  |  |               |   |            |               |  |        |   |  |  |      
|                                 | Year ended December 31, 2002 |                        |  | 2,014 |                    |  |  | 2,370            |  |  |               |  |            |               |  | (2,096 | ) |  |  | 2,288 | 
|                                 | Year ended December 31, 2003 |                        |  | 2,288 |                    |  |  | 3,134            |  |  |               |  |            |               |  | (2,978 | ) |  |  | 2,444 | 
|                                 | Year ended December 31, 2004 |                        |  | 2,444 |                    |  |  | 3,222            |  |  |               |  |            |               |  | (2,890 | ) |  |  | 2,776 | 






|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Represents provision for losses on accounts receivable.   
|   
|(2) | Represents collection of accounts previously written off. 
|   
|(3) | Represents write-off of uncollectable accounts receivable.

|                    |                              |                        |  |       |                    |  |  |                  |   |  |               |   |            |               |  |        |   |  |  |       | 
|------------------- | ---------------------------- | ---------------------- |  | ----- | ------------------ |  |  | ---------------- | - |  | ------------- | - | ---------- | ------------- |  | ------ | - |  |  | ----- | 
|Column A            |                              | Column B               |  |       | Column C Additions |  |  | Column D         |   |  | Column E      |  
|                    |                              |                        |  |       |                    |  |  |                  |   |  |               |  
|                    |                              | Balance at             |  |       | Charged to         |  |  |                  |   |  |               |  
|                    |                              | Beginning of           |  |       | Costs and          |  |  | Charged to Other |   |  |               |   | Balance at |              
|                    |                              | Period                 |  |       | Expenses(A)        |  |  | Accounts         |   |  | Deductions(B) |   |            | End of Period | 
|                    |                              |                        |  |       |                    |  |  |                  |   |  |               |   |            |               | 
|                    |                              | (Amounts in thousands) | 
|Inventory Reserves: |                              |                        |  |       |                    |  |  |                  |   |  |               |   |            |               |  |        |   |  |  |      
|                    | Year ended December 31, 2002 |                        |  | 4,522 |                    |  |  | 6,720            |   |  |               |  |            |               |  | (3,226 | ) |  |  | 8,016 | 
|                    | Year ended December 31, 2003 |                        |  | 8,016 |                    |  |  | (606             | ) |  |               |  |            |               |  | (2,511 | ) |  |  | 4,899 | 
|                    | Year ended December 31, 2004 |                        |  | 4,899 |                    |  |  | 2,205            |   |  |               |  |            |               |  | (931   | ) |  |  | 6,173 | 






|    |  |                                                                                 
|--- |  | --------------------------------------------------------------------------------
|(A) |  | Represents provisions for losses.                                               
|   
|(B) |  | Represents write-offs or reserve utilization as a result of
    inventory sales.

F-39



---



##### 



INDEX TO EXHIBITS


|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 2  | .1   |  |            |  | Agreement and Plan of Merger, dated April 13, 1998, merging
    Crowley Investments, Inc. into the Company (incorporated by
    reference to Exhibit 2.1 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                           
|        | 2  | .2   |  |            |  | Articles of Merger, dated June 4, 1998 (incorporated by
    reference to Exhibit 2.2 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                               
|        | 3  | .1   |  |            |  | Articles of Incorporation of the Company (incorporated by
    reference to Exhibit 3.1 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                             
|        | 3  | .2   |  |            |  | Bylaws of the Company (incorporated by reference to
    Exhibit 3.2 of the Companys Registration Statement on
    Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                
|        | 4  | .1   |  |            |  | Indenture, dated as of June 4, 1998, among the Company, as
    issuer, the Guarantors named therein and United States Trust
    Company of New York (incorporated by reference to
    Exhibit 4.1 of the Companys Registration Statement on
    Form S-4, No. 333-62021).                                                                                                                                                                  
|        | 4  | .2   |  |            |  | First Supplemental Indenture dated as of July 3, 2000 among
    Home Interiors & Gifts, Inc., Laredo Candle Company,
    L.L.P. and United States Trust Company of New York (incorporated
    by reference to Exhibit 10.6 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on
    August 14, 2000).                                                                                                                
|        | 4  | .3   |  |            |  | Second Supplemental Indenture dated as of December 31, 2002
    among Home Interiors & Gifts, Inc., Brenda
    Buell & Associates, Inc. and The Bank of New York, as
    successor in interest to the corporate trust business of United
    States Trust Company of New York, as Successor Trustee
    (incorporated by reference to Exhibit 4.4 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).
|        | 4  | .4   |  |            |  | Third Supplemental Indenture dated as of March 14, 2003
    among Home Interiors & Gifts, Inc., EM Boehm, Inc. and
    The Bank of New York, as successor in interest to the corporate
    trust business of United States Trust Company of New York, as
    Successor Trustee (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on
    Form 10-Q, No. 333-62021, filed on May 12, 2003).                    
|        | 10 | .1   |  |            |  | Financial Advisory Agreement, dated June 4, 1998, between
    the Company, Dallas Woodcraft, Inc., GIA, Inc., Homco, Inc.,
    Homco Puerto Rico, Inc., Spring Valley Scents, Inc., Homco de
    Mexico, S.A. de C.V., and Hicks, Muse & Co. Partners,
    L.P. (incorporated by reference to Exhibit 10.2 of the
    Companys Registration Statement on Form S-4,
    No. 333-62021).                                                     
|        | 10 | .1.1 |  |            |  | First Amendment to Financial Advisory Agreement dated as of
    March 30, 2001, between the Company, Dallas Woodcraft, Inc,
    GIA, Inc., Homco, Inc., Homco Puerto Rico, Inc., Spring Valley
    Scents, Inc., Homco de Mexico, S.A. de C.V., and Hicks,
    Muse & Co. Partners, L.P. (incorporated by reference to
    Exhibit 10.2.1 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed April 4, 2001).             
|        | 10 | .2   |  |            |  | Monitoring and Oversight Agreement, dated June 4, 1998
    between the Company, Dallas Woodcraft, Inc., GIA, Inc., Homco,
    Inc., Homco Puerto Rico, Inc., Spring Valley Scents, Inc., Homco
    de Mexico, S.A. de C.V., and Hicks, Muse & Co.
    Partners, L.P. (incorporated by reference to Exhibit 10.3
    of the Companys Registration Statement on Form S-4,
    No. 333- 62021).                                               
|        | 10 | .2.1 |  |            |  | First Amendment to Monitoring and Oversight Agreement dated as
    of March 30, 2001, between the Company, Dallas Woodcraft,
    Inc, GIA, Inc., Homco, Inc., Homco Puerto Rico, Inc., Spring
    Valley Scents, Inc., Homco de Mexico, S.A. de C.V., and Hicks,
    Muse & Co. Partners, L.P. (incorporated by reference to
    Exhibit 10.3.1 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed April 4, 2001).       
|        | 10 | .3   |  |            |  | Home Interiors & Gifts, Inc. 1998 Stock Option Plan for
    Key Employees, dated June 4, 1998 (incorporated by
    reference to Exhibit 10.5 of the Companys Annual
    Report on Form 10-K, No. 333-62021, filed March 16,
    1999).                                                                                                                                                                                                     
|        | 10 | .4   |  |            |  | Executive Employment Agreement, dated June 4, 1998, between
    the Company and Christina L. Carter Urschel (incorporated by
    reference to Exhibit 10.9 of the Companys
    Registration Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                         



---



##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .5    |  |  |             | Second Amended and Restated Employment Agreement, dated
    December 26, 2001 between Christina L. Carter Urschel and
    the Company. (incorporated by reference to Exhibit 10.7.1
    of the Companys Annual Report on Form 10-K,
    No. 333-62021 filed March 26, 2002).                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .6    |  |  |             | Home Interiors & Gifts, Inc., 1998 Stock Option Plan
    for Unit Directors, Branch Directors and Certain Other
    Independent Contractors (incorporated by reference to
    Exhibit 10.10 of the Companys Registration Statement
    on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .7    |  |  |             | Home Interiors & Gifts, Inc. 1998 Stock Option Trust,
    dated June 4, 1998 (incorporated by reference to
    Exhibit 10.11 of the Companys Registration Statement
    on Form S-4, No. 333- 62021).                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .8    |  |  |             | Agreement, dated February 26, 1997, by and between the
    Company and Distribution Architects International, Inc.
    (incorporated by reference to Exhibit 10.12 of the
    Companys Registration Statement on Form S-4,
    No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .9    |  |  |             | Shareholders Agreement, as of June 4, 1998 between the
    Company, Adkins Family Partnership, LTD., M. Douglas Adkins,
    Estate of Fern Ardinger, Ardinger Family Partnership, LTD.,
    Donald J. Carter, Jr., Linda J. Carter, Ronald Lee Carter,
    Donald J. Carter, William J. Hendrix, as Independent Special
    Trustee of the Carter 1997 Charitable Remainder Unit Trust,
    Howard L. Hammond and Barbara J. Hammond, Trustees of the
    Hammond Family Trust and Christina Carter Urschel (incorporated
    by reference to Exhibit 10.14 of the Companys
    Registration Statement on Form S-4, No. 333-62021).
|        | 10 | .10   |  |  |             | Granite Tower at the Centre Office Lease dated August 17,
    1999, between 520 Partners, Ltd. and the Company (incorporated
    by reference to Exhibit 10.22 of the Companys Annual
    Report on Form 10-K, No. 333-62021, filed March 14,
    2000).                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .11   |  |  |             | Amended and Restated Employment Agreement, dated
    November 10, 2000, between Kenneth J. Cichocki and the
    Company (incorporated by reference to Exhibit 10.27.1 of
    the Companys Annual Report on Form 10-K,
    No. 333-62021, filed April 4, 2001).                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .11.1 |  |  |             | Second Amended and Restated Employment Agreement, dated
    November 1, 2001, between Kenneth J. Cichocki and the
    Company (incorporated by reference to Exhibit 10.15.1 of
    the Companys Annual Report on Form 10-K,
    No. 333-62021, filed March 26, 2002).                                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .11.2 |  |  |             | Amendment to Second Amended and Restated Employment Agreement
    between Kenneth J. Cichocki and the Company, entered into as of
    November 15, 2002 and effective as of November 1, 2002
    (incorporated by reference to Exhibit 10.15.2 of the
    Companys Annual Report on Form 10-K,
    No. 333-62021, filed March 14, 2003).                                                                                                                                                                                                                                                                                           
|        | 10 | .11.3 |  |  |             | Letter of Agreement dated March 4, 2005, between Home
    Interiors & Gifts, Inc. and Kenneth J. Cichocki
    (incorporated by reference to Exhibit 10.1 of the
    Companys Current Report on Form 8-K, No. 333-62021,
    filed March 10, 2005).                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .12   |  |  |             | Lease Schedule No. 1000101377, dated May 5, 2000,
    between the Company and Banc One Leasing Corporation.
    (incorporated by reference to Exhibit 10.32 of the
    Companys Annual Report on Form 10-K, No. 333-62021
    filed on March 14, 2000).                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .13   |  |  |             | Industrial Lease dated August 10, 2000 between Parker
    Metropolitan, L.P. and Home Interiors & Gifts, Inc.
    (for building and facilities located in Coppell, Texas)
    (incorporated by reference to Exhibit 10.8 of the
    Companys Quarterly Report on Form 10-Q,
    No. 333-62021, filed on August 14, 2000).                                                                                                                                                                                                                                                                                                          
|        | 10 | .14   |  |  |             | Master Lease Agreement dated as of December 30, 1999
    between Bank One Leasing Corporation and Home
    Interiors & Gifts, Inc. (incorporated by reference to
    Exhibit 10.9 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed on August 14, 2000).                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .15   |  |  |             | Commercial lease dated May 21, 2002, between H.T.
    Ardinger & Son, co. and the Company (for building and
    facilities located in Carrollton, Texas) (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021, filed August 13,
    2002).                                                                                                                                                                                                                                                                                                                              
|        | 10 | .16   |  |  |             | Lease Agreement dated April 10, 2002, between GSG, S.A. de
    S.V. and Home Interiors de Mexico S. de R.L. de C.V. (for
    building and facilities located in San Nicolas de Los
    Garza, Mexico) (incorporated by reference to Exhibit 10.2
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed August 13, 2002).                                                                                                                                                                                                                                                                                      



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##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .17   |  |  |             | Consulting Agreement dated July 15, 2002, between PWC
    Consulting and the Company (incorporated by reference to
    Exhibit 10.3 of the Companys Quarterly Reporting Form
    10-Q, No. 333-62021 filed August 13, 2002).                                                                                                                                                 
|        | 10 | .18   |  |  |             | Multi-Tenant Industrial Net Lease dated July 29, 2002,
    between CalWest Industrial Holdings Texas, L.P. and the Company
    (incorporated by reference to Exhibit 10.4 of the
    Companys Quarterly Reporting Form 10-Q, No. 333-62021
    filed August 13, 2002).                                                                                                       
|        | 10 | .19   |  |  |             | Home Interiors & Gifts, Inc. 2002 Stock Option Plan for
    Key Employees dated August 14, 2002 (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002).                                                                                                                                
|        | 10 | .20   |  |  |             | Home Interiors & Gifts, Inc. 2002 Form of Tier 1
    Option Agreement (incorporated by reference to Exhibit 10.2
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed November 12, 2002).                                                                                                                                                              
|        | 10 | .20.1 |  |  |             | Form of Amendment, dated November 11, 2004, to Tier 1
    and Tier 2 Option Agreements under the Home
    Interiors & Gifts 2002 Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021 filed
    November 15, 2004).                                                                             
|        | 10 | .21   |  |  |             | Home Interiors & Gifts, Inc. 2002 Form of Tier 2
    Option Agreement (incorporated by reference to Exhibit 10.3
    of the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021 filed November 12, 2002).                                                                                                                                                              
|        | 10 | .21.1 |  |  |             | Form of Amendment, dated November 11, 2004, to Tier 1
    and Tier 2 Option Agreements under the Home
    Interiors & Gifts 2002 Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021 filed
    November 15, 2004).                                                                             
|        | 10 | .22   |  |  |             | Industrial real estate lease dated September 13, 2002
    between Argent Frankford, L.P. and the Company (incorporated by
    reference to Exhibit 10.4 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002).                                                                                                                       
|        | 10 | .23   |  |  |             | Commercial lease dated August 15, 2002 between H.T.
    Ardinger & Son, Co. and the Company (for building and
    facilities located in Carrollton, Texas) (incorporated by
    reference to Exhibit 10.5 of the Companys Quarterly
    Reporting Form 10-Q, No. 333-62021 filed November 12,
    2002.)                                                                     
|        | 10 | .24   |  |  |             | Employment Agreement, dated January 1, 2003, between
    Eugenia Price and the Company (incorporated by reference to
    Exhibit 10.31 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 14, 2003).                                                                                                                                                 
|        | 10 | .25   |  |  |             | Stock Purchase Agreement dated December 31, 2002 among
    Brenda Buell & Associates, Inc., Brenda Buell, and the
    Company (incorporated by reference to Exhibit 10.32 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).                                                                                                          
|        | 10 | .27   |  |  |             | Asset Purchase Agreement dated January 25, 2003 among
    Tempus Corporation, S.A. de C.V., Miguel Angel Pachur Salgado,
    Oscar Guadalupe de Leon Ulloa and HI Metals, S.A. de C.V.
    (incorporated by reference to Exhibit 10.33 of the
    Companys Annual Report on Form 10-K, No. 333-62021,
    filed March 14, 2003).                                             
|        | 10 | .28   |  |  |             | Intangible Asset Purchase Agreement dated January 25, 2003
    between Miguel Angel Pachur Salgado and Oscar Guadalupe de Leon
    Ulloa and the Company (incorporated by reference to
    Exhibit 10.34 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 14, 2003).                                                                               
|        | 10 | .29   |  |  |             | Asset Purchase Agreement dated March 5, 2003 among Edward
    Marshall Boehm, Inc., Douglas Lorie, Inc., Helen F. Boehm and EM
    Boehm, Inc. (incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Reporting Form 10-Q,
    No. 333-62021, filed on May 12, 2003).                                                                                      
|        | 10 | .30   |  |  |             | Credit Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., the several banks and other
    financial institutions or entities parties thereto, Bear Sterns
    Corporate Lending Inc. and JPMorgan Chase Bank (incorporated by
    reference to Exhibit 99.1 of the Companys Current
    Report on Form 8-K, No. 333-62021, filed on April 2,
    2004).



---



##### 



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----- |  | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .30.1 |  |  |             | First Amendment, dated December 6, 2004 to the Credit
    Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., a Texas corporation, the
    several banks and other financial institutions from time to time
    parties thereto, Bear Stearns Corporate Lending Inc., as
    syndication agent, and JPMorgan Chase Bank, N.A., as
    administrative agent for the Lenders (incorporated by reference
    to Exhibit 10.1 of the Companys Current Report on
    Form 8-K, No. 333-62021, filed on December 9, 2004).
|        | 10 | .31   |  |  |             | Stock Purchase Agreement, dated March 31, 2004, among Home
    Interiors & Gifts, Inc., HI Cayman, L.P. and HI Senior
    Debt Partners, L.P. (incorporated by reference to
    Exhibit 99.2 of the Companys Current Report on
    Form 8-K, No. 333-62021, filed on April 2, 2004).                                                                                                                                                                                                                                                     
|        | 10 | .32   |  |  |             | Termination and Mutual Release, dated as of March 31, 2004,
    by and between Home Interiors & Gifts, Inc., a Texas
    corporation, on the one hand, and HI Cayman, L.P., a Cayman
    Islands exempted limited partnership, and HI Senior Debt
    Partners, L.P., a Texas limited partnership (incorporated by
    reference to Exhibit 99.3 of the Companys Current
    Report on Form 8-K, No. 333-62021, filed on April 2,
    2004).                                                                                             
|        | 10 | .33   |  |  |             | Employment and Non-Compete Agreement, effective as of
    January 1, 2004, between Home Interiors & Gifts,
    Inc., a Texas corporation and Mary-Knight Tyler (incorporated by
    reference to Exhibit 10.1 of the Companys Quarterly
    Report on Form 10-Q, No. 333-62021, filed on
    August 12, 2004).                                                                                                                                                                                                                           
|        | 10 | .34   |  |  |             | Executive Employment Agreement, executed June 23, 2004, to
    be effective as of January 1, 2004, made and entered into
    by and between Home Interiors & Gifts, Inc., a Texas
    corporation and Michael D. Lohner (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 12, 2004).                                                                                                                                                                         
|        | 10 | .34.1 |  |  |             | Letter of agreement referring to the Executive Employment
    Agreement, dated as of June 23, 2004, by and between Home
    Interiors & Gifts, Inc., a Texas corporation and
    Michael D. Lohner (incorporated by reference to
    Exhibit 10.3 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 12, 2004).                                                                                                                                                                                              
|        | 10 | .35   |  |  |             | Asset Purchase Agreement dated January 24, 2003 among
    Ceramica y Vidrio de Nuevo Leon, S.A. de C.V., Maquiladora
    Produr, S.A. de C.V., Industrias Tromex Corporation, S.A. de
    C.V., and HI Ceramics, S.A. de C.V. (incorporated by reference
    to Exhibit 10.35 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed March 14, 2003).                                                                                                                                                                      
|        | 14 | .1    |  |  |             | Home Interiors & Gifts, Inc. Code of Ethics for Senior
    Financial Management (incorporated by reference to
    Exhibit 14.1 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed March 22, 2004).                                                                                                                                                                                                                                                                                                                     
|        | 21 | .1*   |  |  |             | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 31 | .1*   |  |  |             | Certification of Chief Executive Officer of the Company pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 31 | .2*   |  |  |             | Certification of Chief Financial Officer of the Company pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 32 | .1*   |  |  |             | Certification of Chief Executive Officer of the Company pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 32 | .2*   |  |  |             | Certification of Chief Financial Officer of the Company pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                    






|  |                
|- | ---------------
|* | Filed herewith.