##### Table of Contents









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,
    2003
|                                               
|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,
    2003

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

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

Indicate by check mark whether the registrant: is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o
No þ

The common stock of the registrant is not
publicly registered or traded and, therefore, no market value,
whether held by affiliates or non-affiliates, can readily be
ascertained.

As of March 22, 2004, 15,240,218 shares of
the Companys common stock, par value $0.10 per share, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None




---






---

TABLE OF CONTENTS



|                                               |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                        
|                                               | Item 1. Business                                                                             
|                                               | Item 3. Legal Proceedings                                                                    
|                                               | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                       
|                                               | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                               | 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                                                             
|PART III                                      
|                                               | Item 10. Directors and Executive Officers of the Registrant                                  
|                                               | Item 11. Executive Compensation                                                              
|                                               | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                       
|                                               | Item 14. Principal Accountant Fees and Services                                              
|                                               | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                    
|REPORT OF INDEPENDENT AUDITORS                
|Employment and Non-Competition Agreement      
|Code of Ethics for Senior Financial Management
|Subsidiaries of the Company                   
|Certification of CEO Pursuant to Section 302  
|Certification of CFO Pursuant to Section 302  
|Certification of CEO Pursuant to Section 906  
|Certification of CFO Pursuant to Section 906  



---



##### Table of Contents






PART I




Item 1.     Business

General

Home Interiors & Gifts, Inc. (the
Company) is a fully-integrated manufacturer and
distributor of home decorative accessories. The Company believes
it is the largest direct seller of home decorative accessories
in the United States, as measured by sales. The Companys
products include, but are not limited to, framed artwork and
mirrors, candles and candle accessories, plaques, figurines,
planters, artificial floral arrangements, wall shelves, sconces,
small furniture and tableware (the Products). The
Company primarily sells the Products through a direct selling
channel of non-employee, independent contractor sales
representatives (Displayers) who resell the Products
primarily through the party-plan method of
conducting in-home presentations (Shows) for
potential customers. The Company has approximately 98,300 active
Displayers located in the United States, Mexico, Canada and
Puerto Rico.

Since its inception in 1957, the Company has sold
a coordinated line of Products to Displayers, a group of
individuals (a majority of which are women) who operate their
own businesses by purchasing the Products from the Company and
reselling them to customers. The Company continues to stress the
importance and dignity of women, a philosophy adopted by its
founder, Mary Crowley. This philosophy remains deeply imbedded
in the Companys training, recruiting, motivating and
selling strategies. The Company believes that this philosophy
has contributed to its ability to attract and retain loyal
Displayers and to distinguish its Products in the marketplace.
The Company also believes that by providing its Displayers with
the appropriate support and encouragement, they can achieve
personally satisfying and financially rewarding careers by
enhancing the home environments of their customers.

The Company has been located in Dallas, Texas
since its inception. Currently, a majority of the Companys
outstanding common stock of record is owned by affiliates of
Hicks, Muse, Tate & Furst Incorporated, a Dallas-based
private investment firm (Hicks Muse).

The Company purchases its Products from a select
number of independent suppliers as well as from its wholly owned
subsidiaries. Approximately 45% of the dollar volume of Products
purchased for the direct selling channel of the Company in 2003
was purchased from, and manufactured by, the Companys
subsidiaries. In addition to the products sold to the Company
for the direct selling channel, these subsidiaries have a
growing presence in the wholesale supply market. In 2003,
wholesale supply sales comprised $30.3 million or 17.2% of
total manufacturing sales compared to $9.2 million or 6.3%
of total manufacturing sales in 2002.

Sales in the United States, including direct
sales and wholesale supply sales accounted for approximately
89%, 93% and 95% of net sales in 2003, 2002 and 2001,
respectively. Subsidiaries and divisions of the Company in
Mexico, Canada and Puerto Rico accounted for the remaining 11%,
7% and 5% of net sales in 2003, 2002 and 2001, respectively.

Company Direct Selling Strategy

The Company has evolved its strategy to put
greater focus on what management believes to be the key drivers
of the direct selling business  recruiting, retention and
productivity of the Displayer base.

Recruit and Retain Active Displayers.The Company recognizes the need to
continue to attract and retain new Displayers. As of
December 31, 2003, the Companys active Displayer base
in the United States increased 10.6% to approximately 70,800
active Displayers from approximately 64,000 as of December 31,
2002. This increase was a result of the Companys continued
focus on key areas such as Displayer understanding and awareness
of the Hostess program, improved training and business guides,
and a more clearly defined and communicated career path as
reflected in the new recruit program.

Management believes that the retention of
experienced Displayers requires operational focus on several
areas: product distribution fulfillment rates, product
selection, and Displayer training and motivation. First,

1



---



##### Table of Contents



fulfillment rates for product distribution
remained strong at approximately 97% as of December 31,
2003. Second, the Company is continuing to introduce new
products during 2003 that complement the current line of
products, in an attempt to give the product line a fresh and
more innovative look. Finally, the Companys
Recertification program educates Displayers on how
to become more effective Directors and trainers by helping them
to develop and enhance their leadership skills. In order to
enhance this program, the Company has partnered with John
Maxwell, a New York Times best-selling author on leadership.
Mr. Maxwell is communicating with the field leadership
through various media forms, including newsletters, audio, and
regularly scheduled conference calls to help them develop and
enhance their leadership skills and grow their business.


Empower Displayers to Be Productive.Displayer training and motivation
requires the introduction of sales promotion and development
activities directed at helping Displayers increase their
productivity. Sales tools such as Power Paks have
helped the field leadership plan and present more effective
sales meetings and training sessions for Displayers.

Company Manufacturing Strategy

Pursue Manufacturing Strategy and Wholesale
Supply Sales.The Company continues to
emphasize products from its wholesale supply operation in the
direct selling channel, which provides opportunities for gross
margin improvements and leverages the fixed expense component of
its cost structure. This increased focus of the Companys
manufacturing strategy has supported Displayer productivity and
retention through increased fulfillment rates and increased
flexibility related to promotion strategies.

During 2003, the Companys wholesale supply
or Domistyle operation also increased sales to
customers outside of the direct selling channel by nearly 229%.
Wholesale supply sales by the Company were $30.3 million
for the year ended December 31, 2003, as compared to
$9.2 million for the year ended December 31, 2002. In
connection with the Companys overall manufacturing and
wholesale supply strategy, the Company acquired Brenda Buell
& Associates, Inc. (BBA, now known as Domistyle,
Inc.), a wholesaler that designs and develops iron and glass
accessories, on December 31, 2002. Additionally, during the
first quarter of 2003, the Company acquired certain assets of
Tempus Corporation, S.A. de C.V. (HI Metals), a
metals manufacturing company in Mexico on January 29, 2003,
and Ceramica y Vidrio de Nuevo Leon, S.A. de C.V., Maquiladora
Produr, S.A. de C.V. (HI Ceramics) and Industrias
Tromex Corporation, S.A. de C.V., (HI Glass),
metals, glass and ceramic manufacturing facilities in Mexico on
February 7, 2003, and Edward Marshall Boehm, Inc.
(Boehm) a porcelain manufacturing company in New
Jersey on March 14, 2003. During the third quarter of 2003,
the Company acquired the assets of Gaines & Associates,
Inc., a wholesaler and designer of home décor products. The
combination of these newly acquired companies, along with the
Companys existing manufacturing operations of Dallas
Woodcraft Company, LP, Laredo Candle Company, L.P. and GIA, Inc.
form what the Company refers to as Domistyle, a
uniquely positioned home décor manufacturing and design
operation that not only sells to the Companys core direct
selling business, but also sells to the Companys wholesale
supply channel.

The Company may pursue additional strategic
acquisition opportunities in the future.

Products

Product Line.The
Companys product line consists of approximately 1,100
items. The best selling Products include framed artwork and
mirrors, candles, and candle accessories. Most of the Products
are designed for display and sale in coordinated decorative
groupings, which encourages customers to purchase several
accessories to achieve a complete look. In general,
the Products fit within design categories favored by Displayers
and their customers, such as Casual Comfort, Romantic Living,
Timeless Elegance, Todays Lifestyle, Contemporary, and
Ethnic.

Prices.Products are
targeted to individuals who are interested in decorating their
homes and appreciate the value of decorating services, but have
a limited budget. Each Products suggested retail price is
generally below $100 per item, with most Products ranging in
price from $7 to $30 per item. Although Displayers may sell the
Products at any price, the Company believes that most Displayers
charge the Companys suggested

2



---



##### Table of Contents



retail prices. The Company believes that the
suggested retail prices for the Products are competitive of
products of similar quality and design available from other
sources, thereby offering the Displayers customers
excellent value. In addition, unlike many other direct sales
organizations, which the Company believes charge their field
representatives and/or customers shipping costs, the Company
delivers the majority of its Products to the Displayers in the
48 contiguous states and Mexico free of shipping charges if
minimum order sizes are met. A shipping charge is applied in
Alaska, Hawaii, Puerto Rico, and Canada.


Product Design and Introduction Process.In order to meet the changing needs of
customers, the Company regularly introduces new merchandise. The
Product Development team coordinates the design, development and
introduction of new products. Team members attend color
marketing seminars as well as furniture, home furnishing, gift
& accessory, and art trade shows to stay abreast of trends
in the gift, accessory, and home furnishing industries. The
performance of existing Products is constantly under review. The
Product Development team tests proposed or prototype products
with a select group of Displayers in order to receive feedback
on product appeal and product value. Based on that review, new
products are introduced into the Companys Product line.
The Company has historically replaced approximately one third of
its Products annually with new items.

Direct Sales Method and Organization

Displayers.The
Companys direct sales strategy is focused on motivating
Displayers to market the Companys Products. Because the
Company does not use mail-order catalogs, retail outlets or
other methods of distribution, it is entirely dependent on
Displayers to market the Products. As independent contractor
sales representatives, each Displayer is responsible for
operating such Displayers own business. Displayers work on
a full or part-time basis.

Displayers can profit from the difference between
the purchase price of the Products paid by them to the Company
and the sales price charged by them to their customers, which,
for Displayers who are not Directors (as defined below), is
their principal source of income from doing business with the
Company. Displayers are also able to earn money and other
incentives based on the number of Displayers they recruit, as
well as the dollar amount of Products they purchase from the
Company. In addition, Displayers benefit from periodic discounts
offered by the Company.

Generally, Displayers pay for Products ordered
from the Company at the time an order is placed, although the
Company provides Displayers with an unsecured line of credit of
up to $4,000. The Company periodically modifies each
Displayers credit limit based on sales volume and credit
history. The Company uses Home Online®, an internet order
entry system (Home Online), to simplify the ordering
process for its Displayers. Approximately 96% of the orders
received by the Company were received through Home Online at the
end of 2003. Displayers may have their own website linked to
Home Online allowing them the opportunity to better communicate
with and service their customers. As of March 22, 2004,
approximately 13% of the Companys Displayers had their own
website.

Displayers are contractually prohibited from
marketing any other goods at Shows at which the Companys
Products will be sold. In addition, Displayers who become
qualified trainers (Trainers) or Directors are
prohibited from representing or selling the products of any
other direct selling company whose products or services directly
compete with the Companys.

Shows.The principal
sales method used by Displayers is the party plan,
in which Displayers conduct Shows in the homes of individuals
who serve as hostesses for the Shows (Hostesses).
Each Show is attended by guests who have been invited by the
Hostess for that Show. At a Show, which typically lasts two to
three hours, a Displayer will display representative groups of
Products and color brochures depicting the Companys new
Products or entire Product line. Initially, the Displayer
demonstrates the Products, but most of the Show time is devoted
to discussing each guests decorating interests or needs
and taking orders for Products. Typically, Products are paid for
at the time they are ordered and are delivered to the Hostess by
the Displayer within two weeks of the Show. The Company believes
that Shows create group enthusiasm for the Products, enable
Displayers to increase sales, offer the opportunity for
Displayers to develop new customers, and provide Displayers the
opportunity to recruit new Hostesses and Displayers.

3



---



##### Table of Contents



Hostesses.Hostesses
are critical to a Displayers success. A Hostess is
responsible for inviting guests, or prospective customers, to a
Show, and later, for distributing the purchased Products to each
customer. To reward the Hostess for their efforts, Hostesses who
meet certain sales thresholds receive Products in an amount
equal to 20% of the sales generated at the Show. Hostesses also
qualify for 55% discount bonus buys and can receive additional
gifts for bookings. Several times per year, the Company will
provide discounts which allow the Displayer to increase the
Hostess Program benefit to 30% or even 40% of the sales
generated at the Show.

Product Brochures.In addition to sales generated at
Shows, Displayers also receive orders generated from Product
brochures. Displayers generally mail Product brochures to
Hostesses or distribute the brochures at Shows and other events.
The Company produces both quarterly brochures containing the
Companys complete Product line and supplemental monthly
brochures containing the newest and most popular Products. All
brochures have a place for the Displayer to insert personal
contact information, since Products cannot be purchased by
customers directly from the Company. The Company also has a
preferred mailing program whereby Displayers provide a list of
customers to the Company through Home Online. The Company then
sends a personalized brochure directly to each individual on the
Displayers mailing list for a small fee. This service is
designed to reduce the administrative burden on the Displayers
and allow them more time to make personal contact with their
customers and expand their business. As of March 22, 2004,
nearly 4,800 Displayers have subscribed to the preferred mailing
program and over 154,000 customer names were submitted.

Training and Sales Support

Field Organization.The Companys training and sales
support for Displayers is designed to give Displayers a stable
foundation upon which to build their businesses. Displayers are
recruited into Units for training and motivational
purposes. In the United States, the number of Displayers in a
Unit ranges from 3 to 314, with an average of approximately 61
Displayers per Unit. Approximately 1,200 Units are headed by
either a Branch Director or a Unit
Director and each Unit is grouped with other Units to
constitute a Branch. The number of Units in a Branch
ranges from 2 to 30, with an average of approximately 11 Units
per Branch. There are approximately 100 Branches in the United
States, the majority of which are headed by a Branch Director.
In addition, Branches are grouped into Districts.
Twelve District Directors travel throughout the United States,
Canada and Puerto Rico motivating, training and inspiring Branch
and Unit Directors. All Displayers and Directors are independent
contractors and not employees of the Company. The Companys
sales development team, led by the Chief Executive Officer and
Senior Vice-President, International and Business Development,
work closely with and provide support and direction to Directors.

Recruiting and Training of New Displayers.It is vital to the Companys
success to consistently recruit new Displayers. Accordingly, the
Company provides Displayers with financial rewards and the
possibility of promotions to different Director levels based
upon their ability to recruit and train productive Displayers.
As part of their marketing and sales activities, Displayers seek
to identify and to recruit new Displayers, typically women who
previously have attended Shows. Once a candidate is identified,
a trainer or Director interviews the candidate to explain the
opportunities, time commitment, start-up costs, training, and
other activities a Displayer can expect to experience.

Though any Displayer can recruit an individual to
become a Displayer, only Displayers who are Trainers may train a
recruit and earn commissions on the Product sales of recruits
that they have trained. To become a Trainer, a Displayer must
have demonstrated previous recruiting success, have been
recommended by the Displayers Branch Director, and have
attended training classes. The Company has certified
approximately 2,800 of its Displayers as Trainers. In 2003,
Trainers earned commissions totaling $3.9 million. When the
recruiting and sales volume of a Trainer and the Trainers
recruits reach certain levels, the Trainer may be permitted to
form a new Unit and become a Unit Director.

The Company believes that training is a critical
component of a Displayers success. The Company emphasizes
sales of its Products and typically requires all recruits to
participate in an intensive sales-training program. The Company
encourages Displayers to recruit new Displayers who will sell
Products to customers

4



---



##### Table of Contents



rather than purchase items for personal
consumption. The training program includes personal instruction
by a Trainer and the observation of several Shows conducted by
experienced Displayers. In addition to the one-on-one training
sessions and group training sessions that are conducted by a
Certified Trainer, the Displayers receive a business guide that
was created as a reference manual for use in their business
along with the Four-Step Decorating Flip
Chart©, a tool to help the Displayer conduct
successful Show presentations. New Displayers also receive
information from their Trainer about the Products, and are
taught the fundamental elements of home decorating as well as
different methods of conducting successful Shows.


On-Going Training and
Motivation.The Company believes that
Company-sponsored training and motivation of Displayers is
critical to Displayer morale and, therefore, to the
Companys sales. The Company hosts a three-day annual
seminar for all Displayers. At the seminar, the Company provides
motivational speakers, Product displays, entertainment and
meals, conducts recognition ceremonies to highlight Displayer
achievements, and introduces new Product lines as well as new
Products in existing lines. The Company also sponsors one-day or
two-day events throughout the United States to introduce the
Companys new Product lines and motivate the sales force.
The Company has recently entered into an agreement with a
production and fulfillment company to produce a quarterly
DVD/video series entitled HIG Creative Concepts, to
which Displayers may subscribe and receive up-to-date Product
information and decorating tips. Additionally, the
Companys Chief Executive Officer, other senior executives,
and National Trainers routinely visit and assist Branch
Directors.

Twice a month, the Company mails each Displayer a
newsletter that announces new incentive programs or discounts,
discusses selling techniques, motivational strategies and
Product status, and recognizes successful Displayers. Unit
Directors typically hold weekly sales meetings for the
Displayers in their Unit, and Branch Directors hold quarterly
meetings for their Unit Directors and Displayers to discuss
selling techniques, motivational strategies, Product
introductions, and sales recognition.

Incentive Programs.In addition to the gross profit
Displayers can earn through the purchase and resale of the
Products, the Company provides incentives to Displayers by
rewarding top-performing Displayers with vacation trips, gifts,
and other prizes. The incentive rewards, which vary annually,
are based on the volume of Products purchased from the Company
by a Displayer. The Company also provides a variety of discount
programs in connection with Product purchases and rewards
Displayers who recruit other productive Displayers.

Remuneration.Directors earn commissions on the
Product purchases of the Displayers they service and are
eligible for performance bonuses. District, Branch, Group, and
Unit Directors earned commissions, including performance
bonuses, amounting to $57.0 million in 2003. In general,
District Directors also receive a monthly amount for each Branch
they service plus an annual payment based on the percentage of
their Districts annual increase in Product purchases. In
addition, District Directors, Branch Directors, Group Directors,
and certain Unit Directors are reimbursed for certain travel and
other expenses. Reimbursed expenses totaled $3.1 million in
2003.

Product Supply and Manufacturing

Approximately 45% of the dollar volume of
Products purchased by the Company in 2003 was purchased from,
and manufactured by, the Companys subsidiaries and sold
through the direct selling channel. The Company manufactures
framed artwork and mirrors, candles, plaques, and various types
of molded plastic products through the use of custom-designed
equipment. To date, the Company has been able to secure an
adequate supply of raw materials for its manufacturing
operations from numerous sources, and the Company does not
expect any material interruptions in the supply of raw materials
it uses to manufacture Products.

Products not manufactured by the Company are
purchased from numerous foreign and domestic suppliers. The
Company is either the largest or the only customer of many of
its suppliers, and most of its Products are manufactured
exclusively for the Company. Many of the Companys supplier
relationships have existed for more than 20 years, and the
Company has experienced minimal supplier turnover in recent
years. However, because the Company does not enter into supply
agreements with its suppliers, these relationships generally may
be terminated at any time by either party. One third-party
supplier furnished the Company with

5



---



##### Table of Contents



more than 10% of its purchased Products during
2003. The Company believes its relationship with this and its
other suppliers to be good and does not expect any material
interruptions in the supply of Products from its suppliers.


Product Distribution

Displayers typically submit orders, via the
Internet or mail, to the Companys headquarters weekly on
one assigned order processing day. Upon receipt, orders are
recorded and the Displayers recent sales activity, credit
and accounts receivable status are verified. Each order is
filled and shipped, generally within 24-36 hours from when it is
received. The Company uses an automated order fulfillment system
and ships substantially all orders from its Carrollton, Texas
distribution center.

To minimize shipping costs, the Company uses a
two-step process in which approximately 60 common carriers and
truckload carriers ship full truck loads or partial loads of
Products to approximately 210 regional delivery sites where
locally-based freight distributors (Local
Distributors) sort the loads and deliver the Products to
each Displayer. Approximately 79% of the Products shipped by the
Company are delivered in this manner. In cases where Local
Distributors are not used, the Products are shipped by common
carrier, couriers via pool distribution, FedEx Home Delivery or
UPS directly to Displayers.

When the Displayer receives a bulk packaged
order, the Displayer repackages the Products for individual
customers and typically delivers them to the Hostesses, who in
turn deliver the Products to the final customer. Displayers
typically contact customers to confirm their satisfaction with
their Products. Multiple contacts with Hostesses and customers
provide Displayers several opportunities to provide information
regarding the Company and its Products, which assists in the
Displayers sales and recruiting efforts.

International Operations

Direct
Sales

The Companys international operations are
conducted primarily through its Dallas office and Mexico office.
Direct sales orders received from Canada and Puerto Rico are
processed by the Companys Dallas office whereas all Mexico
direct sales are handled by the Companys Mexico direct
sales subsidiary.

As of December 31, 2003, the Company had
over 25,400 active Displayers in Mexico as compared to
approximately 16,900 active Displayers as of December 31,
2002. Net sales in Mexico increased 60.0% to $48.3 million
for 2003 as compared to $30.2 million in 2002.

As of December 31, 2003, the Company had
over 1,300 active Displayers in Canada as compared to
approximately 800 active Displayers as of December 31,
2002. Net sales in Canada increased 127.0% to $8.4 million
for 2003 as compared to $3.7 million in 2002.

As of December 31, 2003, the Company had
over 800 active Displayers in Puerto Rico as compared to
approximately 500 active Displayers as of December 31, 2002. Net
sales in Puerto Rico increased 69.0% to $4.9 million for
2003 from $2.9 million in 2002.

Manufacturing
Operations

The Company acquired certain manufacturing
operations in Monterrey, Mexico during the first quarter of
2003; HI Metals, HI Ceramics and HI Glass. Net sales generated
by these facilities were $20.9 million or 3.4% of
consolidated net sales during 2003.

The Companys international operations are
subject to certain customary risks inherent in carrying on
business abroad, including the risk of adverse currency
fluctuations as well as unfavorable economic and political
conditions.

6



---



##### Table of Contents



Financial Information About Segments

Refer to the information under Note 17 to
Consolidated Financial Statements, which is hereby incorporated
by reference.

Competition

The Company operates in a highly competitive
environment. Products sold by the Company compete with products
sold elsewhere, including department and specialty stores, mail
order catalogs, internet and other direct selling companies. The
Company competes in the sale of Products on the basis of
quality, price and service. Because of the limited number of
Products it manufactures and its relatively small number of
suppliers of finished Products, the Company is able to exercise
some control over the quality and price of the Products. As a
result, the prices charged by Displayers are within a range
believed to be acceptable to their customers.

The Company also competes with other direct
selling organizations, even those whose products may not compete
with the Companys Products, in recruiting and retaining
sales representatives. The Companys success requires the
recruitment, retention and integration into the Companys
business of highly qualified management, sales, marketing and
product development personnel in order to support the needs of
the Displayers.

Employees

As of March 22, 2004, the Company has
approximately 3,700 employees located principally in Texas and
Monterrey, Mexico. The employees located in the United States
are not represented by a labor union or covered by a collective
bargaining agreement. The majority of the employees located in
Mexico are represented by various labor unions that have had
favorable relationships with the Company. The Company believes
its relationship with its employees and related labor unions to
be good.

Item 2.     Properties

Owned Properties

As of December 31, 2003, the Company owned
the following properties in the United States and Mexico, each
of which is used for the respective purpose set forth below:

|                       |  |                                                                 |  |                |         | 
|---------------------- |  | --------------------------------------------------------------- |  | -------------- | ------- | 
|                       |  |                                                                 |  | 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      |  | Manufacturing facility                                          |  |                | 226,000 | 

7



---



##### Table of Contents



Leased Properties

As of December 31, 2003, the Company leased
the following properties in the United States, Canada and
Mexico, each of which is used for the respective purpose set
forth below:

|                    |  |                                                   |  |               |                   |                |  |  |         | 
|------------------- |  | ------------------------------------------------- |  | ------------- | ----------------- | -------------- |  |  | ------- | 
|                    |  |                                                   |  | Expiration of |                   | Approximate   
|Location            |  | Purpose                                           |  | Lease Term    |                   | Square Footage
|                    |  |                                                   |  |               |                   |               
|Carrollton, Texas   |  | Warehouse space                                   |  |               | July, 2004        |                |  |  | 148,000 | 
|Carrollton, Texas   |  | Warehouse space                                   |  |               | February, 2006    |                |  |  | 205,000 | 
|Carrollton, Texas   |  | Warehouse space                                   |  |               | June, 2004        |                |  |  | 58,000  | 
|Carrollton, Texas   |  | Warehouse space                                   |  |               | June, 2004        |                |  |  | 78,000  | 
|Coppell, Texas      |  | Warehouse space                                   |  |               | July, 2005        |                |  |  | 79,000  | 
|Dallas, Texas       |  | Former corporate headquarters, net of sublease(1) |  |               | January, 2010     |                |  |  | 31,000  | 
|Laredo, Texas       |  | Warehouse space                                   |  |               | April, 2004       |                |  |  | 50,000  | 
|Trenton, New Jersey |  | Manufacturing facility                            |  |               | March, 2005       |                |  |  | 40,000  | 
|Palm Beach, Florida |  | Retail store                                      |  |               | June, 2004        |                |  |  | 2,500   | 
|Houston, Texas      |  | Sales office                                      |  |               | April, 2008       |                |  |  | 2,500   | 
|Monterrey, Mexico   |  | Manufacturing facility                            |  |               | December, 2004    |                |  |  | 91,000  | 
|Monterrey, Mexico   |  | Manufacturing facility                            |  |               | December, 2003(2) |                |  |  | 119,000 | 
|Monterrey, Mexico   |  | Manufacturing facility                            |  |               | February, 2005    |                |  |  | 18,000  | 
|Monterrey, Mexico   |  | Mexico Direct Selling office                      |  |               | June, 2004        |                |  |  | 9,500   | 
|Monterrey, Mexico   |  | Distribution facility                             |  |               | June, 2004        |                |  |  | 53,000  | 
|Monterrey, Mexico   |  | Distribution facility                             |  |               | September, 2007   |                |  |  | 105,000 | 
|Monterrey, Mexico   |  | New combined distribution facility and office(3)  |  |               | June, 2009        |                |  |  | 164,000 | 
|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 for Domistyle offices and showroom space.
|   
|(2) | An extension of the existing lease to July 2004
    is being finalized.                                                                                                                                                                                                                                                                                                           
|   
|(3) | Lease signed in October 2003, occupancy expected
    upon completion of construction in June 2004.                                                                                                                                                                                                                                                                                




Item 3.     Legal
Proceedings

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

8



---



##### Table of Contents






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

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.




PART II




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

There is no established public trading market for
the Companys common stock, $0.10 par value per share. As
of March 22, 2004, the Company had outstanding 15,240,218
shares of common stock held by 194 shareholders.

Holders of common stock are entitled to share
ratably in dividends, if and when declared by the Companys
Board of Directors (the Board) out of funds legally
available therefor. The Company is restricted in the amount of
dividends that may be paid to holders of common stock pursuant
to the credit agreement with its principal lenders (the
Senior Credit Facility) and the Indenture dated as
of June 4, 1998 (the Indenture), among the
Company, certain of its subsidiaries, as guarantors, and United
States Trust Company of New York, as trustee, pursuant to which
the Company issued its 10 1/8% Senior Subordinated Notes
Due 2008 (the Notes). The certificate of designation
governing the Companys outstanding Senior Preferred Stock
(the Preferred Stock Designation) also provides that
dividends cannot be paid on any junior securities, including
common stock, unless all accrued and unpaid dividends on the
Senior Preferred Stock have been paid in full. Because the terms
of the Notes, the Companys Senior Credit Facility and the
Preferred Stock Designation all restrict the Companys
ability to pay dividends, the Company does not anticipate the
payment of dividends on its common stock in the foreseeable
future.

As described below under Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations, it is anticipated that the Company
will repurchase all of its outstanding shares of Senior
Preferred Stock from affiliates of the Companys
controlling shareholder with a portion of the proceeds of a new
credit facility that the Company expects to enter into prior to
the end of its first fiscal quarter.

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 |                         |   | 278,983           |           |                           | $ | 18.50 |  |  |   | 2,069     |          
|                                                                | 1998 Key Employee Plan           |                         |   | 1,026,672         |           |                           | $ | 18.26 |  |  |   | 327,252   |          
|                                                                | 2002 Key Employee Plan           |                         |   | 3,600,000         |           |                           | $ | 19.42 |  |  |   | 2,400,000 |          
|Equity compensation plans not approved by
    security holders: |                                  |                         |  |                   |           |                           |   |       |  |  |  |          
|                                                                |                                  |                         |   |                   |           |                           |   |       |  |  |   |          
|                                                                |                                  | Total                   |   |                   | 4,905,655 |                           |   |       |  |  |   |           | 2,729,321 | 
|                                                                |                                  |                         |   |                   |           |                           |   |       |  |  |   |          

The Company did not sell any equity securities
during the period covered by this Form 10-K that were not
registered under the Securities Act.

9



---



##### Table of Contents



Item 6. Selected Financial Data

The following summary is intended to highlight
certain information contained elsewhere in this report. Refer to
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Consolidated Financial Statements elsewhere in this
report for greater detail.

|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         | 
|------------------------------------ | ---------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                     |                                          |                                          
|                                     |                                          | Year Ended December 31,                  
|                                     |                                          |                                          
|                                     |                                          | 1999                                      |         | 2000    |         | 2001 |         | 2002    |         | 2003
|                                     |                                          |                                           |         |         |         |      |         |         |         |     
|                                     |                                          |                                          
|                                     |                                          | (In thousands, except Displayer data)    
|Statement of operations data:        |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net sales                            |                                          | $                                         | 503,344 |         |         | $    | 460,440 |         |         | $    | 461,689 |         |         | $ | 574,499 |         |         | $ | 617,444 |        
|Cost of goods sold(1)                |                                          |                                           | 240,390 |         |         |      | 223,514 |         |         |      | 200,889 |         |         |   | 251,748 |         |         |   | 288,233 |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Gross profit                         |                                          |                                           | 262,954 |         |         |      | 236,926 |         |         |      | 260,800 |         |         |   | 322,751 |         |         |   | 329,211 |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Selling, general and administrative: |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                     | Selling(1)                               |                                           |         | 89,514  |         |      |         | 82,285  |         |      |         | 86,461  |         |   |         | 105,117 |         |   |         | 103,500 |        
|                                     | Freight, warehouse and distribution      |                                           |         | 48,144  |         |      |         | 44,896  |         |      |         | 50,599  |         |   |         | 66,597  |         |   |         | 77,763  |        
|                                     | General and administrative(1)            |                                           |         | 29,193  |         |      |         | 48,867  |         |      |         | 56,146  |         |   |         | 58,168  |         |   |         | 66,048  |        
|                                     | Loss (gain) on the disposition of assets |                                           |         | (10,650 | )       |      |         | (2,738  | )       |      |         | 495     |         |   |         | (361    | )       |   |         | 108     |        
|                                     | Stock option expense (credit)            |                                           |         | 912     |         |      |         | (351    | )       |      |         | (62     | )       |   |         | 1,267   |         |   |         | 4,207   |        
|                                     | Homco restructuring                      |                                           |         |        |         |      |         | 1,027   |         |      |         |        |         |   |         |        |         |   |         |        |        
|                                     | Redundant warehouse and distribution     |                                           |         |        |         |      |         | 6,089   |         |      |         | 1,197   |         |   |         |        |         |   |         |        |        
|                                     | Loss on debt restructure(2)              |                                           |         |        |         |      |         |        |         |      |         | 2,437   |         |   |         | 7,188   |         |   |         |        |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                     |                                          | Total selling, general and administrative |         |         | 157,113 |      |         |         | 180,075 |      |         |         | 197,273 |   |         |         | 237,976 |   |         |         | 251,626 | 
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Operating income                     |                                          |                                           | 105,841 |         |         |      | 56,851  |         |         |      | 63,527  |         |         |   | 84,775  |         |         |   | 77,585  |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Other income (expense):              |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                     | Interest income                          |                                           |         | 2,978   |         |      |         | 2,208   |         |      |         | 1,017   |         |   |         | 472     |         |   |         | 359     |        
|                                     | Interest expense                         |                                           |         | (44,081 | )       |      |         | (45,496 | )       |      |         | (38,476 | )       |   |         | (27,497 | )       |   |         | (27,506 | )      
|                                     | Other income (expense), net              |                                           |         | (183    | )       |      |         | 2,116   |         |      |         | 925     |         |   |         | (1,439  | )       |   |         | (1,129  | )      
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Other income (expense), net          |                                          |                                           | (41,286 | )       |         |      | (41,172 | )       |         |      | (36,534 | )       |         |   | (28,464 | )       |         |   | (28,276 | )      
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income before income taxes           |                                          |                                           | 64,555  |         |         |      | 15,679  |         |         |      | 26,993  |         |         |   | 56,311  |         |         |   | 49,309  |        
|Income tax provision                 |                                          |                                           | 22,967  |         |         |      | 5,892   |         |         |      | 23,433  |         |         |   | 20,663  |         |         |   | 16,948  |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income                           |                                          | $                                         | 41,588  |         |         | $    | 9,787   |         |         | $    | 3,560   |         |         | $ | 35,648  |         |         | $ | 32,361  |        
|                                     |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Other financial data:                |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Gross profit percentage              |                                          |                                           | 52.2    | %       |         |      | 51.5    | %       |         |      | 56.5    | %       |         |   | 56.2    | %       |         |   | 53.3    | %      
|Adjusted EBITDA(3)                   |                                          | $                                         | 100,135 |         |         | $    | 75,259  |         |         | $    | 84,942  |         |         | $ | 106,473 |         |         | $ | 105,288 |        
|Adjusted EBITDA margin(4)            |                                          |                                           | 19.9    | %       |         |      | 16.3    | %       |         |      | 18.4    | %       |         |   | 18.5    | %       |         |   | 17.1    | %      
|Cash flows provided by (used in):    |                                          |                                           |         |         |         |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                     | Operating activities                     |                                           | $       | 28,073  |         |      | $       | 28,001  |         |      | $       | 40,295  |         |   | $       | 44,223  |         |   | $       | 17,524  |        
|                                     | Investing activities                     |                                           |         | (6,685  | )       |      |         | (20,625 | )       |      |         | (14,838 | )       |   |         | (13,796 | )       |   |         | (27,438 | )      
|                                     | Financing activities                     |                                           |         | (30,274 | )       |      |         | 2,299   |         |      |         | (49,893 | )       |   |         | 20,599  |         |   |         | (21,312 | )      
|Depreciation and amortization        |                                          |                                           | 4,032   |         |         |      | 8,837   |         |         |      | 9,762   |         |         |   | 11,715  |         |         |   | 15,663  |        
|Capital expenditures                 |                                          |                                           | 12,703  |         |         |      | 34,135  |         |         |      | 15,088  |         |         |   | 14,168  |         |         |   | 14,561  |        
|Dividends paid(5)                    |                                          |                                           |        |         |         |      |        |         |         |      |        |         |         |   |        |         |         |   |        |        

10



---



##### Table of Contents



|                                                         |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|-------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                         |  |                                      
|                                                         |  | Year Ended December 31,              
|                                                         |  |                                      
|                                                         |  | 1999                                  |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                         |  |                                       |         |      |  |      |         |      |  |     
|                                                         |  |                                      
|                                                         |  | (In thousands, except Displayer data)
|Domestic Displayer data:                                 |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|Number of orders shipped                                 |  |                                       | 921,636 |      |  |      | 821,716 |      |  |      | 782,670 |  |  |   | 926,934 |  |  |   | 1,067,671 | 
|Average order size(6)                                    |  | $                                     | 536     |      |  | $    | 542     |      |  | $    | 560     |  |  | $ | 570     |  |  | $ | 492       | 
|Active Displayers at end of period(7)                    |  |                                       | 68,300  |      |  |      | 59,300  |      |  |      | 59,000  |  |  |   | 64,000  |  |  |   | 70,800    | 
|Average number of active Displayers
    during period(7) |  |                                       | 59,000  |      |  |      | 61,900  |      |  |      | 58,300  |  |  |   | 62,000  |  |  |   | 66,500    | 

|                                             |  |                    |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |          |  
|-------------------------------------------- |  | ------------------ | -------- | ---- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                             |  |                   
|                                             |  | As of December 31,
|                                             |  |                   
|                                             |  | 1999               |          | 2000 |  | 2001 |          | 2002 |  | 2003
|                                             |  |                    |          |      |  |      |          |      |  |     
|                                             |  |                   
|                                             |  | (In thousands)    
|Balance sheet data:                          |  |                    |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   |          |  
|Cash and cash equivalents(8)                 |  | $                  | 32,406   |      |  | $    | 41,720   |      |  | $    | 17,247   |   |  | $ | 68,111   |   |  | $ | 36,636   |  
|Property, plant and equipment, net           |  |                    | 30,473   |      |  |      | 60,600   |      |  |      | 65,164   |   |  |   | 69,482   |   |  |   | 75,191   |  
|Total assets(8)                              |  |                    | 161,541  |      |  |      | 165,398  |      |  |      | 158,083  |   |  |   | 234,593  |   |  |   | 235,923  |  
|Total debt (including current maturities)(5) |  |                    | 455,546  |      |  |      | 465,333  |      |  |      | 317,842  |   |  |   | 344,916  |   |  |   | 323,238  |  
|Shareholders deficit                        |  |                    | (371,186 | )    |  |      | (362,111 | )    |  |      | (263,013 | ) |  |   | (227,701 | ) |  |   | (191,382 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain non-recurring costs of $8.2 million,
    $6.6 million, $2.9 million, and $7.3 million in
    2000, 2001, 2002, and 2003 respectively, associated with
    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), consulting
    costs associated with the Companys reorganization plan,
    accelerated amortization of leasehold improvements,
    non-capitalizable costs of a new enterprise resource planning
    (ERP) system, and non-recurring costs related to the
    integration of new international manufacturing entities are
    included in cost of goods sold and selling, 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) | Adjusted EBITDA represents earnings before
    interest, taxes, the effects of SAB 101, depreciation and
    amortization, reorganization costs, non-cash expense
    (credit) for stock options, Homco restructuring expenses,
    redundant warehouse and distribution expenses, losses on debt
    restructure, (gains) losses on disposition of assets, and
    other income expense. Adjusted EBITDA generally is considered to
    provide information regarding a companys ability to incur
    and service debt, and it is included herein to provide
    additional information with respect to the ability of the
    Company to meet its future debt service, capital expenditure,
    and working capital requirements. Adjusted EBITDA should not be
    considered in isolation, as a substitute for net income, cash
    flows from operations, or other consolidated income or cash flow
    data prepared in accordance with generally accepted accounting
    principles, or as a measure of a companys profitability or
    liquidity. See Note 17 to the Consolidated Financial Statements
    for a reconciliation of net income to Adjusted EBITDA.
|   
|(4) | Adjusted EBITDA as a percentage of net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

11



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | On February 24, 2004, the Company entered
    into a commitment letter with two financial institutions
    pursuant to which the Company intends to refinance loans
    outstanding under its existing senior credit facility. See Note
    16 to the Consolidated Financial Statements. It is anticipated
    that a portion of the proceeds of the Companys
    contemplated refinancing transaction will be used to repurchase
    for $139.0 million all of the Companys outstanding
    Senior Preferred Stock. The aggregate purchase price to be paid
    in respect of the Senior Preferred Stock represents a premium of
    approximately $10.4 million over the aggregate liquidation
    preference (totaling $96.1 million) plus the cumulative
    preferred stock dividends in arrears (totaling
    $29.5 million) as of December 31, 2003. See
    Item 7. Managements Discussion and Analysis of
    Financial Condition and Results of Operations.
|   
|(6) | 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, and
    $30.3 million for 2001, 2002, and 2003 have been excluded
    from net sales, respectively. There were no outside sales in
    2000 or prior years. In addition, international sales of
    approximately $9.1 million, $15.1 million,
    $21.9 million, $36.7 million, and $61.6 million
    for 1999, 2000, 2001, 2002, and 2003 have been excluded from net
    sales, respectively.                                                                                                                                                                                                                                                                                                                                                 
|   
|(7) | An active Displayer is a Displayer who has placed
    an order with the Company within the prior 14 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(8) | The Company reclassified book overdrafts to other
    current liabilities. As of December 31, 2002 and 2003, the
    Company had book overdrafts totaling $4.0 million and
    $4.9 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              




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

Special Note Regarding Forward-Looking
Statements

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

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

All of these forward-looking statements are based
on estimates and assumptions made by management of the Company,
which, although believed to be reasonable, are inherently
uncertain. Therefore, undue reliance should not be placed upon
such statements. No assurance can be given that any of such
estimates or statements will be realized and actual results may
differ materially from those contemplated by such
forward-looking statements. Factors that may cause such
differences include: (i) Displayer recruiting and activity
levels; (ii) loss or retirement of key members of
management; (iii) imposition of foreign, federal or state
taxes; (iv) change in status of independent contractors;
(v) increased competition; (vi) the success of new
products and promotion programs; (vii) general economic
conditions; and (viii) the success of integrating the
recently acquired businesses. Many of these factors will be
beyond the control of the Company.

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

Company Direct Selling Strategy

The Company has evolved its strategy to put
greater focus on what management believes to be the key drivers
of the direct selling business, which are recruiting, retention
and productivity of the Displayer base.

Recruit and Retain Active Displayers.The Company recognizes the need to
continue to attract and retain new Displayers. As of
December 31, 2003, the Companys active Displayer base
in the United States increased 10.6% to approximately 70,800
active Displayers from approximately 64,000 as of December 31,
2002. This increase was a result of the Companys continued
focus on key areas such as Displayer

12



---



##### Table of Contents



understanding and awareness of the Hostess
program, improved training and business guides, and a more
clearly defined and communicated career path as reflected in the
new recruit program.


Management believes that the retention of
experienced Displayers requires operational focus on several
areas: product distribution fulfillment rates, product
selection, and Displayer training and motivation. First,
fulfillment rates for product distribution remained strong at
approximately 97% as of December 31, 2003. Second, the
Company is continuing to introduce new products during 2003,
that complement the current line of products, in an attempt to
give the product line a fresh and more innovative look. Finally,
the Companys Recertification program educates
Displayers on how to become more effective Directors and
Trainers by helping them to develop and enhance their leadership
skills. In order to enhance this program, the Company has
partnered with John Maxwell, a New York Times best-selling
author on leadership. Mr. Maxwell is communicating with the
field leadership through various media including newsletters,
audio, and regularly scheduled conference calls to help them
develop and enhance their leadership skills and grow their
business.

Empower Displayers to Be Productive.Displayer training and motivation
requires the introduction of sales promotion and development
activities directed at helping Displayers increase their
productivity. Sales tools such as Power Paks and the
Companys HIG Creative Concepts DVD/video
series have helped the field leadership plan and present more
effective sales meetings and training sessions for Displayers.

Company Manufacturing Strategy

Pursue Manufacturing Strategy and Wholesale
Supply Sales.The Company continues to
emphasize products from its wholesale supply operation in the
direct selling channel, which provides opportunities for gross
margin improvements and leverages the fixed expense component of
its cost structure. This increased focus of the Companys
manufacturing strategy has supported Displayer productivity and
retention through increased fulfillment rates and increased
flexibility related to promotion strategies.

During 2003, the Companys wholesale supply
or Domistyle operation also increased sales to
customers outside of the direct selling channel by nearly 229%.
Wholesale supply sales by the Company were $30.3 million
for the year ended December 31, 2003, as compared to
$9.2 million for the year ended December 31, 2002. In
connection with the Companys overall manufacturing and
wholesale supply strategy, the Company acquired Brenda Buell
& Associates, Inc. (BBA, now known as Domistyle,
Inc.), a wholesaler that designs and develops iron and glass
accessories, on December 31, 2002. Additionally, during the
first quarter of 2003, the Company acquired certain assets of
Tempus Corporation, S.A. de C.V. (HI Metals), a
metals manufacturing company in Mexico on January 29, 2003,
and Ceramica y Vidrio de Nuevo Leon, S.A. de C.V., Maquiladora
Produr, S.A. de C.V. (HI Ceramics) and Industrias
Tromex Corporation, S.A. de C.V., (HI Glass),
metals, glass and ceramic manufacturing facilities in Mexico on
February 7, 2003, and Edward Marshall Boehm, Inc.
(Boehm), a porcelain manufacturing company in New
Jersey, on March 14, 2003. During the third quarter of
2003, the Company acquired the assets of Gaines &
Associates, Inc., a wholesaler and designer of home decor
products. The combination of these newly acquired companies,
along with the Companys existing manufacturing operations
of Dallas Woodcraft Company, LP, Laredo Candle Company, L.P. and
GIA, Inc., form what the Company refers to as
Domistyle, a uniquely positioned home décor
manufacturing and design operation that not only sells to the
Companys core direct selling business, but also sells to
the Companys wholesale supply channel.

The Company may pursue additional strategic
acquisition opportunities in the future.

Recent Developments



| |                                            
| | -------------------------------------------
| | Refinancing of Existing Credit
    Facility

The Company is in the process of refinancing its
existing credit facility which would, if consummated, provide
the Company with a term loan facility of up to $320 million
and $50 million revolving credit facility (which represents
an increase over the Companys existing term loan and
credit facilities of $168.7 million and $30.0 million,
respectively). On a pro forma basis after giving effect to the
refinancing as currently contemplated and the anticipated use of
proceeds therefrom, as of December 31, 2003, the Company
would

13



---



##### Table of Contents



have had approximately $474.6 million in
total debt (as compared to approximately $323.2 million in total
debt as of December 31, 2003 on an actual basis).


The Company believes that it is an opportune time
to refinance indebtedness of the Company due to the levels of
financing available to the Company and current market
conditions. On February 24, 2004, the Company entered into
a commitment letter with two financial institutions pursuant to
which the Company intends to refinance loans outstanding under
its existing Senior Credit Facility. The financial
institutions commitments to make such facilities available
to the Company are subject to conditions precedent that are
customary for a financing of this type. Pursuant to the
commitment letter, the financial institutions named therein have
committed to provide the Company with a term loan facility of up
to $320 million and a $50 million revolving credit
facility. It is anticipated that the proceeds of the new term
loan and revolving credit facilities will be used (i) to
refinance the Companys existing senior debt, including
partial year interest thereon (approximately
$169.8 million), (ii) to repurchase all of the
Companys outstanding Senior Preferred Stock (approximately
$139.0 million), (iii) for general working capital
purposes (approximately $2.0 million) and (iv) to pay
transaction fees and expenses (approximately $9.2 million).
The Companys outstanding preferred stock is currently held
by affiliates of the Companys controlling shareholders.
The aggregate purchase price to be paid in respect of the Senior
Preferred Stock represents a premium of approximately
$10.4 million over the aggregate liquidation preference
(totaling $96.1 million) plus the cumulative preferred
stock dividends in arrears (totaling $29.5 million) as of
December 31, 2003. On a pro forma basis after giving effect to
the refinancing as currently contemplated and the anticipated
use of the proceeds therefrom as of December 31, 2003, the
Company would have had approximately $474.6 million in
total debt (as compared to approximately $323.2 million in
total debt as of December 31, 2003 on an actual basis). The
Company anticipates closing its refinancing transaction (and
consummating the repurchase of its outstanding Senior Preferred
Stock) prior to the end of the first fiscal quarter. However,
there can be no assurance that the contemplated refinancing
transaction will be consummated prior to the end of the first
fiscal quarter or at all, or that it will be consummated on the
terms currently contemplated.

Critical Accounting Policies and
Estimates

Managements Discussion and Analysis of its
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with generally accepted accounting
principles. The Companys significant accounting policies
are described in Note 2 to its Consolidated Financial
Statements. The preparation of these financial statements
requires management to make estimates and judgements that affect
the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its
estimates, including those related to allowances for bad debts,
inventory reserves, actuarially determined insurance reserves,
and tax reserves. Management bases its estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions. The Companys critical
accounting policies subject to significant judgments and
estimates include the following:



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

The Company recognizes revenue in accordance with
SEC Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements, as amended. Accordingly, revenue from
product sales is recognized upon an estimation of expected
delivery date to the Displayer at which point title to the
product and risk of ownership passes. Provisions for discounts
and rebates to Displayers, and returns and other adjustments are
provided for in the same period the related sales are recorded.
Shipping and handling expenses are recorded as operating
expenses. Deferred revenue is recorded to the extent that
shipments have not been received by Displayers by period end.

14



---



##### Table of Contents





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

The Company maintains allowances for bad debts
for estimated losses resulting from uncollectible amounts due
from Displayers and Domistyle customers. The primary factors
considered by the Company in determining its allowance for bad
debts is the age of outstanding receivables, payment trends and
estimated recovery dates. If the financial condition of the
Companys Displayers and Domistyle customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.



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

The Company provides reserves for estimated
obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and the estimated net realizable
value using assumptions about future demand for its Products and
market conditions. If actual future demand or market conditions
are less favorable than those projected by management,
additional inventory reserves may be required.



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

The Company is self-insured for workers
compensation and provides reserves for workers
compensation claims which were incurred but not reported by
year-end. The Company takes into consideration the status of
current and historical claims and actuarial estimates of losses
from such claims to determine the reserve amounts. If current or
future claims are higher than estimated, additional reserves may
be required.



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

The Company provides a reserve for the future
payment of state and federal income taxes arising out of
completed transactions. The current reserve includes the
estimated tax due as a result of the debt purchase transaction
and the issuance of preferred stock by the Company as well as
the estimated income tax due to various states arising out of
the Companys obligation to file income taxes in all states
for the years beginning in 1999. At this time, the Company does
not foresee any additional tax obligations beyond what is
reserved. However, if future tax obligations are higher than
estimated, additional reserves may be required.



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

The Company follows SFAS No. 142,
Goodwill and Other Intangible Assets which states
that there will be no amortization of goodwill or intangible
assets with indefinite lives. Impairment of these assets is
assessed at least annually to determine if the estimated fair
value of the reporting unit exceeds the net carrying value of
the reporting unit, including the applicable goodwill. The
estimates of fair market value are based upon managements
estimates of the present value of future cash flows. Management
makes assumptions regarding the estimated cash flows and if
these estimates or their related assumptions change, an
impairment charge may be incurred.



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

The Company accounts for grants under the
Independent Contractor Stock Option Plan (the 1998
Independent Contractor Plan) in accordance with Statement
of Accounting Financial Standards No. 123. The Company
estimates quarterly compensation expense using the Black-Scholes
option-pricing method, using certain key assumptions such as the
estimated fair value of the Companys common stock, term,
dividend yield, volatility and risk-free interest rate. These
key assumptions are subjective in nature and future compensation
expense could vary significantly from prior periods.

The Company accounts for grants under the 1998
Key Employee Stock Option Plan (the 1998 Plan) and
the 2002 Key Employee Stock Option Plan (the 2002
Plan) in accordance with the Accounting Principles Board
Opinion No. 25. Options issued to employees under the 1998
Plan had no intrinsic value at the date of grant, thus, the
Company does not record compensation expense related to these
options. The 2002 Plan options are accounted for under variable
accounting due to their vesting being linked to certain Company

15



---



##### Table of Contents



financial performance goals. The Company
estimates quarterly compensation expense for the 2002 Plan using
the Minimum Value option-pricing method, using certain key
assumptions such as the estimated fair value of the
Companys common stock, term, dividend yield, and risk-free
interest rate. These key assumptions are subjective in nature
and future compensation expense could vary significantly from
prior periods.




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

Certain reclassifications have been made to prior
years balances to conform with current year presentation.

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 reported amounts 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 million for 2001 and decreased by $2.7 million
for 2002.

Results of Operations



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

Net salesincreased
$42.9 million, or 7.5%, to $617.4 million in 2003 from
$574.5 million in 2002. The increase was primarily due to
an increase in international direct sales to non-affiliates of
$24.9 million or 67.8% related to the increase in Mexico
and Canada Displayer bases, and an increase in Domistyle sales
to non-affiliate retailers of $21.1 million or 229.3%
primarily due to sales from newly acquired companies. Domestic
direct sales to non-affiliates decreased $3.2 million or
0.6%. The primary variables that impact domestic direct sales
include the number of Displayers, the number of orders shipped,
the number of orders per Displayer, and average order size. The
average domestic order size decreased 13.7% to $492 in 2003 as
compared to $570 in 2002. The Company believes the decrease in
average order size is due to the increase in new Displayers who
are historically less productive and the timing of incentive
promotions. The number of active domestic Displayers increased
to approximately 70,800 as of December 31, 2003 as compared
to approximately 64,000 at December 31, 2002. The number of
orders shipped increased 15.2% to 1,067,671 orders in 2003 from
926,934 orders in 2002.

Gross profitincreased $6.4 million, or 2.0%,
to $329.2 million in 2003 from $322.8 million in 2002.
As a percentage of net sales, gross profit decreased to 53.3% in
2003 from 56.2% in 2002. The decrease as a percentage of net
sales is primarily due to significantly discounted product sales
resulting from a special, one-time inventory reduction promotion
that occurred in the third quarter of 2003. Approximately
$2.9 million of non-recurring costs related to redundant
labor and inventory write-offs for the new international
manufacturing entities is included in cost of goods sold for
2003.

Selling expensedecreased $1.6 million, or 1.5%,
to $103.5 million in 2003 from $105.1 million in 2002.
As a percentage of net sales, selling expense decreased to 16.8%
in 2003 from 18.3% in 2002. The decrease in selling expense is
primarily due to the cost and timing of accruals for sales
events such as the Companys annual Seminar and a decrease
in Director bonuses of $5.8 million as a result of lower
commissionable sales compared to the prior year. These decreases
were partially offset by increased expenses related to the newly
acquired subsidiaries in 2003.

Freight, warehouse and distribution expenseincreased $11.2 million, or
16.8%, to $77.8 million in 2003 from $66.6 million in
2002. These costs were 12.6% of net sales in 2003 compared to
11.6% in 2002. This increase was primarily due to the increase
in facility related expenses and freight, labor and warehouse
supplies as a result of the 15.2% increase in the number of
orders shipped over 2002.

16



---



##### Table of Contents



General and administrative expenseincreased $7.8 million, or 13.4%,
to $66.0 million in 2003, from $58.2 million in 2002.
This increase consists primarily of a $2.7 million increase
in depreciation and amortization expense, $2.1 million
increase related to additional facility related expenses, $1.5
million increase in professional fees, $0.6 million
increase in bad debt expense, and $0.7 million increase in
employee related costs. Included in general and administrative
expense are certain additional non-recurring costs of
$4.4 million in 2003 and $2.9 million in 2002 related
to excess facilities, uncapitalizable fees related to the new
ERP system, corporate organizational realignment expenses, and
integration of newly acquired manufacturing subsidiaries, and
$3.7 million related to additional subsidiary operating
expenses primarily as a result of the newly acquired companies.

Loss on the disposition of assetsof $0.1 million and a gain of
$0.4 million was recorded in 2003 and 2002, respectively. The
loss in 2003 was related to impairment losses on the retirement
of manufacturing equipment offset by a gain on the sale of land.
The gain in 2002 was related to the sale of a partial interest
in an aircraft.

Loss on debt restructureof $7.2 million in 2002 was a
result of the write-off of $3.3 million of unamortized debt
issuance costs and $3.9 million of fees related to the debt
restructure in July, 2002.

Stock option expenseof approximately $4.2 million and
$1.3 million was recorded in 2003 and 2002, respectively.
The increase in 2003 is due to the full year impact of the
issuance of options in the third quarter of 2002 under the 2002
Stock Option Plan for Key Employees.

Interest incomedecreased $0.1 million, or 23.9%,
to $0.4 million in 2003 from $0.5 million in 2002
primarily due to lower average interest rates.

Interest expenseremained unchanged at
$27.5 million due to a higher average debt balance in 2003
compared to 2002 offset by a slight decrease in LIBOR interest
rates in 2003 compared to 2002.

Other income (expense)decreased $0.3 million to
$1.1 million in 2003 from $1.4 million in 2002
primarily due to a decrease of expenses related to an inventory
purchase in 2002 that was liquidated and not sold through the
normal course of business offset by an increase in foreign
currency translation losses due to newly acquired subsidiaries.

Income taxesdecreased $3.8 million to
$16.9 million in 2003 from $20.7 million in 2002. Income
taxes, as a percentage of income before income taxes, were 34.3%
in 2003 compared to 36.8% in 2002. The change in income taxes as
a percentage of income before income taxes is due to a favorable
state income tax audit determination in the third quarter of
2003, as well as the recognition of a deferred tax valuation
allowance as a result of net operating loss carryforwards in
association with the manufacturing companies located in Mexico.



| |                      
| | ---------------------
| | 2002 Compared to 2001

Net salesincreased
$112.8 million, or 24.4%, to $574.5 million in 2002
from $461.7 million in 2001. The increase was primarily due
to a larger and more productive domestic Displayer base and an
increase in Domistyle sales to non-affiliate resellers of
$7.6 million. The average domestic order size increased
1.8% to $570 in 2002 as compared to $560 in 2001. The number of
active domestic Displayers increased to approximately 64,500 as
of December 31, 2002 as compared to approximately 59,000 at
December 31, 2001. The number of orders shipped increased
18.4% to 926,934 orders in 2002 from 782,670 orders in 2001.

Gross profitincreased $62.0 million, or
23.8%, to $322.8 million in 2002 from $260.8 million
in 2001. As a percentage of net sales, gross profit decreased
slightly to 56.2% in 2002 from 56.5% in 2001. The decrease in
the gross profit percentage was primarily due to increased
inventory reserves for additional product lines and an expanded
Christmas line.

Selling expenseincreased $18.6 million, or
21.5%, to $105.1 million in 2002 from $86.5 million in
2001. As a percentage of net sales, selling expense decreased to
18.3% in 2002 from 18.7% in 2001. The decrease was a result of
fewer promotional related expenses such as incentive trips and
recruiting incentives as compared to 2001 and was partially
offset by increased Director bonuses of $9.2 million
related to increased commissionable sales over the prior year.

17



---



##### Table of Contents



Freight, warehouse and distribution expenseincreased $16.0 million, or
31.6%, to $66.6 million in 2002 from $50.6 million in
2001. These costs were 11.6% of net sales in 2002 compared to
11.0% in 2001. This increase was primarily due to costs
associated with additional warehousing space required for the
growth in inventory in 2002.

General and administrative expenseincreased $2.1 million, or 3.7%,
to $58.2 million in 2002, from $56.1 million in 2001.
This increase was primarily due to increases in credit card
processing fees of $2.2 million, depreciation expense of
$2.0 million, and outside services of $1.2 million
primarily related to temporary labor. These increases were
offset by certain non-recurring costs of $2.9 million in
2002 as compared to $6.3 million in 2001 associated with
non-capitalizable legal fees related to obtaining a debt
covenant waiver in 2001, excess facilities, consulting costs
associated with the Companys reorganization plan and the
non-capitalizable costs of a new ERP system.

Gain on the disposition of assetsof $0.4 million and a loss of
$0.5 million was recorded in 2002 and 2001, respectively. The
gain in 2002 was related to the sale of a partial interest in an
aircraft. The loss in 2001 was related to the impairment loss on
retired manufacturing equipment and the loss on the sale of land.

Stock option expenseof approximately $1.3 million and
a credit of $62,000 were recorded in 2002 and 2001,
respectively. The increase in 2002 is due to the issuance of
options under the 2002 Stock Option Plan for Key Employees and
an increase in the fair value of the stock.

Loss on debt restructureof $7.2 million in 2002 was a
result of the write-off of $3.3 million of unamortized debt
issuance costs and $3.9 million of fees related to the debt
restructure in July 2002. The loss of $2.4 million in 2001
was a result of the write-off of $2.4 million in
unamortized debt issuance costs related to the debt
restructuring in July 2001.

Redundant warehouse and distribution expenseof $1.2 million was recorded in
2001 and consisted primarily of costs associated with operating
certain manual distribution centers longer than anticipated and
the consolidation of the manual distribution centers into the
new distribution facility. The Company did not incur redundant
warehouse costs in 2002.

Interest incomedecreased $0.5 million, or 50.0%,
to $0.5 million in 2002 from $1.0 million in 2001
primarily due to lower average interest rates.

Interest expensedecreased $11.0 million, or
28.6%, to $27.5 million in 2002 from $38.5 million in
2001. The interest expense in 2002 declined as compared to 2001
primarily due to a reduced debt balance as a result of the
conversion of $95.8 million in debt to Senior Preferred
Stock as part of the Debt Restructuring in July 2001.

Other income (expense)in 2002 includes expense of
$1.4 million related to an inventory purchase in the second
quarter of 2002 that was liquidated and not sold through the
normal course of business.

Income taxesdecreased $2.7 million to
$20.7 million in 2002 from $23.4 million in 2001. Income
taxes, as a percentage of income before income taxes, were 36.8%
in 2002 compared to 86.7% in 2001. In 2001, the Company recorded
$12.8 million of income taxes related to the debt
restructuring completed in July 2001.

Segment Profitability

The Companys reportable segments include
its domestic and international direct sales operations and
Domistyle. The Companys manufacturing operations are part
of its Domistyle segment, which sells the majority of its
products to the Company. As a result, Domistyle sales generally
follow the Companys domestic sales trend. International
operations include direct sales by Displayers in Mexico, Canada,
and Puerto Rico. International direct sales are directly
attributable to the number of international Displayers the
Company has selling its products. The Company evaluates the
performance of its segments and allocates resources to them
based on earnings before interest, taxes, the effects of SAB
101, depreciation and amortization, reorganization and
redundancy costs, non-cash expense (credit) for stock
options, losses on debt restructure, (gains) losses on
disposition of assets, and other income and expense (defined as
Adjusted EBITDA). The Company also uses Adjusted
EBITDA as a performance measure due to the Companys
required compliance thresholds for

18



---



##### Table of Contents



covenants contained in the Companys Senior
Credit Facility. See Note 17 to the Companys Consolidated
Financial Statements included herein for a reconciliation of net
income to Adjusted EBITDA.




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

Consolidated net sales increased
$42.9 million, or 7.5%, to $617.4 million in 2003 from
$574.5 million in 2002. Consolidated Adjusted EBITDA
decreased $1.2 million, or 1.1%, to $105.3 million in
2003 from $106.5 million in 2002. See discussion in
Results of Operations.

Direct Selling

Domestic

Domestic net sales to non-affiliates and
affiliates increased $8.5 million, or 1.6%, to
$554.4 million in 2003 from $545.9 million in 2002. Of
this increase, net sales to affiliates increased
$11.8 million, or 68.6% to $29.0 million in 2003 from
$17.2 million in 2002. The increase in net sales to
affiliates is directly attributable to the net sales increase in
the international direct selling segment. Net sales to
non-affiliates decreased $3.2 million, or 0.6%, to
$525.5 million in 2003 from $528.7 million in 2002.
The primary sales drivers for non-affiliate sales are average
order size, Displayer productivity, and number of active
Displayers. Domestic Adjusted EBITDA decreased
$1.9 million, or 3.3%, to $55.1 million in 2003 from
$57.0 million in 2002. The decrease is attributable to a
decrease in average order size to $492 in 2003 from $570 in 2002
and significantly discounted product sales resulting from a
special one-time inventory reduction promotion that occurred in
the third quarter of 2003.

International

International direct sales include sales in
Mexico, Canada, and Puerto Rico. These sales increased
$24.9 million, or 67.8%, to $61.6 million in 2003 from
$36.7 million in 2002. This increase is primarily due to
the increase in the Displayer base in Mexico and Canada. As of
December 31, 2003, the Displayer base was approximately
25,400, 1,300, and 800 in Mexico, Canada, and Puerto Rico,
respectively as compared to 16,900, 800, and 500 as of
December 31, 2002. International direct sales Adjusted
EBITDA increased $3.7 million, or 123.3%, to
$6.7 million in 2003 from $3.0 million in 2002.

Domistyle

The Company is in the process of trying to expand
its wholesale supply sales to non-affiliate resellers. Sales to
non-affiliate resellers increased $21.1 million, or 229.3%,
to $30.3 million in 2003 from $9.2 million in 2002. Of
these sales, 53.1% or $16.1 million were generated by the
newly acquired companies and their existing customer base.
Domistyle sales to affiliates increased $9.7 million or
7.1% to $145.8 million in 2003 from $136.1 million in
2002. Adjusted EBITDA generated by Domistyle decreased
$1.9 million, or 4.1%, to $44.9 million in 2003 from
$46.8 million in 2002 primarily due to production and
pricing inefficiencies incurred during the integration period of
the newly acquired companies.

2002 Compared
to 2001

Consolidated net sales increased
$112.8 million, or 24.4%, to $574.5 million in 2002 from
$461.7 million in 2001. Consolidated Adjusted EBITDA
increased $21.6 million, or 25.4%, to $106.5 million
in 2002 from $84.9 million in 2001. See discussion in
Results of Operations.

Direct Selling

Domestic

Domestic net sales to non-affiliates and
affiliates increased $97.5 million, or 21.7%, to
$545.9 million in 2002 from $448.4 million in 2001. Of
this increase, net sales to affiliates increased
$7.1 million, or 70.3% to $17.2 million in 2002 from
$10.1 million in 2001. The increase in net sales to
affiliates is directly attributable to the net sales increase in
the international direct selling segment. Net sales to
non-affiliates increased $90.5 million, or 20.7%, to
$528.7 million in 2002 from $438.2 million in 2001.
The primary sales drivers for

19



---



##### Table of Contents



non-affiliate sales are average order size,
Displayer productivity, and number of active Displayers.
Domestic Adjusted EBITDA increased $7.7 million, or 15.6%,
to $57.0 million in 2002 from $49.3 million in 2001. The
increase is attributable to an increase in average order size to
$570 in 2002 from $560 in 2001, and an 18.4% increase in the
number of orders shipped.


International

International direct sales include sales in
Mexico, Canada, and Puerto Rico. These sales increased
$14.8 million, or 67.6%, to $36.7 million in 2002 from
$21.9 million in 2001. This increase is primarily due to
the expansion of the Displayer base in Mexico and
$3.7 million in net sales related to newly initiated
operations in Canada. International direct sales Adjusted EBITDA
increased $0.4 million, or 15.4%, to $3.0 million in
2002 from $2.6 million in 2001.

Domistyle

Sales to non-affiliate resellers increased
$7.6 million, or 475.0%, to $9.2 million in 2002 from
$1.6 million in 2001. Domistyle sales to affiliates
increased $19.2 million or 16.4% to $136.1 million in
2002 from $116.9 million in 2001. Adjusted EBITDA generated
by Domistyle increased $12.9 million, or 38.1%, to
$46.8 million in 2002 from $33.9 million in 2001
primarily due to increased manufacturing profitability on sales
to affiliates and increases in sales to non-affiliates.

Seasonality

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

Liquidity and Capital Resources

The Companys cash decreased
$31.5 million from $68.1 million as of
December 31, 2002, to $36.6 million at
December 31, 2003. The decrease resulted primarily from
$27.4 million and $21.3 million of net cash used by
investing and financing activities, respectively, offset in part
by $17.5 million of net cash provided by operating
activities.

Net cash of $17.5 million provided by
operating activities consisted primarily of $57.8 million
provided by net income, as adjusted for non-cash items, and
$40.3 million used by working capital. Working capital
usage consisted primarily of a $15.5 million increase in
inventory balances, a $12.0 million increase in accounts
receivable, a $6.8 million decrease in accrued seminar
expenses and incentive awards, and a $5.2 million decrease
in royalties payable to Displayers.

Net cash of $27.4 million used in investing
activities was a result of approximately $13.5 million of
cash used for the acquisitions of the new manufacturing entities
in Mexico and New Jersey, and $14.6 million of cash used
for the purchases of property, plant and equipment.

Net cash used in financing activities totaled
$21.3 million and was primarily a result of
$19.0 million of principal payments under the Senior Credit
Facility and $1.8 million in principal payments under
capital lease obligations. During 2003, there were no borrowings
nor repayments of the Revolving Loans.

Payments on the Notes and the Senior Credit
Facility represent significant cash requirements for the
Company. Interest payments on the Notes commenced in December
1998 and will continue semi-annually until the Notes mature in
2008. The Company has the option to redeem the Notes in whole or
in part at any

20



---



##### Table of Contents



time on or after June 1, 2003. Borrowings
under the Senior Credit Facility require quarterly interest and
principal payments. In addition, the Senior Credit Facility
includes $30.0 million of Revolving Loans, which mature on
December 31, 2004. As described above, the Company is currently
in discussions with two financial institutions regarding the
refinancing of such Revolving Loans. The Revolving Loans were
reduced from $40.0 million to $30.0 million as a
result of the amendment to the Senior Credit Facility in March
2001. As of December 31, 2003, there were no outstanding
Revolving Loans.


The Company paid a total of $44.3 million in
debt service for 2003, consisting of principal payments under
the Senior Credit Facility of $19.0 million, which included a
mandatory prepayment of $12.4 million, interest and
commitment fees under the Senior Credit Facility of
approximately $10.2 million, and interest of $15.1 million
on the Notes.

The terms of the Notes and Senior Credit Facility
include significant operating and financial restrictions, such
as limits on the Companys ability to incur indebtedness,
create liens, sell assets, engage in mergers or consolidations,
make investments, and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with
specified financial ratios and tests, including minimum fixed
charge coverage ratios, maximum leverage ratios, capital
expenditure measurements, and Adjusted EBITDA measurements. As
of December 31, 2003, cumulative preferred stock dividends
in arrears were $29.5 million.

The Company is in compliance with all covenants
or other requirements set forth in its credit agreements and
indentures. Further, the Company does not have any rating
downgrade triggers that would accelerate maturity dates of its
debt.

Contractual Obligations

The following table summarizes the Companys
contractual obligations at December 31, 2003, and the
effects such obligations are expected to have on its liquidity
and cash flow in future periods (in thousands).

|                                                                  |                               |                        |         |           |  |           |       |           |  |       |         |         |  |   |         |         |  |   |   |   | 
|----------------------------------------------------------------- | ----------------------------- | ---------------------- | ------- | --------- |  | --------- | ----- | --------- |  | ----- | ------- | ------- |  | - | ------- | ------- |  | - | - | - | 
|                                                                  |                               |                       
|                                                                  |                               | Payments Due by Period
|                                                                  |                               |                       
|                                                                  |                               |                        |         | Less than |  |           |       | After 5  
|                                                                  |                               | Total                  |         | 1 Year    |  | 1-3 Years |       | 4-5 Years |  | Years
|                                                                  |                               |                        |         |           |  |           |       |           |  |      
|CONTRACTUAL OBLIGATIONS:                                          |                               |                        |         |           |  |           |       |           |  |       |         |         |  |   |         |         |  |   |   |  
|Long-term debt                                                    |                               | $                      | 317,782 |           |  | $         | 8,953 |           |  | $     | 159,729 |         |  | $ | 149,100 |         |  | $ |  |  
|Capital lease obligations                                         |                               |                        | 4,094   |           |  |           | 1,146 |           |  |       | 2,948   |         |  |   |        |         |  |   |  |  
|Related party note payable                                        |                               |                        | 1,362   |           |  |           | 675   |           |  |       | 687     |         |  |   |        |         |  |   |  |  
|Guaranteed minimum royalty obligation                             |                               |                        | 5,000   |           |  |           | 2,000 |           |  |       | 3,000   |         |  |   |        |         |  |   |  |  
|Non-cancelable operating lease obligations (net
    of subleases) |                               |                        | 13,140  |           |  |           | 2,849 |           |  |       | 7,364   |         |  |   | 2,927   |         |  |   |  |  
|Letters of credit                                                 |                               |                        | 4,932   |           |  |           | 4,932 |           |  |       |        |         |  |   |        |         |  |   |  |  
|                                                                  |                               |                        |         |           |  |           |       |           |  |       |         |         |  |   |         |         |  |   |   |  
|                                                                  | Total contractual obligations |                        | $       | 346,310   |  |           | $     | 20,555    |  |       | $       | 173,728 |  |   | $       | 152,027 |  |   | $ |  | 
|                                                                  |                               |                        |         |           |  |           |       |           |  |       |         |         |  |   |         |         |  |   |   |  

Long-term debt consists of borrowings under the
Senior Credit Facility and Notes. The Senior Credit Facility
borrowings require quarterly principal payments and the Notes
require semi-annual interest payments. The Company may, at its
option, prepay the term loans without premium or penalty.

The Company entered into capital lease
obligations for equipment, associated with the automated order
fulfillment system being used in the warehouse and distribution
facility, and office furniture and equipment. The lessor funded
the equipment purchase when construction of the automated order
fulfillment system was completed in April 2000. The initial term
of each of the leases is seven years. Interest is imputed at a
weighted average rate of 6.1% per annum.

In June of 2003, the Company entered into a
twelve-year license agreement (the License
Agreement) with Meredith Corporation, of which, the first
two years are non-cancelable by either party. The License
Agreement governs the development, manufacture, marketing and
distribution of products to be sold by the Company under the
trademark Better Homes and Gardens. The agreement
provides for earned royalty

21



---



##### Table of Contents



payments to Meredith Corporation determined by a
percentage of net sales and guaranteed annual minimum royalty
payments that escalate through the term of the license agreement.


The Company has several outstanding operating
leases related to the Granite facility and additional
warehousing space. The majority of the Granite facility has been
subleased. See Item 2. Properties.

As of December 31, 2003, the Company had
several letters of credit outstanding related to insurance
policies.

At December 31, 2003 the Company did not
have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As such, the Company is not materially exposed to any financing,
liquidity or market or credit risk that could arise if the
Company had engaged in such relationships.

The Companys near and long-term operating
strategies focus on broadening the Displayer base through
recruiting efforts and increasing retention and productivity of
the existing Displayer base and leveraging the assets of the
Companys manufacturing subsidiaries. The Company believes
that cash on hand, net cash flow from operations and borrowings
under the Revolving Loans will be sufficient to fund its cash
requirements through the year ended December 31, 2004. Cash
requirements will consist primarily of payments of principal and
interest on outstanding indebtedness, working capital
requirements and capital expenditures. The Companys future
operating performance and ability to service or refinance its
current indebtedness will be subject to future economic
conditions and to financial, business and other factors, many of
which are beyond the Companys control.

Market-Sensitive Instruments and Risk
Management

The Companys Products are sold in Mexico
and Canada thereby subjecting the Company to financial market
risk due to fluctuating foreign currency exchange rates.
Historically, due to a stable foreign exchange and due to the
fact that these operations have not been significant, the risk
has been minor. However, as the Companys international
operations become significant to the Company as a whole, changes
in foreign currency exchange rates could have a material effect
on the Company in the future. The Company has not entered into
any hedging instruments related to foreign currency risk.

As a result of the interest pricing mechanism
associated with the bank debt, the Company is exposed to
financial market risk due to fluctuating interest rates. The
Company monitors this risk and makes decisions to participate in
interest hedging devices based on interest rate expectations,
the Companys desire to maintain total yield within
predetermined levels and the ratio of fixed to variable debt.
During 2003, the Company did not enter into any hedging
instruments. In addition, the Company does not use derivative
instruments for trading or speculative purposes.

The following table presents principal cash flows
of variable rate debt by maturity date and the related average
interest rates based upon existing terms. The interest rates are
weighted between the Tranche A Loan and the Tranche B Loan based
on debt outstanding and are estimated based on implied forward
rates using a yield curve as of December 31, 2003. The
Notes are at a fixed rate of 10.125% and will mature in 2008.

|                      |  |                        |       |      |  |      |        |      |  |      |        |      |  |       |   |            |  |   |         |   |  |  |   |  |  |   |         |  |  |   |         | 
|--------------------- |  | ---------------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ----- | - | ---------- |  | - | ------- | - |  |  | - |  |  | - | ------- |  |  | - | ------- | 
|                      |  |                       
|                      |  | 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  | % |  |  |  |  |  |   |        |  |  |   |        | 

22



---



##### Table of Contents



The following table presents comparable data for
the prior year ended December 31, 2002.

|                      |  |                        |        |      |  |      |       |                |  |      |        |      |  |       |        |            |  |  |   |  |  |   |         |   |  |   |         |  |  |   |         | 
|--------------------- |  | ---------------------- | ------ | ---- |  | ---- | ----- | -------------- |  | ---- | ------ | ---- |  | ----- | ------ | ---------- |  |  | - |  |  | - | ------- | - |  | - | ------- |  |  | - | ------- | 
|                      |  |                       
|                      |  | Expected Maturity Date
|                      |  |                       
|                      |  | 2003                   |        | 2004 |  | 2005 |       | 2006           |  | 2007 |        | 2008 |  | Total |        | Fair Value
|                      |  |                        |        |      |  |      |       |                |  |      |        |      |  |       |        |           
|                      |  |                        |        |      |  |      |       |                |  |      |        |      |  |      
|                      |  |                        |        |      |  |      |       | (In thousands) |  |      |        |      |  |      
|Variable rate debt    |  | $                      | 19,007 |      |  | $    | 8,953 |                |  | $    | 70,643 |      |  | $     | 89,086 |            |  |  |  |  |  |   |        |   |  | $ | 187,689 |  |  | $ | 187,689 | 
|Average interest rate |  |                        | 6.49   | %    |  |      | 7.87  | %              |  |      | 8.64   | %    |  |       |       |            |  |  |  |  |  |   |        |   |  |   |        |  |  |   |        | 
|Fixed-rate debt       |  |                        |       |      |  |      |      |                |  |      |       |      |  |       |       |            |  |  |  |  |  | $ | 149,100 |   |  | $ | 149,100 |  |  | $ | 138,700 | 
|Interest rate         |  |                        |       |      |  |      |      |                |  |      |       |      |  |       |       |            |  |  |  |  |  |   | 10.125  | % |  |   |        |  |  |   |        | 

Inflation

Although the Companys operations are
affected by general economic trends, inflation and changing
prices did not have a material impact on the Companys
operations in 2001, 2002 or 2003.

Recently Issued Statements of Financial
Accounting Standards

In May of 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS No. 150). SFAS No. 150 establishes
standards for classification and measurement of financial
instruments issued by entities that have the characteristics of
both liabilities and equity. SFAS No. 150 is effective
for financial instruments entered into or modified after
May 31, 2003. The Company adopted SFAS No. 150 on
May 31, 2003 and there was not a financial accounting
impact associated with its adoption.

In April of 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS
No. 149). SFAS No. 149 clarifies the definition
of a derivative and amends the implementation guidance of
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 149
is effective for contracts entered into or modified after
June 30, 2003, except for hedging relationships designated
after June 30, 2003. The provisions of
SFAS No. 149, which amend implementation guidance of
SFAS No. 133, are effective for fiscal quarters that began
prior to June 15, 2003. The company adopted certain
provisions of SFAS No. 149 and determined that there was
not a financial impact on the quarter ended, March 31,
2003. The Company adopted the remaining provisions of SFAS
No. 149 on June 30, 2003 and there was not a financial
impact associated with its adoption.

In December of 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure (SFAS No.
148). SFAS No. 148 amends FASB Statement No. 123
Accounting for Stock-Based Compensation to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements of Statement
123 to require prominent disclosure about the effects on
reported net income of an entitys accounting policy
decisions with respect to stock-based employee compensation.
SFAS No. 148 also amends APB Opinion No. 28
Interim Financial Reporting, to require disclosure
about those effects in interim financial information. SFAS
No. 148 is effective for fiscal year ended
December 31, 2002. The Company has elected to continue
accounting for the employee stock options plans under APB 25;
however, the Company has adopted the new disclosure requirements
of SFAS No. 148. The Company has decided not to adopt the
fair value based method of accounting for stock-based employee
compensation.






Item 7a.     Quantitative
and Qualitative Disclosures About Market Risk


The Securities and Exchange Commission requires
that registrants include information about the potential effects
of changes in interest rates and currency exchange on their
financial statements. Refer to the information appearing under
the subheading Market-Sensitive Instruments and Risk
Management under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which

23



---



##### Table of Contents



information is hereby incorporated by reference
into this Item 7A. All statements other than historical
information incorporated into this Item 7A are
forward-looking statements. The actual impact of future market
changes could differ materially due to, among other things, the
factors discussed in this report. Based on the Companys
bank debt balances throughout the 2003 fiscal year, a one point
increase or decrease in the variable interest rate for the
Tranche A Loan and the Tranche B Loan would result in an
increase or decrease in income before income taxes of
approximately $1.8 million.





Item 8.     Financial
Statements and Supplementary Data

The consolidated financial statements and
financial statement schedule of the Company and its subsidiaries
required by this Item 8 are listed in Part IV,
Item 15(a) of this report. Such consolidated financial
statements are included herein beginning on page F-1.




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

Not applicable.




Item 9A.     Controls
and Procedures

(a) The Company maintains disclosure
controls and procedures that are designed to ensure that
information required to be disclosed in the Companys
filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the periods specified
in the rules and forms of the Securities and Exchange
Commission. Such information is accumulated and communicated to
the Companys management, including its principal executive
officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. The
Companys management, including the principal executive
officer and principal accounting officer, recognizes that any
set of controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives.

During 2003, the Company carried out an
evaluation of the effectiveness of the design and operation of
the Companys disclosure controls and procedures under the
supervision and with the participation of the Companys
management, including the Companys principal executive
officer and the Companys principal financial officer.
Based on that evaluation, the Companys principal executive
officer and principal financial officer concluded that the
Companys disclosure controls and procedures are effective.

(b) There have been no significant changes
in the Companys internal controls or in other factors that
could significantly affect the internal controls subsequent to
the date of their evaluation in connection with the preparation
of this annual report on Form 10-K.

24



---



##### Table of Contents






PART III




Item 10.     Directors
and Executive Officers of the Registrant

Directors And Executive Officers

Set forth below is certain information as of
March 22, 2004 with respect to those individuals who are
serving as members of the Board or as executive officers of the
Company:

|                            |  |     |    |          |  |                                                                         
|--------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------
|Name                        |  | Age |    | Position
|                            |  |     |    |         
|Donald J. Carter, Jr.       |  |     | 43 |          |  | Chairman of the Board                                                   
|Barbara J. Hammond          |  |     | 73 |          |  | Director and Vice-Chairman                                              
|Christina L. Carter Urschel |  |     | 40 |          |  | Director, Vice-Chairman and National Spokesperson                       
|Michael D. Lohner           |  |     | 41 |          |  | President and Chief Executive Officer                                   
|Kenneth J. Cichocki         |  |     | 51 |          |  | Sr. Vice-President of Finance, Chief Financial
    Officer and Secretary
|Eugenia B. Price            |  |     | 38 |          |  | Sr. Vice-President International and Business
    Development           
|Mary-Knight Tyler           |  |     | 42 |          |  | Sr. Vice-President, Operations                                          
|Charles L. Elsey            |  |     | 50 |          |  | President of Domistyle, Inc.                                            
|Thomas O. Hicks             |  |     | 58 |          |  | Director                                                                
|Jack D. Furst               |  |     | 45 |          |  | Director                                                                
|Joe Colonnetta(1)           |  |     | 42 |          |  | Director                                                                
|Sheldon I. Stein(1)         |  |     | 50 |          |  | Director                                                                
|Robert H. Dedman, Jr.       |  |     | 46 |          |  | Director                                                                
|Gretchen M. Williams(1)     |  |     | 47 |          |  | Director                                                                



---



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

Set forth below is a description of the
backgrounds of those persons who are serving as members of the
Board and as executive officers of the Company. All of the
Companys officers are appointed by the Board and serve at
its discretion.

Donald J. Carter, Jr.served as Chief Executive Officer of
the Company from October 1997 to December 31, 2003. He was
elected to the Board of Directors of the Company in 1992, became
Chairman of the Board of Directors in June 1998 and continues to
serve in that capacity. Since he joined the Company in 1984,
Mr. Carter has also served the Company in various executive
capacities, including as Executive Vice-President of Sales from
1994 to 1997. Mr. Carter is the Immediate Past Chairman of
the Direct Selling Association (DSA) and he
currently serves on the Board of Directors of the DSA. Mr.
Carter also serves as an officer of the Pocketful of Hope
Charities charitable foundation. Mr. Carter is the brother
of Christina L. Carter Urschel, and the grandson of the
Companys founder, Mary Crowley.

Barbara J. Hammondhas served as Vice-Chairman of the
Company since February 2000, and as of January 1, 2002, is
a consultant to the Company and has been a Director of the
Company since 1970. Ms. Hammond served as President of the
Company from 1995 to January 2000. Ms. Hammond has served
the Company in various executive capacities from 1978 to 1995,
including as National Sales Manager and Executive Vice-President
of Sales. Ms. Hammond originally joined the Company as a
Displayer in 1960, when she was personally trained by Mary
Crowley, and rose to become one of the Companys top
Displayers and Directors.

Christina L. Carter Urschelhas served the Company as
Vice-Chairman and National Spokesperson since November 1,
2001, President from February 2000 to November 1, 2001, and
has been a Director of the

25



---



##### Table of Contents



Company since May 1995. Ms. Urschel served as
Executive Vice-President of the Company from 1997 to January
2000, and as Vice-President from 1994 to 1997. Ms. Urschel
joined the Company in 1987 and, since that time, has undertaken
various sales and marketing responsibilities. As of
November 1, 2001, Ms. Urschel serves as the President
of the Pocketful of Hope Charities charitable foundation.
Ms. Urschel is the sister of Donald J. Carter, Jr., and the
granddaughter of the Companys founder, Mary Crowley.


Michael D. Lohnerwas elected to the office of Chief
Executive Officer, effective January 1, 2004. He continues
to serve as President, a position he has held since
November 1, 2001. Mr. Lohner has previously served the
Company in various other capacities, including as Chief
Operating Officer since November 1, 2001, as Executive
Vice-President and Chief Operating Officer from January 10,
2001 to November 1, 2001, and as Sr. Vice-President and
Chief Operating Officer from May 24, 2000 to
January 10, 2001. Mr. Lohner held various positions,
including President and CEO, at Evergreen Alliance Golf Limited
from 1991 through 1999. A graduate of Stanford Business School,
Mr. Lohner has also worked as a Management Consultant for Bain
& Company and has participated in the Executive in
Residence program of Hicks, Muse, Tate & Furst,
Incorporated. Mr. Lohner also serves on the Board of
Directors of the DSA and is Chairman of the Industry Research
Committee.

Kenneth J. Cichockihas served the Company as Senior
Vice-President of Finance and Chief Financial Officer since
November 1, 2001 and as Vice-President of Finance and Chief
Financial Officer from November 1, 1999 to November 1,
2001. He has also served as the Companys Secretary since
May, 2001. From 1993 to 1999, Mr. Cichocki served as a
consultant for the RMP Group, a corporate consulting firm that
provided financial and management consulting services. From 1980
to 1992, Mr. Cichocki served Guinness PLC in various
capacities, including Chief Financial Officer of one of its
divisions. Prior to joining Guinness, Mr. Cichocki served
Price Waterhouse LLP from 1975 to 1980 as a Senior Accountant.
Mr. Cichocki is a Certified Public Accountant.

Eugenia B. Pricehas
served the Company as Senior Vice-President International and
Business Development since November 21, 2003. She
previously served the Company as Senior Vice-President
International from May 21, 2002 to November 21, 2003,
as Vice-President International and New Market Development from
October 2000 to April 2002, as Vice-President Marketing and
International from May 1999 to September 2000, and as
Vice-President International and Strategic Planning from January
1999 to April 1999. Prior to joining the Company, Ms. Price
held various management positions at Mary Kay Inc. in the
International Development and Marketing areas from 1991 through
1998.

Mary-Knight Tylerhas served the Company as Senior
Vice-President, Operations since November 21, 2003, and as
Vice-President of Financial Services from July 2001 to
November 21, 2003. Prior to joining the Company,
Ms. Tyler was the Chief Financial Officer of Employbridge
and Senior Vice-President of Finance with Careerblazers.
Ms. Tyler is a Certified Public Accountant.

Charles L. Elseyhas
served the Company as President of its manufacturing retail
division, Domistyle, Inc., since September 9, 2003. Prior
to joining the Company, Mr. Elsey worked as an executive
and consultant in the energy/manufacturing fields, including
assignments with Pacific Enterprises, DJS Investments, EEX, a
subsidiary of Ensearch, RHI, Harbison Walker, and with Flowserve
Corp. He holds an undergraduate degree from Texas Christian
University and a Doctor of Jurisprudence degree from Tulsa
University.

Thomas O. Hickshas
been a Director of the Company since June 1998. Mr. Hicks is
Chairman of the Board of Hicks, Muse, Tate & Furst
Incorporated. From 1984 to May 1989, Mr. Hicks was
Co-Chairman of the Board and Co-Chief Executive Officer of Hicks
& Haas Incorporated, a Dallas-based private investment firm.
Mr. Hicks serves as a Director of Clear Channel
Communications, Inc., and of Viasystems Group, Inc.
Mr. Hicks also serves as a Director of Corpgroup Limited,
Digital Latin America, Fox Pan American Sports LLC, MVS
Corporation, and Swift & Co. He also serves on the Board of
Directors of Crow Family Holdings, as well as the JP Morgan
Chase National Advisory Board.

Jack D. Fursthas
been a Director of the Company since June 1998. Mr. Furst is a
Partner of Hicks, Muse, Tate & Furst Incorporated. Prior to
joining Hicks Muse, Mr. Furst was a Vice-President and
subsequently a Partner of Hicks & Haas Incorporated, a
Dallas-based private investment firm from 1987 to

26



---



##### Table of Contents



May 1989. From 1984 to 1986, Mr. Furst was a
merger and acquisition/corporate finance specialist for The
First Boston Corporation in New York. Before joining First
Boston, Mr. Furst was a financial consultant at Price
Waterhouse, LLP. Mr. Furst serves on the Board of Directors
of Activant Solutions, Inc. and The Realm Business Solutions,
Inc.


Joe Colonnettahas
been a Director of the Company since August 1999. Mr. Colonnetta
is a Partner of Hicks, Muse, Tate & Furst Incorporated.
Prior to joining Hicks Muse, Mr. Colonnetta served as a
Managing Principal of a management affiliate of Hicks Muse from
1995 to 1998. Mr. Colonnetta has served in various
Executive Positions of consumer and industrial companies owned
by Bass Investment Partners and Oppenheimer & Company.
Mr. Colonnetta is also a Director of Swift & Company,
Viasystems Group, Inc., Grupo Minsa, Zilog and Veltri
Automotive, Inc.

Sheldon I. Steinbecame a Director in July 1998.
Mr. Stein is a Senior Managing Director and oversees the
Southwest Region Investment Banking for Bear Stearns. Prior to
joining Bear Stearns in 1986, Mr. Stein was a partner in
the Dallas law firm of Hughes & Luce, where he specialized
in corporate finance and mergers and acquisitions.
Mr. Stein serves on the Boards of Directors of several
companies including The Mens Wearhouse, Inc. and Fitz and
Floyd. He was a Trustee of Brandeis University and currently
serves on the Board of Overseers of the Brandeis Graduate School
of Economics and Finance.

Robert H. Dedman, Jr.became a Director of the Company in
May 1999. Mr. Dedman is Chairman of the Board and Chief
Executive Officer of ClubCorp, Inc. and Chairman of ClubCorp
USA, Inc. Mr. Dedman was Director of Corporate Planning for
ClubCorp from 1980 to 1984 and then served as an associate at
Salomon Brothers Inc specializing in mergers and acquisitions
from 1984 to 1987. In 1987 he returned to ClubCorp as CFO, was
named President and Chief Operating Officer in January 1989 and
Chairman of the Board in August 2002. Mr. Dedman serves on the
Board of Directors of ClubCorp, Southern Methodist
Universitys Dedman School of Law, JPMorgan Chase Dallas
Region and the University of Texas at Austin Development Board.
He is also an Executive Board Member of Golf 20/20, a National
Trustee in the Southwest Region of the Boys and Girls Clubs of
America, Trustee of Southwestern Medical Foundation, Dallas
Museum of Art and past Chairman of the Texas Business Hall of
Fame. Mr. Dedman also Chairs the Southern Methodist
Universitys 21st Century Council.

Gretchen M. Williamsbecame a Director of the Company in
December 1998. Ms. Williams is Co-Chairman of the Board and
Co-Chief Executive Officer of Minyard Food Stores, Inc., its
divisions Sack N Save and Carnival Food Stores and its
subsidiary, Minyard Properties. She has been employed by Minyard
Food Stores, Inc. since 1972. Ms. Williams also serves as a
Director of the Leukemia Association of North Central Texas and
of Baylor University Medical Center.

The Hicks Muse Shareholders (as defined below in
Item 12. Security Ownership of Certain Beneficial
Owners and Management) and Adkins Family Partnership,
Ltd., M. Douglas Adkins, Estate of Fern Ardinger, Ardinger
Family Partnership, Ltd., Donald J. Carter, Linda J. Carter,
Donald J. Carter, Jr., Christina L. Carter Urschel, Ronald L.
Carter, Carter 1997 Charitable Remainder Unitrust and Hammond
Family Trust (collectively, the Carter Shareholders)
entered into a Shareholders Agreement (the Shareholder
Agreement) upon consummation of the Companys 1998
recapitalization. The Shareholders Agreement generally provides
that Hicks Muse may designate six directors. Donald J. Carter,
Jr., Barbara J. Hammond and Christina L. Carter Urschel, as
designees (the Carter Designees) of the Carter
Shareholders may designate three directors and Hicks Muse and
the Carter Designees mutually may designate two independent
directors. Thomas O. Hicks, Jack D. Furst, Joe Colonnetta and
Sheldon I. Stein are designated as directors by Hicks Muse.
Donald J. Carter, Jr., Barbara J. Hammond and Christina L.
Carter Urschel are designated as directors by the Carter
Designees. Hicks Muse and the Carter Designees mutually
designated Robert H. Dedman, Jr. and Gretchen M. Williams as
independent Directors of the Company. Hicks Muse has not
designated the additional directors.

27



---



##### Table of Contents



Compliance with Section 16(a) of the
Exchange Act

The Company does not have any class of equity
securities registered under Section 12 of the Securities
Exchange Act of 1934, as amended. Therefore, the shareholders of
the Company are not required to file reports pursuant to
Section 16(a) thereof.

Code of Ethics for Senior Financial
Management

The Company has adopted the Home Interiors &
Gifts Code of Ethics for Senior Financial Management (Code
of Ethics), which is applicable to the Companys
senior financial officers, including the Chief Executive
Officer, Chief Financial Officer, Vice-President of Financial
Services, the Chief Legal Officer, if one, and other Officers
designated by the Chief Executive Officer. The Company has
granted no waivers to the Code of Ethics to date.




Item 11.     Executive
Compensation

The following table sets forth the compensation
earned during each of the three years in the period ended
December 31, 2003, to the Chief Executive Officer and the
other four most highly compensated executive officers who were
serving as executive officers at December 31, 2003 (the
Named Executive Officers).

|                            |                                       |                     |      |        |  |       |         |         |  |  |           |           |  |  |   |   | 
|--------------------------- | ------------------------------------- | ------------------- | ---- | ------ |  | ----- | ------- | ------- |  |  | --------- | --------- |  |  | - | - | 
|                            |                                       |                    
|                            |                                       | Annual Compensation
|                            |                                       |                    
|                            |                                       |                     |      | Salary |  | Bonus |         | Other  
|Name and Principal Position |                                       | Year                |      | ($)    |  | ($)   |         | ($)    
|                            |                                       |                     |      |        |  |       |         |        
|Donald J. Carter, Jr.       |                                       |                     | 2003 |        |  |       | 500,000 |         |  |  | 225,000   |           |  |  |  |  
|                            | Chairman of the Board and             |                     |      | 2002   |  |       |         | 500,000 |  |  |           | 1,193,750 |  |  |   |  | 
|                            | Chief Executive Officer(1)            |                     |      | 2001   |  |       |         | 500,000 |  |  |           | 575,000   |  |  |   |  | 
|Michael D. Lohner           |                                       |                     | 2003 |        |  |       | 450,000 |         |  |  | 1,039,916 |           |  |  |  |  
|                            | President and Chief                   |                     |      | 2002   |  |       |         | 450,000 |  |  |           | 1,181,168 |  |  |   |  | 
|                            | Operating Officer(1)                  |                     |      | 2001   |  |       |         | 450,000 |  |  |           | 1,092,750 |  |  |   |  | 
|Kenneth J. Cichocki         |                                       |                     | 2003 |        |  |       | 306,250 |         |  |  | 41,351    |           |  |  |  |  
|                            | Sr. Vice-President of Finance,        |                     |      | 2002   |  |       |         | 279,167 |  |  |           | 99,471    |  |  |   |  | 
|                            | Chief Financial Officer and Secretary |                     |      | 2001   |  |       |         | 275,000 |  |  |           | 145,375   |  |  |   |  | 
|Eugenia B. Price            |                                       |                     | 2003 |        |  |       | 235,542 |         |  |  | 31,816    |           |  |  |  |  
|                            | Sr. Vice-President International and  |                     |      | 2002   |  |       |         | 190,625 |  |  |           | 77,965    |  |  |   |  | 
|                            | Business Development                  |                     |      | 2001   |  |       |         | 154,275 |  |  |           | 58,564    |  |  |   |  | 
|Mary-Knight Tyler           |                                       |                     | 2003 |        |  |       | 159,632 |         |  |  | 21,562    |           |  |  |  |  
|                            | Sr. Vice-President of Operations      |                     |      | 2002   |  |       |         | 143,800 |  |  |           | 81,236    |  |  |   |  | 
|                            |                                       |                     | 2001 |        |  |       | 62,102  |         |  |  | 58,800    |           |  |  |  |  



---



|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Carter served as the Companys
    Chief Executive Officer until December 31, 2003.
    Mr. Lohner was appointed as Chief Executive Officer as of
    January 1, 2004.

Summary of Option Grants

There were 60,000 options granted to Mary-Knight
Tyler, under the 2002 Stock Option Plan for Key Employees during
the 2003 fiscal year.

Compensation of Directors

Persons serving as outside directors on the Board
are paid $2,500 per Board meeting, and $750 per Committee
Meeting ($250 for telephone participation). The outside
directors serving on the Board in 2003 were Sheldon I. Stein,
Gretchen M. Williams, Robert H. Dedman, Jr. and Barbara J.
Hammond. Mr. Stein and Ms. Williams also served on the
Audit Committee.

During 2003, Board and Board Committee fees were
paid to the outside Directors in the amount of $34,250 as
follows: Mr. Stein received $13,000, Ms. Williams received
$10,250, Mr. Dedman received $3,000 and Ms. Hammond
received $8,000.

28



---



##### Table of Contents



In addition, the initial outside directors of the
Company were given the right to purchase up to $100,000 of
common stock and were granted stock options to purchase up to
$100,000 of common stock based on the amount of their common
stock investment. No such options were granted to the
independent directors in 2003.

Compensation Committee Interlocks and Insider
Participation

During 2003 the Companys Compensation
Committee was comprised of Donald J. Carter Jr., Thomas O.
Hicks, and Jack D. Furst. All decisions regarding compensation
of executive officers are made by the Compensation Committee.
During fiscal 2003, Mr. Carter also served as an executive
officer of the Company. Messrs. Hicks and Furst are also
principals of Hicks Muse Partners (as defined below) an entity
which receives fees in connection with certain advisory and
oversight services to the Company. See Item 13.
Certain Relationships and Related Transactions.

Executive Employment and Consulting
Agreements

On June 4, 1998, the Company entered into an
Executive Employment Agreement with Donald J. Carter, Jr.
Pursuant to the terms of his Executive Employment Agreement,
Donald J. Carter, Jr. was employed as Chairman of the Board and
Chief Executive Officer of the Company for five years with a
base salary of $500,000 and with total annual compensation
(including bonuses) ranging from $500,000 to $1,125,000. The
Executive Employment Agreement with Donald J. Carter, Jr.,
provides for a lump sum severance payment in the event such
individual is terminated by the Company without Cause (as
defined in such Executive Employment Agreement) or such
individual terminates their employment for Good Reason (as
defined in such Executive Employment Agreement). Subject to
certain exceptions, the amount of such lump sum severance
payment equals (i) five times the applicable executives
base salary if such executive is terminated within one year or
(ii) the greater of (a) the aggregate base salary
payable to the executive from the date of termination through
the expiration of the remainder of the term of the Executive
Employment Agreement or (b) three times the total base
salary and annual bonus, if any, received by the executive in
the fiscal year preceding the fiscal year in which such
executive was terminated. In addition, the executive agreed
pursuant to his Executive Employment Agreement not to compete
with the Company during his employment and for a period of three
years after termination of such executives employment for
any reason. Effective December 31, 2003 Donald J. Carter,
Jr. retired from his position as Chief Executive Officer of the
Company. The Executive Employment Agreement terminated upon the
date of his resignation with the Company.

On May 24, 2000, the Company entered into an
Employment Agreement with Michael D. Lohner. Mr. Lohner was
employed as Senior Vice-President and Chief Operating Officer
for the Company for one year with a base salary of $295,000 and
with total annual compensation (including bonuses) ranging from
$295,000 to $405,625. Effective December 31, 2000,
Mr. Lohners Employment Agreement was amended and
restated as President and Chief Operating Officer allowing for a
$450,000 base salary and with total compensation (including
bonuses) ranging from $450,000 to $1,868,750. Effective
July 30, 2001, the Company entered into a second amended
and restated Employee Agreement with Mr. Lohner allowing
for an extended employment through December 2004 with the same
compensation. Effective January 1, 2004, Mr. Lohner
was named Chief Executive Officer and he retained the position
of President of the Company.

On November 1, 1999, the Company entered
into an Employment Agreement with Kenneth J. Cichocki.
Mr. Cichocki was employed as Vice-President of Finance,
Chief Financial Officer and Secretary of the Company for one
year with a base salary of $250,000 and with total annual
compensation (including bonuses) ranging from $250,000 to
$350,000. Effective November 1, 2000,
Mr. Cichockis Employment Agreement was amended and
restated allowing for a $275,000 base salary and with total
compensation (including bonuses) ranging from $275,000 to
$378,125. As of November 1, 2001, Mr. Cichocki is
employed as Senior Vice-President of Finance and Chief Financial
Officer. Effective November 1, 2002,
Mr. Cichockis Employment Agreement was amended
allowing for a $300,000 base salary and with total compensation
(including bonuses) that ranges from $300,000 to $412,500.
Mr. Cichockis Employment Agreement may be extended
for successive one-year periods.

29



---



##### Table of Contents



On January 1, 2003, the Company entered into
an Employment Agreement with Eugenia B. Price. Ms. Price is
employed as Senior Vice-President International and Business
Development for one year with a base salary of $214,000 and with
total annual compensation (including bonuses) ranging from
$214,000 to $294,250. Ms. Prices Employment Agreement
may be extended for successive one-year periods.

On November 21, 2003 the Company named
Mary-Knight Tyler Senior Vice-President, Operations. The Company
does not currently have an employment agreement with
Ms. Tyler.

Effective August 15, 2003, the Company
entered into a Separation Agreement and Release with
Ms. Nora Serrano, the Companys Senior Vice-President
of Sales. Under the terms of the agreement, Ms. Serrano was
paid severance benefits including a cash payment of $1,096,691
and other compensation totaling $52,447 which included the
transfer of title of a leased automobile and medical insurance
premiums, and Ms. Serrano agreed not to compete with the
Company for a period of three years beginning on August 15,
2003. She also kept all vested stock options in the
Companys stock option plans. Accordingly, Ms. Serrano has
10,000 stock options in the 1998 Stock Option Plan for Key
Employees and 100,000 stock options in the 2002 Stock Option
Plan for Key Employees.

1998 Stock Option Plan for Key
Employees

The employees eligible for options under the 1998
Stock Option Plan for Key Employees (the 1998 Plan)
are those employees whose performance and responsibilities are
determined by the Board (or a committee thereof) (in either
case, the Committee) to be essential to the success
of the Company and its subsidiaries. A total of 1,353,924 shares
of common stock are available for grant under the 1998 Plan.
Generally, the option period (i.e., the term under which an
option is exercisable) may not be more than ten years from the
date the option is granted. The Committee will determine, in its
discretion, the key employees and eligible non-employees who
will receive grants, the number of shares subject to each option
granted, the exercise price and the option period and will
administer and interpret the 1998 Plan.

As of December 31, 2003, options for
1,106,823 of common stock at an exercise price of $18.05451,
options for 42,192 shares of common stock at an exercise price
of $21.33, options for 37,125 shares of common stock at an
exercise price of $19.42, and options for 20,000 shares of
common stock at an exercise price of $20.54 were issued under
the 1998 Plan. In 2003, no options for shares of common stock
were exercised or forfeited. As of December 31, 2003,
options for 327,252 shares of common stock were available for
grant under the 1998 Plan. As of December 31, 2003, Donald
J. Carter, Jr., Michael D. Lohner, Kenneth J. Cichocki,
Mary-Knight Tyler and Eugenia B. Price held options to purchase
338,481, 50,000, 24,916, 5,000 and 9,376 shares of common stock,
respectively. These options were granted on substantially
similar terms, and vest over a five-year period, subject to
accelerated vesting in full upon a Change of Control (as defined
in Purchase Option, below) or, in respect of any
such holder, upon such holders termination of employment
without cause.

Although the Committee has full discretion to
determine the terms of any option, it is expected that options
will generally vest or become exercisable in equal annual
installments over a five-year period from the date of the grant.
All installments that become exercisable will be cumulative and
may be exercised at any time after they become exercisable until
the expiration of the option period. Both incentive stock
options and nonqualified stock options may be granted under the
1998 Plan. Incentive stock options and, unless otherwise
specified in the applicable stock option agreements,
nonqualified stock options may not be transferred other than by
will or by the laws of descent and distribution. The Committee
shall have the right, but not the obligation, to accelerate the
vesting of any option upon the occurrence of, or the entering
into an agreement providing for, a Change of Control.

Unless terminated sooner in accordance with its
terms, the 1998 Plan will terminate on April 11, 2008, and
no options may be granted under the 1998 Plan thereafter. The
Committee may amend, modify, suspend or terminate the 1998 Plan
without the shareholders approval, except that, without
shareholder approval, the Committee will not have the power or
authority to increase the number of shares of common stock that
may be issued pursuant to the exercise of options under the 1998
Plan, decrease the minimum exercise price of any incentive stock
options or modify the requirements relating to eligibility with
respect to incentive options. The

30



---



##### Table of Contents



Committee may, however, make appropriate
adjustments in the number and/or kind of shares and/or interests
subject to an option and the per share price or value thereof to
reflect any merger, consolidation, combination, liquidation,
reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange
of shares or other like change in capital structure of the
Company.


2002 Stock Option Plan for Key
Employees

The employees eligible for options under the 2002
Stock Option Plan for Key Employees (the 2002 Plan)
are those employees who are identified by the Committee as
having a direct and significant effect on the performance of the
Company or any related entity. A total of 6,000,000 shares of
common stock are available for grant under the 2002 Plan with a
limitation of no more than 2,000,000 shares allowed to be issued
to a single person. Generally, the option period (i.e., the term
under which an option is exercisable) may not be more than ten
years from the date the option is granted. The Committee will
determine, at its discretion, the key employees who will receive
grants, the number of shares subject to each option granted, the
exercise price and the option period and will administer and
interpret the 2002 Plan.

As of December 31, 2003, options for
3,700,000 shares of common stock at an exercise price of $19.42
had been granted under the 2002 Plan. In 2003, options for
100,000 shares of common stock were forfeited and no options for
shares of common stock were exercised. As of December 31,
2003, options for 2,400,000 shares of common stock were
available for grant under the 2002 Plan. As of December 31,
2003, Michael D. Lohner, Kenneth J. Cichocki, Mary-Knight Tyler
and Eugenia B. Price held options to purchase 1,000,000,
600,000, 180,000 and 500,000 shares of common stock,
respectively. These options were granted on substantially
similar terms, and vest over a five-year period, if certain
equity value targets are met or upon a Change of Control if
certain Change of Control equity values are met (as defined in
Purchase Option, below).

Although the Committee has full discretion to
determine the terms of any option, it is expected that options
will generally vest or become exercisable in equal annual
installments over a five-year period from the date of the grant,
subject to the equity value targets being met for such annual
periods. All installments that become exercisable will be
cumulative and may be exercised at any time after they become
exercisable until the expiration of the option period. Both
incentive stock options and nonqualified stock options may be
granted under the 2002 Plan. Incentive stock options and, unless
otherwise specified in the applicable stock option agreements,
nonqualified stock options may not be transferred other than by
will or by the laws of descent and distribution. The Committee
shall have the right, but not the obligation, to accelerate the
vesting of any option upon the occurrence of, or the entering
into an agreement providing for, a Change of Control.

Unless terminated sooner in accordance with its
terms, the 2002 Plan will terminate on August 14, 2012, and
no options may be granted under the 2002 Plan thereafter. The
Committee may amend, modify, suspend or terminate the 2002 Plan
without the shareholders approval, except that, without
shareholder approval, the Committee will not have the power or
authority to increase the number of shares of common stock that
may be issued pursuant to the exercise of options under the 2002
Plan, decrease the minimum exercise price of any incentive stock
options or modify the requirements relating to eligibility with
respect to incentive options or increase the term of the 2002
Plan. The Committee may, however, make appropriate adjustments
in the number and/or kind of shares and/or interests subject to
an option and the per share price or value thereof to reflect
any merger, consolidation, combination, liquidation,
reorganization, recapitalization, stock dividend, stock split,
split-up, split-off, spin-off, combination of shares, exchange
of shares or other like change in capital structure of the
Company.

Purchase Option

Until such time as the Company has consummated an
underwritten public offering with the result that the ownership
of the then outstanding shares of common stock held by the Hicks
Muse Shareholders (as defined below) is less than 10% of the
fully-diluted common stock of the Company, the Company shall
have the right, but not the obligation, to purchase an
optionees options under the 1998 Plan or the 2002 Plan or
any shares of common stock acquired pursuant to the exercise of
his or her options in the event of an optionees

31



---



##### Table of Contents



termination of employment or the occurrence of a
Change of Control. Change of Control shall mean,
generally, (a) any sale, lease, exchange or other transfer
of all or substantially all of the assets of the Company to an
unaffiliated person or entity, (b) a majority of the Board
shall consist of individuals other than those nominated by the
majority of the Directors then serving on the Board or
affiliates of the Hicks Muse Shareholders or (c) the
acquisition by any person other than one or more of the Hicks
Muse Shareholders of the power to vote or direct the voting of
more than 50% of the ordinary voting power for the election of
directors of the Company. If the Company exercises its right to
purchase any optionees options or shares of common stock,
the purchase price shall be equal to the fair market value (as
defined in the 1998 Plan or the 2002 Plan).


Stock Option Trust

Effective on June 4, 1998, the Company
adopted the Home Interiors & Gifts, Inc. 1998 Stock Option
Plan for Unit Directors, Branch Directors, and certain other
independent contractors (the 1998 Independent Contractor
Plan). This Plan was put in place in order to afford
certain Unit Directors, Branch Directors and other independent
contractors an opportunity to acquire a proprietary interest in
the Company. Options for a total of 338,481 shares of common
stock were available for grant under the 1998 Independent
Contractor Plan. As of December 31, 2003, options for
275,338 shares of common stock at an exercise price of
$18.05451, and options for 61,074 shares of common stock at an
exercise price of $21.33 had been granted to a trustee (the
Trust Options), to be held in trust (the Stock
Option Trust) for the benefit of such Unit Directors,
Branch Directors and other independent contractors. As of
December 31, 2003, options for 2,069 shares of common stock
were available for grant under the Stock Option Trust. Under the
terms of the Stock Option Trust, the Trust Options vest in five
equal annual installments from the date of grant or, if earlier,
upon the consummation of an underwritten initial public offering
of common stock satisfying certain requirements. The Trust
Options expire on the tenth anniversary of the date of grant.
The Trust Options are not exercisable until the first to occur
of the 90th day following the consummation of an underwritten
initial public offering of common stock satisfying certain
requirements and the eighth anniversary of the consummation of
the recapitalization of the Company in June, 1998. At such time
as the Trust Options become exercisable, the trust created under
the Stock Option Trust will be liquidated and the Trust Options
will be distributed to the respective beneficiaries. Under
certain circumstances, the Company shall have the right to
purchase the Trust Options, or the shares of common stock
issuable upon exercise thereof, for the difference between the
fair market value of the common stock underlying such Trust
Options and the option exercise price thereof.



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

For information regarding securities authorized
for issuance under equity compensation plans, see Item 5 of
this Form 10-K.

The following table sets forth as of
March 22, 2004, certain information regarding the
beneficial ownership of the common stock by (i) each person
who owns beneficially more than 5% of the issued and outstanding
shares of common stock, (ii) each Director of the Company,
(iii) each Named Executive Officer and (iv) all
Directors and Executive Officers of the Company as a group. The
Company believes that each

32



---



##### Table of Contents



such holder has sole voting and dispositive power
over the shares of common stock held, except as otherwise
indicated.


|                                                                 |                                                |                         |            |            |  |  |      |   | 
|---------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | ---------- | ---------- |  |  | ---- | - | 
|                                                                 |                                                |                        
|                                                                 |                                                | Beneficial Ownership of
|                                                                 |                                                | Common Stock           
|                                                                 |                                                |                        
|                                                                 |                                                | Amount and              |            |           
|                                                                 |                                                | Nature of               |            |           
|                                                                 |                                                | Beneficial              |            | Percentage
|                                                                 |                                                | Ownership               |            | of Class  
|                                                                 |                                                |                         |            |           
|5% Shareholders                                                  |                                                |                         |            |            |  |  |      |  
|Christina L. Carter Urschel                                      |                                                |                         | 992,106    |            |  |  | 6.4  | %
|                                                                 | 1649 Frankford Road, W                         |                         |            |            |  |  |      |   | 
|                                                                 | Carrollton, Texas 75007                        |                         |            |            |  |  |      |   | 
|Donald J. Carter                                                 |                                                |                         | 942,151    | (1)        |  |  | 6.2  | %
|                                                                 | 4757 Frank Luke Road                           |                         |            |            |  |  |      |   | 
|                                                                 | Addison, Texas 75001                           |                         |            |            |  |  |      |   | 
|Hicks Muse Shareholders                                          |                                                |                         | 16,579,016 |            |  |  | 76.4 | %
|                                                                 | c/o Hicks, Muse, Tate & Furst
    Incorporated |                         |            |            |  |  |      |   | 
|                                                                 | 100 Crescent Court, Suite 1600                 |                         |            |            |  |  |      |   | 
|                                                                 | Dallas, Texas 75201                            |                         |            |            |  |  |      |   | 
|Directors and Named Executive
    Officers                       |                                                |                         |            |            |  |  |      |  
|Donald J. Carter, Jr.                                            |                                                |                         | 653,984    | (3)        |  |  | 4.3  | %
|Barbara J. Hammond                                               |                                                |                         | 258,570    | (4)        |  |  | 1.7  | %
|Christina L. Carter Urschel                                      |                                                |                         | 992,106    | (5)        |  |  | 6.4  | %
|Thomas O. Hicks                                                  |                                                |                         | 16,579,016 | (2)        |  |  | 76.4 | %
|Michael D. Lohner                                                |                                                |                         | 230,000    | (6)        |  |  | 1.5  | %
|Kenneth J. Cichocki                                              |                                                |                         | 136,825    | (7)        |  |  | *    |  
|Eugenia B. Price                                                 |                                                |                         | 107,501    | (8)        |  |  | *    |  
|Mary-Knight Tyler                                                |                                                |                         | 26,000     | (9)        |  |  | *    |  
|Jack D. Furst                                                    |                                                |                         |           | (10)       |  |  |     |  
|Joe Colonnetta                                                   |                                                |                         |           |            |  |  |     |  
|Robert H. Dedman, Jr.                                            |                                                |                         | 11,224     | (11)       |  |  | *    |  
|Gretchen M. Williams                                             |                                                |                         | 7,815      | (12)       |  |  | *    |  
|Sheldon I. Stein                                                 |                                                |                         | 7,815      | (13)       |  |  | *    |  
|All directors and executive officers as a group
    (13 persons) |                                                |                         | 19,010,856 |            |  |  | 82.8 | %



---



| |   |              
| | - | -------------
| | * | less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | 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 Home Interiors
    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
    Home Interiors LLC. In addition, the amounts shown also include
    an aggregate of 6,467,580 shares of common stock issuable upon
    conversion of (a) 50,900 shares of Senior Preferred Stock
    (including shares of common stock issuable in respect of accrued
    and unpaid dividends through December 31, 2003 on such
    shares of Senior Preferred Stock) beneficially owned by HI
    Cayman, L.P. (Cayman LP), a Cayman Islands exempted
    limited partnership whose sole general partner is HI Cayman GP,
    Ltd. (Cayman GP), and (b) 45,158.98 shares of Senior
    Preferred Stock (including shares of common stock issuable in
    respect of accrued and unpaid dividends through
    December 31, 2003 on such shares of Senior Preferred Stock)
    beneficially

33



---



##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | owned by HI Senior Debt Partners, L.P.
    (Debt LP), a Texas limited partnership whose sole
    general partner is HI Senior Debt Partners GP, LLC (Debt
    GP). Each share of Senior Preferred Stock is convertible
    into 51.49330587 shares of common stock (subject to adjustment,
    the Conversion Price), and all accrued and unpaid
    dividends on the Senior Preferred Stock as of the date of
    conversion are convertible into a number of shares of common
    stock equal to the amount of such accrued and unpaid dividends
    divided by the Conversion Price, in each case at any time at the
    holders election, subject to the satisfaction or waiver of
    any applicable waiting period under the Hart-Scott-Rodino
    Antitrust Improvements Act of 1976. As disclosed above, it is
    anticipated that a portion of the proceeds of the Companys
    contemplated refinancing transaction will be used to repurchase
    all of the outstanding shares of Senior Preferred Stock. See
    Item 7. Managements Discussion and Analysis of
    Financial Condition and Results of Operations. Thomas O. Hicks
    is the sole member or sole stockholder, as applicable, and
    director of Home Interiors LLC, Cayman GP and Debt GP and,
    accordingly, may be deemed to be the beneficial owner of common
    stock held by HIEP, HMIP, HM BST, Cayman LP and Debt LP,
    (collectively, the Hicks Muse Shareholders). In
    addition, Mr. Hicks is an indirect minority limited partner
    in HIEP. Mr. Hicks disclaims beneficial ownership of common
    stock owned of record by the Hicks Muse Shareholders.
|   
|(3) | Includes 235 shares held by Penni W. Carter,
    Donald J. Carter, Jr.s wife, and a total of 422 shares
    held by Donald J. Carter, Jr. as custodian for his three
    children. Donald J. Carter, Jr. disclaims beneficial ownership
    of all shares held by Penni W. Carter. Also includes, 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.
    Donald J. Carter, Jr. 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 Mr. Carter may be
    deemed to share voting and dispositive power with the other
    Directors. Donald J. Carter, Jr. disclaims beneficial ownership
    of all shares held in the name of the DMC Non-Exempt
    Partnership, LTD and the DMC Exempt Partnership, LTD.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(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) | 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, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(6) | Includes 230,000 shares of common stock subject
    to presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(7) | Includes 136,825 shares of common stock subject
    to presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(8) | Includes 107,501 shares of common stock subject
    to presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(9) | Includes 26,000 shares of common stock subject to
    presently exercisable options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



|     |                                                                                                                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Furst holds indirect minority limited
    partnership interests in HIEP. Mr. Furst disclaims
    beneficial ownership of common stock owned of record by HIEP.                                                                           
|    
|(11) | Includes 6,536 shares of common stock subject to
    presently exercisable options.                                                                                                                                                          
|    
|(12) | Includes 5,045 shares of common stock subject to
    presently exercisable options.                                                                                                                                                          
|    
|(13) | Consists of 7,815 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.

34



---



##### Table of Contents



The Shareholders Agreement

The Shareholders Agreement provides that the
Board will consist of eleven members, including six directors
designated by Hicks Muse, three directors designated by the
Carter Designees and two independent directors mutually
designated by the Carter Designees and Hicks Muse. As of the
date hereof, the Board consists of nine members. The number of
directors to be designated by Hicks Muse and the Carter
Designees is subject to adjustment based upon the ownership of
common stock by the Hicks Muse Shareholders and the Carter
Shareholders. See Item 10. Directors and Executive
Officers of the Registrant.

The Shareholders Agreement also includes the
Companys grant of certain registration rights to the Hicks
Muse Shareholders and the Carter Shareholders, pursuant to which
they may require, subject to certain restrictions, in the event
the Company effects an underwritten initial public offering of
common stock for gross proceeds of in excess of
$25.0 million under the Securities Act, subject to certain
restrictions, the Company to register under the Securities Act
the shares of common stock owned by them. In addition, if the
Company proposes to register any of its securities under the
Securities Act, the Hicks Muse Shareholders and the Carter
Shareholders shall have the right, subject to certain
restrictions, to include in such registration their shares of
common stock.

If any Hicks Muse Shareholders desire to transfer
shares of common stock representing more than 20% of the shares
of common stock then held by the Hicks Muse Shareholders, the
Hicks Muse Shareholders must, subject to certain restrictions,
offer the Carter Shareholders the opportunity to include in the
proposed sale their proportionate share of the Carter
Shareholders common stock. In addition, if through
multiple sales of less than 20% of the shares of common stock
then held by the Hicks Muse Shareholders, the Hicks Muse
Shareholders desire to sell shares that, when aggregated with
such prior sales, would result in the Hicks Muse Shareholders
holding less than 50% of the shares of common stock held by them
immediately after consummation of the Companys 1998
recapitalization, the Carter Shareholders will have the right to
sell shares of their common stock in an amount equal to the same
percentage of the shares they owned immediately after
consummation of the Companys 1998 recapitalization as the
percentage, in the aggregate, previously sold by the Hicks Muse
Shareholders.






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

Set forth below is a description of transactions
entered into between the Company and certain of its shareholders
or affiliates during 2003.

Executive Employment Agreement with Donald J.
Carter

In connection with the Companys 1998
recapitalization, the Company entered into an Executive
Employment Agreement with Donald J. Carter, a shareholder who
beneficially owns 6.2% of the outstanding common stock of the
Company. Under the terms of his Executive Employment Agreement,
Donald J. Carter will remain with the Company as Chairman
Emeritus but will not work full-time. Donald J. Carters
Executive Employment Agreement provides for an employment term
of five years and annual compensation of $200,000, plus
reimbursement for certain business-related aviation expenses,
and the use of a Company-owned vehicle. Donald J. Carters
Executive Employment Agreement generally requires the Company to
pay Mr. Carters salary throughout the five-year term
unless Mr. Carter voluntarily terminates his employment
during such term. Donald J. Carter has agreed, pursuant to his
Executive Employment Agreement, not to compete with the Company
during his employment and for three years thereafter (or, if
earlier, until such time as one of Mr. Carters direct
lineal descendants is no longer the Chief Executive Officer of
the Company). The existing agreement with Mr. Carter
expired in accordance with its terms, but the Company has
continued to compensate Mr. Carter since that time on the
same terms and conditions pursuant to an oral arrangement. In
2003, the Company paid Mr. Carter approximately $200,000
pursuant to the terms and conditions of his Executive Employment
Agreement. Mr. Carter is the father of Donald J. Carter Jr.
and Christina L. Carter Urschel.

35



---



##### Table of Contents



Pocketful of Hope Charities

Donald J. Carter, Jr., Michael D. Lohner,
Christina Carter Urschel and Leonard Robertson, Chief
Administrative Officer of the Company, are officers of Pocketful
of Hope Charities, a not-for-profit charity organization. The
Company contributed approximately $966,000 to the organization
in 2003.

Certain Other Transactions

During 2003, the Company engaged Element Visual
Communications (Element) to develop a product branding strategy.
The engagement covered the launch of the Domistyle branding
strategy and the Company paid $116,300 for the services
rendered. The owner of Element is the sister-in-law of Michael
D. Lohner, President and Chief Operating Officer of the Company
during 2003.

In connection with the Companys 1998
recapitalization, the Company entered into an agreement (the
Monitoring and Oversight Agreement) with Hicks, Muse
& Co. Partners, L.P. (Hicks Muse Partners), an
affiliate of Hicks Muse. The Monitoring and Oversight Agreement
makes available to the Company and its management on an ongoing
basis the resources of Hicks Muse Partners concerning a wide
variety of financial and operational matters. The Company does
not believe that the services that have been and will continue
to be provided to the Company by Hicks Muse Partners could
otherwise be obtained by the Company without the addition of
personnel or the engagement of outside professional advisors.
Pursuant to the Monitoring and Oversight Agreement, the Company
will pay Hicks Muse Partners a fee, payable quarterly, for
monitoring and oversight services to be provided to the Company.
The fee will be adjusted, but not below $1.0 million on
January 1 of each calendar year to an amount equal to 1.0% of
the consolidated annual budgeted earnings of the Company before
interest, taxes, depreciation and amortization, but in no event
shall such fee exceed $1.5 million annually. The Company
paid Hicks Muse Partners approximately $1.2 million for
monitoring and oversight services and reimbursement of general
expenses in 2003.

If the Board requests financial advisory services
from Hicks Muse Partners from time to time after the
Companys 1998 recapitalization, Hicks Muse Partners also
will be entitled to receive a fee equal to 1.5% of the
transaction value (as defined in the Financial
Advisory Agreement) for each subsequent transaction
(as defined in the Financial Advisory Agreement) in which the
Company is involved. Each of the Monitoring and Oversight
Agreement and the Financial Advisory Agreement terminates upon
the earlier to occur of (a) the tenth anniversary of its
execution, (b) at any time prior to an underwritten initial
public offering of common stock pursuant to the Securities Act
that meets certain requirements, if Hicks Muse and its
affiliates do not beneficially own at least 25% of the then
outstanding shares of common stock and Hicks Muse has not
designated at least one member of the Board or (c) at any
time after such an underwritten initial public offering of
common stock, if Hicks Muse and its affiliates do not
beneficially own at least 10% of the then outstanding shares of
common stock and Hicks Muse has not designated at least one
member of the Board. Pursuant to the Financial Advisory
Agreement, in 2003 the Company paid approximately
$1.4 million to Hicks Muse for financial advisory services
rendered by Hicks Muse in connection with the debt restructures.




PART IV




Item 14.     Principal
Accountant Fees and Services

Audit Fees.The
aggregate fees billed for professional services rendered by
PricewaterhouseCoopers LLC for the years ended December 31,
2003 and 2002 for the audit of our financial statements for the
years then ended were $394,300 and $353,700, respectively.

Audit-Related Fees.The aggregate fees billed for
audit-related services rendered by PricewaterhouseCoopers LLC
for the years ended December 31, 2003 and 2002 for
accounting treatment research were $55,200 and $52,000,
respectively.

Tax Fees.The
aggregate fees billed for professional services rendered by
PricewaterhouseCoopers LLC for the years ended December 31,
2003 and 2002 for tax compliance, tax advice and tax planning
were $89,700 and $87,800, respectively.

36



---



##### Table of Contents



All Other Fees.The
aggregate fees billed for professional services rendered by
PricewaterhouseCoopers LLC for the years ended December 31,
2003 and 2002 for services other than those described under
Audit Fees, Audit-Related Fees and
Tax Fees were $142,800 and $979,200, respectively.

The Audit Committees charter provides that
the Audit Committee shall approve the following:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | 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                   
|
| |  | approve the fees to be paid to the Companys
    independent auditor, as well as any other advisors employed by
    the committee.




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

(a) Financial Statements

(1) and (2) Financial Statementsand
Schedules



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

(3) 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 |  |            |  | Credit Agreement, dated as of June 4, 1998, among
    the Company, the Lenders from time to time party thereto, The
    Chase Manhattan Bank, as syndication agent, National Westminster
    Bank, PLC, as documentation agent, The Prudential Insurance
    Company of America, as a co-agent, Societe Generale, as a
    co-agent, Citicorp USA, Inc., as a co-agent, and Nationsbank,
    N.A., as administrative agent for the Lenders (incorporated by
    reference to Exhibit 10.1 of the Companys Registration
    Statement on Form S-4, No. 333-62021).

37



---



##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ---- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .1.1 |  |            |  | First Amendment to Credit Agreement, dated as of
    December 18, 1998, among the Company, the Lenders from time to
    time party thereto, The Chase Manhattan Bank, as syndication
    agent, National Westminster Bank, PLC, as documentation agent,
    The Prudential Insurance Company of America, as a co-agent,
    Societe Generale, as a co-agent, Citicorp USA, Inc., as a
    co-agent, and Nationsbank, N.A., as administrative agent for the
    Lenders (incorporated by reference to Exhibit 10.1.1 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    March 16, 1999).                    
|        | 10 | .1.2 |  |            |  | Second Amendment to Credit Agreement, dated as of
    March 12, 1999, among the Company, the Lenders from time to time
    party thereto, The Chase Manhattan Bank, as syndication agent,
    National Westminster Bank, PLC, as documentation agent, The
    Prudential Insurance Company of America, as a co-agent, Societe
    Generale, as a co-agent, Citicorp USA, Inc., as a co-agent, and
    Nationsbank, N.A., as administrative agent for the Lenders
    (incorporated by reference to Exhibit 10.1.2 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    March 16, 1999).                      
|        | 10 | .1.3 |  |            |  | Third Amendment to Credit Agreement, dated as of
    November 19, 1999, among the Company, the Lenders from time to
    time party thereto, The Chase Manhattan Bank, as syndication
    agent, National Westminster Bank, PLC, as documentation agent,
    The Prudential Insurance Company of America, as a co-agent,
    Societe Generale, as a co-agent, Citicorp USA, Inc., as a
    co-agent, and Nationsbank, N.A., as administrative agent for the
    Lenders (incorporated by reference to Exhibit 10.1.3 of the
    Companys Annual Report on Form 10-K, No. 333-65201, filed
    March 14, 2000).                    
|        | 10 | .1.4 |  |            |  | Fourth Amendment to Credit Agreement dated as of
    July 26, 2000, but effective as of July 3, 2000, among the
    Company, the various lenders that are parties thereto, The Chase
    Manhattan Bank, as syndication agent, National Westminster Bank
    PLC, as documentation agent, The Prudential Insurance Company of
    America, Societe Generale, and Citicorp USA, Inc., as co-agents,
    and Bank of America, N.A., as administrative agent (incorporated
    by reference to Exhibit 10.1 of the Companys Quarterly
    Report on Form 10-Q, No. 333-62021, filed August 14, 2000).                               
|        | 10 | .1.5 |  |            |  | Fifth Amendment to Credit Agreement dated as of
    March 30, 2001, among the Company, the various lenders that are
    parties thereto, The Chase Manhattan Bank, as syndication agent,
    National Westminster Bank, PLC, as documentation agent, The
    Prudential Insurance Company of America, as a co-agent, Societe
    Generale, as a co-agent, Citicorp USA, Inc. as a co-agent and
    Bank of America, N.A., formerly known as NationsBank, N.A., as
    administrative agent. (incorporated by reference to Exhibit
    10.1.5 of the Companys Annual Report on Form 10-K, No.
    333-62021, filed April 4, 2001).
|        | 10 | .1.6 |  |            |  | Amended and Restated Credit Agreement dated as of
    June 30, 2001, by and among the Company, Bank of America, N.A.,
    The Chase Manhattan Bank, Citicorp USA, Inc., Societe General
    and the lenders named thereto (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 9, 2001).                                                                                                                                                                                                                                                                
|        | 10 | .1.7 |  |            |  | First Amendment to the Amended and Restated
    Credit Agreement dated as of June 30, 2001 by and among the
    Company, Bank of America N.A., The Chase Manhattan Bank,
    Citicorp USA, Inc., Societe General and the lenders named
    thereto (incorporated by reference to Exhibit 99.1 of the
    Companys Current Report on Form 8-K, No. 333-62021, filed
    on August 1, 2002).                                                                                                                                                                                                                                       
|        | 10 | .2   |  |            |  | 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 | .2.1 |  |            |  | 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).                                                                                                                                                                                                   

38



---



##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 10 | .3    |  |            |  | 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 | .3.1  |  |            |  | 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 | .4    |  |            |  | 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 | .5    |  |            |  | Executive Employment Agreement, dated June 4,
    1998, between the Company and Donald J. Carter (incorporated by
    reference to Exhibit 10.6 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .6    |  |            |  | Amendment to Executive Employment Agreement,
    dated December 13, 2000, between Barbara J. Hammond and the
    Company (incorporated by reference to Exhibit 10.29.3 of the
    Companys Annual Report on Form 10-K, No. 333-62021 filed
    April 4, 2001).                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .7    |  |            |  | 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 | .7.1  |  |            |  | Second Amended and Restated Employment Agreement,
    dated December 36, 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 | .8    |  |            |  | 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 | .9    |  |            |  | 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 | .10   |  |            |  | 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 | .11   |  |            |  | ISDA Master Agreement, dated as of June 25, 1998,
    by and between NationsBank, N.A. and the Company (incorporated
    by reference to Exhibit 10.13 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .12   |  |            |  | 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 | .13   |  |            |  | Consulting Services Agreement dated as of June 3,
    1999, between the Company and Tompkins Associates Incorporated
    (incorporated by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on August
    13, 1999).                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .13.1 |  |            |  | First Amendment to Consulting Services Agreement
    dated September 2000, between the Company and Tompkins
    Associates Incorporated. (incorporated by reference to Exhibit
    10.16.1 of the Companys Annual Report on Form 10-K, No.
    333-62021, filed April 4, 2001).                                                                                                                                                                                                                                                                                                                                                    

39



---



##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                                          
|------- | -- | ----- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 10 | .14   |  |            |  | 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 | .15   |  |            |  | 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 | .15.1 |  |            |  | 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 | .15.2 |  |            |  | 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 | .16   |  |            |  | Employment Agreement, dated May 24, 2000, between
    Michael D. Lohner and the Company (incorporated by reference to
    Exhibit 10.5 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed on August 14, 2000).                                                                                                     
|        | 10 | .16.1 |  |            |  | Amended and Restated Employment Agreement, dated
    December 31, 2000, between Michael D. Lohner and the Company.
    (incorporated by reference to Exhibit 10.28.1 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    April 4, 2001).                                                                           
|        | 10 | .16.2 |  |            |  | Second Amended and Restated Employment Agreement,
    dated July 30, 2001, between Michael D. Lohner and the Company.
    (incorporated by reference to Exhibit 10.1 of the Companys
    Quarterly Reporting Form 10-Q, No. 333-62021 filed on November
    9, 2001.)                                                                   
|        | 10 | .17   |  |            |  | 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 | .18   |  |            |  | Vectrix Customer Agreement, dated July 21, 2000,
    executed by Vectrix Business Solutions, Inc. and the Company
    (incorporated by reference to Exhibit 10.7 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on November
    10, 2000).                                                                     
|        | 10 | .19   |  |            |  | 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 | .20   |  |            |  | 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 | .21   |  |            |  | Employment Agreement, dated November 1, 2001,
    between Nora Serrano and the Company. (incorporated by reference
    to Exhibit 10.21 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 26, 2002.)                                                                                                           
|        | 10 | .21.1 |  |            |  | Amendment to Employment Agreement between the
    Company and Nora Serrano, entered into as of December 12, 2002
    and effective as of November 1, 2002 (incorporated by reference
    to Exhibit 10.21.1 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed March 14, 2003).                                       
|        | 10 | .21.2 |  |            |  | Separation Agreement and Release between the
    Company and Nora I. Serrano, entered into and effective as of
    August 15, 2003 (incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Reporting Form 10-Q, No. 333-62021,
    filed November 6, 2003.                                                             
|        | 10 | .22   |  |            |  | 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



---



##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .23  |  |            |  | 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 | .24  |  |            |  | 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 | .25  |  |            |  | 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 | .26  |  |            |  | 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 | .27  |  |            |  | 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 | .28  |  |            |  | 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 | .29  |  |            |  | 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 | .30  |  |            |  | 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 | .31  |  |            |  | 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 | .32  |  |            |  | 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 | .33  |  |            |  | 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 | .34  |  |            |  | 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).
|        | 10 | .36  |  |             |  | 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.
    333-6201, filed on May 12, 2003).                                                                             
|        | 10 | .37* |  |            |  | Employment and Non-Competition Agreement between
    the Companys subsidiary, Domistyle, Inc., and Charles L.
    Elsey, effective as of September 9, 2003.                                                                                                                                                                                                        
|        | 14 | .1*  |  |            |  | Home Interiors & Gifts, Inc. Code of Ethics
    for Senior Financial Management.                                                                                                                                                                                                                                                                                    
|        | 21 | .1*  |  |            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                        

41



---



##### Table of Contents



|        |    |     |  |             |  |                                                                                                                           
|------- | -- | --- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|Number  |    |     |  | Description
|        |    |     |  |            
|        | 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.

(b) Reports on Form 8-K:



| |  |                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On June 9, 2003 the Company filed a current
    report on Form 8-K with respect to entering into a
    strategic alliance with Meredith Corporation.                                                                                                                                                                  
|
| |  | On November 7, 2003 the Company filed a
    current report on Form 8-K with respect to the announcement
    that Donald J. Carter, Jr., Joey Carter, Chief
    Executive Officer and Chairman of the Board of Directors of the
    Company would be retiring as Chief Executive officer as on
    December 31, 2003.

42



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                             
| | ----------------------------
| | HOME INTERIORS & GIFTS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ MICHAEL D. LOHNER

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

Date: March 22, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                           |  |                                                                                                                            |  |                |  | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                           |  |                                                                                                                            |  |               
|Signature                                                  |  | Title                                                                                                                      |  | Date          
|                                                           |  |                                                                                                                            |  |               
|                                                          
|/s/ DONALD J. CARTER, JR.Donald J. Carter, Jr.             |  | Chairman of the Board                                                                                                      |  | March 22, 2004
|                                                          
|/s/ BARBARA J. HAMMONDBarbara J. Hammond                   |  | Director and Vice Chairman                                                                                                 |  | March 22, 2004
|                                                          
|/s/ CHRISTINA L. CARTER URSCHELChristina L. Carter Urschel |  | Director and Vice Chairman                                                                                                 |  | March 22, 2004
|                                                          
|/s/ MICHAEL D. LOHNERMichael D. Lohner                     |  | President and Chief Executive Officer                                                                                      |  | March 22, 2004
|                                                          
|/s/ KENNETH J. CICHOCKIKenneth J. Cichocki                 |  | Sr. Vice-President of Finance,
    Chief Financial Officer, and Secretary (principal financial and
    accounting officer) |  | March 22, 2004
|                                                          
|/s/ THOMAS O. HICKSThomas O. Hicks                         |  | Director                                                                                                                   |  | March 22, 2004
|                                                          
|/s/ JACK D. FURSTJack D. Furst                             |  | Director                                                                                                                   |  | March 22, 2004
|                                                          
|/s/ JOE COLONNETTAJoe Colonnetta                           |  | Director                                                                                                                   |  | March 22, 2004
|                                                          
|/s/ SHELDON I. STEINSheldon I. Stein                       |  | Director                                                                                                                   |  | March 22, 2004
|                                                          
|/s/ GRETCHEN M. WILLIAMSGretchen M. Williams               |  | Director                                                                                                                   |  | March 22, 2004
|                                                          
|/s/ ROBERT H. DEDMAN, JR.Robert H. Dedman, Jr.             |  | Director                                                                                                                   |  | March 22, 2004

43



---



##### Table of Contents



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.

No annual report or proxy material has been or
will be sent to security holders of the Registrant.

44



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                            |  |  |      | 
|--------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Auditors                                                                                              |  |  | F-2  | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                            |  |  | F-3  | 
|Consolidated Statements of Operations and
    Comprehensive Income for the years ended December 31, 2001,
    2002 and 2003 |  |  | F-4  | 
|Consolidated Statement of Shareholders
    Deficit for the years ended December 31, 2001, 2002
    and 2003                |  |  | F-5  | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                              |  |  | F-6  | 
|Notes to Consolidated Financial Statements                                                                                  |  |  | F-7  | 
|Schedule II Valuation and Qualifying Accounts                                                                               |  |  | F-36 | 

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders

of Home Interiors & Gifts, Inc.


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations and comprehensive income, shareholders deficit
and cash flows present fairly, in all material respects, the
financial position of Home Interiors & Gifts, Inc. and
Subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Dallas, Texas

March 8, 2004


F-2



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2002 and
2003


|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |          |          |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                                                            |                                                                                                                                                                                                                                                                | 2002                                        |         | 2003    
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |         
|                                                                            |                                                                                                                                                                                                                                                                |                                            
|                                                                            |                                                                                                                                                                                                                                                                | (In thousands, except                      
|                                                                            |                                                                                                                                                                                                                                                                | share information)                         
|ASSETS                                                                     
|Current assets:                                                             |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            | Cash                                                                                                                                                                                                                                                           |                                             | $       | 68,111   |          |   | $       | 36,636   |         
|                                                                            | Accounts receivable, net                                                                                                                                                                                                                                       |                                             |         | 13,581   |          |   |         | 22,027   |         
|                                                                            | Inventories, net                                                                                                                                                                                                                                               |                                             |         | 55,209   |          |   |         | 73,135   |         
|                                                                            | Deferred income tax asset                                                                                                                                                                                                                                      |                                             |         | 8,399    |          |   |         | 6,006    |         
|                                                                            | Other current assets                                                                                                                                                                                                                                           |                                             |         | 2,997    |          |   |         | 3,444    |         
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total current assets                        |         |          | 148,297  |   |         |          | 141,248  |  
|Property, plant and equipment, net                                          |                                                                                                                                                                                                                                                                |                                             | 69,482  |          |          |   | 75,191  |         
|Debt issuance costs, net                                                    |                                                                                                                                                                                                                                                                |                                             | 5,067   |          |          |   | 3,956   |         
|Goodwill                                                                    |                                                                                                                                                                                                                                                                |                                             | 11,126  |          |          |   | 14,519  |         
|Other assets, net                                                           |                                                                                                                                                                                                                                                                |                                             | 621     |          |          |   | 1,009   |         
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total assets                                |         | $        | 234,593  |   |         | $        | 235,923  |  
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|LIABILITIES AND SHAREHOLDERS
    DEFICIT                                  
|Current liabilities:                                                        |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            | Accounts payable                                                                                                                                                                                                                                               |                                             | $       | 32,844   |          |   | $       | 30,757   |         
|                                                                            | Accrued seminars and incentive awards                                                                                                                                                                                                                          |                                             |         | 22,435   |          |   |         | 15,592   |         
|                                                                            | Royalties payable to displayers                                                                                                                                                                                                                                |                                             |         | 13,327   |          |   |         | 8,109    |         
|                                                                            | Accrued compensation                                                                                                                                                                                                                                           |                                             |         | 6,440    |          |   |         | 4,796    |         
|                                                                            | Current maturity of related party note payable                                                                                                                                                                                                                 |                                             |         | 663      |          |   |         | 675      |         
|                                                                            | Current maturities of long-term debt and capital
    lease obligations                                                                                                                                                                                         |                                             |         | 21,017   |          |   |         | 10,099   |         
|                                                                            | Other current liabilities                                                                                                                                                                                                                                      |                                             |         | 19,254   |          |   |         | 23,147   |         
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total current liabilities                   |         |          | 115,980  |   |         |          | 93,175   |  
|Long-term related party note payable, net of
    current maturity           |                                                                                                                                                                                                                                                                |                                             | 1,362   |          |          |   | 687     |         
|Long-term debt and capital lease obligations, net
    of current maturities |                                                                                                                                                                                                                                                                |                                             | 321,874 |          |          |   | 311,777 |         
|Deferred income tax liability                                               |                                                                                                                                                                                                                                                                |                                             | 3,354   |          |          |   | 2,586   |         
|Other liabilities                                                           |                                                                                                                                                                                                                                                                |                                             | 19,724  |          |          |   | 19,080  |         
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total liabilities                           |         |          | 462,294  |   |         |          | 427,305  |  
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|Commitments and contingencies (Note 16)
    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 shares issued
    and outstanding |                                             |         | 94,196   |          |   |         | 94,196   |         
|                                                                            | Common stock, par value $0.10 per share,
    75,000,000 shares authorized, 15,240,218 shares issued and
    outstanding                                                                                                                                        |                                             |         | 1,524    |          |   |         | 1,524    |         
|                                                                            | Additional paid-in capital                                                                                                                                                                                                                                     |                                             |         | 180,829  |          |   |         | 185,036  |         
|                                                                            | Accumulated deficit                                                                                                                                                                                                                                            |                                             |         | (503,731 | )        |   |         | (471,370 | )       
|                                                                            | Accumulated other comprehensive loss                                                                                                                                                                                                                           |                                             |         | (519     | )        |   |         | (768     | )       
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total shareholders deficit                 |         |          | (227,701 | ) |         |          | (191,382 | )
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         
|                                                                            |                                                                                                                                                                                                                                                                | Total liabilities and shareholders deficit |         | $        | 234,593  |   |         | $        | 235,923  |  
|                                                                            |                                                                                                                                                                                                                                                                |                                             |         |          |          |   |         |         

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

F-3



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME

For the Years Ended December 31, 2001,
2002 and 2003


|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |         |         |  
|------------------------------------ | ------------------------------------ | ----------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                     |                                      | 2001                                      |         | 2002    |         | 2003
|                                     |                                      |                                           |         |         |         |     
|                                     |                                      |                                          
|                                     |                                      | (In thousands)                           
|Net sales                            |                                      | $                                         | 461,689 |         |         | $    | 574,499 |         |         | $ | 617,444 |        
|Cost of goods sold                   |                                      |                                           | 200,889 |         |         |      | 251,748 |         |         |   | 288,233 |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Gross profit                         |                                      |                                           | 260,800 |         |         |      | 322,751 |         |         |   | 329,211 |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Selling, general and administrative: |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|                                     | Selling                              |                                           |         | 86,461  |         |      |         | 105,117 |         |   |         | 103,500 |        
|                                     | Freight, warehouse and distribution  |                                           |         | 50,599  |         |      |         | 66,597  |         |   |         | 77,763  |        
|                                     | General and administrative           |                                           |         | 56,146  |         |      |         | 58,168  |         |   |         | 66,048  |        
|                                     | Loss (gain) on disposition of assets |                                           |         | 495     |         |      |         | (361    | )       |   |         | 108     |        
|                                     | Stock option expense (credit)        |                                           |         | (62     | )       |      |         | 1,267   |         |   |         | 4,207   |        
|                                     | Redundant warehouse and distribution |                                           |         | 1,197   |         |      |         |        |         |   |         |        |        
|                                     | Loss on debt restructure             |                                           |         | 2,437   |         |      |         | 7,188   |         |   |         |        |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|                                     |                                      | Total selling, general and administrative |         |         | 197,273 |      |         |         | 237,976 |   |         |         | 251,626 |  
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Operating income                     |                                      |                                           | 63,527  |         |         |      | 84,775  |         |         |   | 77,585  |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Other income (expense):              |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|                                     | Interest income                      |                                           |         | 1,017   |         |      |         | 472     |         |   |         | 359     |        
|                                     | Interest expense                     |                                           |         | (38,476 | )       |      |         | (27,497 | )       |   |         | (27,506 | )      
|                                     | Other income (expense), net          |                                           |         | 925     |         |      |         | (1,439  | )       |   |         | (1,129  | )      
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|                                     |                                      | Other income (expense), net               |         |         | (36,534 | )    |         |         | (28,464 | ) |         |         | (28,276 | )
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Income before income taxes           |                                      |                                           | 26,993  |         |         |      | 56,311  |         |         |   | 49,309  |        
|Income tax provision                 |                                      |                                           | 23,433  |         |         |      | 20,663  |         |         |   | 16,948  |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Net income                           |                                      |                                           | 3,560   |         |         |      | 35,648  |         |         |   | 32,361  |        
|Other comprehensive loss:            |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|                                     | Cumulative translation adjustment    |                                           |         | 37      |         |      |         | 162     |         |   |         | 249     |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        
|Comprehensive income                 |                                      | $                                         | 3,523   |         |         | $    | 35,486  |         |         | $ | 32,112  |        
|                                     |                                      |                                           |         |         |         |      |         |         |         |   |         |        

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

F-4



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS
DEFICIT

For the Years Ended December 31, 2001,
2002 and 2003


|                           |                                                                      |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      |      |   |   |          |        |  
|-------------------------- | -------------------------------------------------------------------- | ---------------------------------------- | --------- | --------- |  | ------ | ------ | ------ | - | ---------- | ---------- | ----------- |  | ----- | ----- | ----- |  | - | ------- | ----- | - | - | -------- | ------ |  | - | ---- | ---- | - | - | -------- | ------ | -
|                           |                                                                      |                                          |           |           |  |        |        |        |   | Additional |            |             |  |       |       |      
|                           |                                                                      | Preferred                                |           | Preferred |  | Common |        | Common |   | Paid-In    |            | Accumulated |  |       |       |      
|                           |                                                                      | Shares                                   |           | Stock     |  | Shares |        | Stock  |   | Capital    |            | Deficit     |  | Other |       | Total
|                           |                                                                      |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |      
|                           |                                                                      |                                         
|                           |                                                                      | (In thousands, except share information)
|Balance, December 31, 2000 |                                                                      |                                          |          |           |  | $      |       |        |   |            | 15,240,218 |             |  | $     | 1,524 |       |  | $ | 179,624 |       |   | $ | (542,939 | )      |  | $ | (320 | )    |   | $ | (362,111 | )     
|                           | Net income                                                           |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          | 3,560  |  |   |      |      |   |   |          | 3,560  |  
|                           | Issuance of preferred stock                                          |                                          |           | 96,058.98 |  |        |        | 95,637 |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      |      |   |   |          | 95,637 |  
|                           | Cumulative translation adjustment                                    |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      | (37  | ) |   |          | (37    | )
|                           | Unrealized gains on derivative swaps at adoption
    of SFAS No. 133 |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      | 456  |   |   |          | 456    |  
|                           | Amortization to earnings of unrealized gain on
    derivative swap   |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      | (456 | ) |   |          | (456   | )
|                           | Stock option credit                                                  |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         | (62   | ) |   |          |        |  |   |      |      |   |   |          | (62    | )
|                           |                                                                      |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      |      |   |   |          |       
|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 | )     
|                           |                                                                      |                                          |           |           |  |        |        |        |   |            |            |             |  |       |       |       |  |   |         |       |   |   |          |        |  |   |      |      |   |   |          |       

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

F-5



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2001,
2002 and 2003


|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |         |         |         |  
|------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                                                                                      |                                                             | 2001                                                                               |                                                         | 2002    |         | 2003   
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |        
|                                                                                      |                                                             |                                                                                   
|                                                                                      |                                                             | (In thousands)                                                                    
|Cash flows from operating activities:                                                 |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Net income                                                                            |                                                             | $                                                                                  | 3,560                                                   |         |         | $       | 35,648 |         |         | $       | 32,361  |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      | Depreciation and amortization                               |                                                                                    |                                                         | 9,762   |         |         |        | 11,715  |         |         |         | 15,663  |        
|                                                                                      | Amortization of debt issuance costs and other               |                                                                                    |                                                         | 2,473   |         |         |        | 1,953   |         |         |         | 1,111   |        
|                                                                                      | Provision for doubtful accounts                             |                                                                                    |                                                         | 2,254   |         |         |        | 2,370   |         |         |         | 3,134   |        
|                                                                                      | Provision for losses on inventories                         |                                                                                    |                                                         | 2,803   |         |         |        | 6,720   |         |         |         | (606    | )      
|                                                                                      | Loss on debt restructure                                    |                                                                                    |                                                         | 2,437   |         |         |        | 7,188   |         |         |         |        |        
|                                                                                      | Loss (gain) on disposition of assets                        |                                                                                    |                                                         | 495     |         |         |        | (361    | )       |         |         | 108     |        
|                                                                                      | Stock option expense (credit)                               |                                                                                    |                                                         | (62     | )       |         |        | 1,267   |         |         |         | 4,207   |        
|                                                                                      | Deferred tax expense (benefit)                              |                                                                                    |                                                         | 12,194  |         |         |        | (1,038  | )       |         |         | 1,846   |        
|                                                                                      | Changes in assets and liabilities:                          |                                                                                    |                                                         |         |         |         |        |         |         |         |         |         |        
|                                                                                      |                                                             | Accounts receivable                                                                |                                                         |         | (4,349  | )       |        |         | (3,290  | )       |         |         | (11,971 | )      
|                                                                                      |                                                             | Inventories                                                                        |                                                         |         | (15,762 | )       |        |         | (21,386 | )       |         |         | (15,530 | )      
|                                                                                      |                                                             | Other current assets                                                               |                                                         |         | 1,059   |         |        |         | (1,807  | )       |         |         | (671    | )      
|                                                                                      |                                                             | Other assets                                                                       |                                                         |         | (205    | )       |        |         | (103    | )       |         |         | (403    | )      
|                                                                                      |                                                             | Accounts payable                                                                   |                                                         |         | 8,086   |         |        |         | 469     |         |         |         | 934     |        
|                                                                                      |                                                             | Income taxes payable                                                               |                                                         |         | 1,510   |         |        |         | (2,770  | )       |         |         | 2,934   |        
|                                                                                      |                                                             | Other current liabilities                                                          |                                                         |         | 14,040  |         |        |         | 7,648   |         |         |         | (15,593 | )      
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      |                                                             |                                                                                    | Total adjustments                                       |         |         | 36,735  |        |         |         | 8,575   |         |         |         | (14,837 | )
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      |                                                             |                                                                                    | Net cash provided by operating activities               |         |         | 40,295  |        |         |         | 44,223  |         |         |         | 17,524  |  
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Cash flows from investing activities:                                                 |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      | Purchases of property, plant and equipment                  |                                                                                    |                                                         | (15,088 | )       |         |        | (14,168 | )       |         |         | (14,561 | )      
|                                                                                      | Business acquisitions, net of cash acquired                 |                                                                                    |                                                         |        |         |         |        | (192    | )       |         |         | (13,474 | )      
|                                                                                      | Other                                                       |                                                                                    |                                                         |        |         |         |        | (10     | )       |         |         |        |        
|                                                                                      | Proceeds from the sale of property, plant and
    equipment |                                                                                    |                                                         | 250     |         |         |        | 574     |         |         |         | 597     |        
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      |                                                             |                                                                                    | Net cash used in investing activities                   |         |         | (14,838 | )      |         |         | (13,796 | )       |         |         | (27,438 | )
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Cash flows from financing activities:                                                 |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      | Book overdraft                                              |                                                                                    |                                                         | 3,535   |         |         |        | 460     |         |         |         | 918     |        
|                                                                                      | Proceeds from borrowings under revolving loan
    facility  |                                                                                    |                                                         | 14,000  |         |         |        |        |         |         |         |        |        
|                                                                                      | Payments under revolving loan facility                      |                                                                                    |                                                         | (44,000 | )       |         |        |        |         |         |         |        |        
|                                                                                      | Payments of principal under capital lease
    obligations   |                                                                                    |                                                         | (1,324  | )       |         |        | (1,531  | )       |         |         | (1,810  | )      
|                                                                                      | Proceeds from issuance of preferred stock                   |                                                                                    |                                                         | 231     |         |         |        |        |         |         |         |        |        
|                                                                                      | Proceeds from borrowings under Senior Credit
    Facility   |                                                                                    |                                                         |        |         |         |        | 35,000  |         |         |         |        |        
|                                                                                      | Payments of principal under Senior Credit Facility          |                                                                                    |                                                         | (20,339 | )       |         |        | (9,170  | )       |         |         | (19,007 | )      
|                                                                                      | Debt issuance costs                                         |                                                                                    |                                                         | (1,574  | )       |         |        | (4,160  | )       |         |         |        |        
|                                                                                      | Payment of principal of other bank debt                     |                                                                                    |                                                         |        |         |         |        |        |         |         |         | (750    | )      
|                                                                                      | Payment of principal of related party note payable          |                                                                                    |                                                         |        |         |         |        |        |         |         |         | (663    | )      
|                                                                                      | Preferred stock issuance costs                              |                                                                                    |                                                         | (422    | )       |         |        |        |         |         |         |        |        
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      |                                                             |                                                                                    | Net cash provided by (used in) financing
    activities |         |         | (49,893 | )      |         |         | 20,599  |         |         |         | (21,312 | )
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Effect of cumulative translation adjustment                                           |                                                             |                                                                                    | (37                                                     | )       |         |         | (162   | )       |         |         | (249    | )      
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Net increase (decrease) in cash                                                       |                                                             |                                                                                    | (24,473                                                 | )       |         |         | 50,864 |         |         |         | (31,475 | )      
|Cash at beginning of year                                                             |                                                             |                                                                                    | 41,720                                                  |         |         |         | 17,247 |         |         |         | 68,111  |        
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Cash at end of year                                                                   |                                                             | $                                                                                  | 17,247                                                  |         |         | $       | 68,111 |         |         | $       | 36,636  |        
|                                                                                      |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|Supplemental disclosures:                                                             |                                                             |                                                                                    |                                                         |         |         |         |        |         |         |         |         |        
|                                                                                      | Cash payments during the year for:                          |                                                                                    |                                                         |         |         |         |        |         |         |         |         |         |        
|                                                                                      |                                                             | Income taxes paid                                                                  |                                                         | $       | 10,692  |         |        | $       | 25,048  |         |         | $       | 16,428  |        
|                                                                                      |                                                             | Interest paid                                                                      |                                                         |         | 36,495  |         |        |         | 25,406  |         |         |         | 25,750  |        
|                                                                                      | Non-cash investing and financing activities:                |                                                                                    |                                                         |         |         |         |        |         |         |         |         |         |        
|                                                                                      |                                                             | Debt converted into preferred stock                                                |                                                         |         | 95,828  |         |        |         |        |         |         |         |        |        
|                                                                                      |                                                             | Converted Tranche A Loan to Tranche B Loan in
    connection with Debt Restructure |                                                         |         | 44,897  |         |        |         | 31,000  |         |         |         |        |        
|                                                                                      |                                                             | Execution of note payable for acquisition                                          |                                                         |         |        |         |        |         | 2,025   |         |         |         |        |        

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

F-6



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Background

Home Interiors & Gifts, Inc. (the
Company) is a fully-integrated manufacturer and
distributor of home decorative accessories. The Company believes
it is the largest direct seller of home decorative accessories
in the United States, as measured by sales. The Companys
products include, but are not limited to, framed artwork and
mirrors, candles and candle accessories, plaques, figurines,
planters, artificial floral arrangements, wall shelves, sconces,
small furniture, and tableware (the Products). The
Company primarily sells the Products through a direct selling
channel of non-employee, independent contractor sales
representatives (Displayers) who resell the Products
primarily through the party-plan method of
conducting in-home presentations (Shows) for
potential customers. The Company has approximately 98,300 active
Displayers located in the United States, Mexico, Canada and
Puerto Rico.

The Company has been located in Dallas, Texas
since its inception in 1957. Currently the majority of the
Companys outstanding common stock of record is owned by
affiliates of Hicks, Muse, Tate & Furst Incorporated, a
Dallas-based private investment firm (Hicks Muse).

The Company purchases its Products from a select
number of independent suppliers as well as from its wholly owned
subsidiaries. During 2003, approximately 45.0% of the dollar
volume of Products purchased for the direct selling channel of
the Company was purchased from, and manufactured by, the
Companys subsidiaries. In addition to the Products sold to
the Company for the direct selling channel, the subsidiaries
have a growing presence in the wholesale supply market.

2.     Significant
Accounting Policies

Principles of Consolidation and Use of
Estimates

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated in the consolidation.

The financial statements, having been prepared in
conformity with generally accepted accounting principles,
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities and the reported amounts of
revenue and expenses during reporting periods. Actual results
could differ from those estimates.

Financial Instruments

The Company considers all liquid interest-bearing
instruments with a maturity of three months or less when
purchased to be cash equivalents. The Company includes in other
current liabilities all book overdrafts. As of December 31,
2002 and 2003, the Company had book overdrafts totaling $4.0
million and $4.9 million, respectively. The Company
maintains cash and cash equivalents at financial institutions in
excess of federally insured limits. There were no cash
equivalents at December 31, 2002 and 2003.

The Company has historically used interest rate
swap agreements to limit the effect of changes in interest rates
on its variable rate long-term borrowings. Periodic amounts paid
or received under the swap agreements are recorded as part of
interest expense. The swaps have historically contained option
provisions, which are separately valued and adjusted to market
quarterly. Any resulting gain or loss is included in other
income (expense). There were no outstanding interest rate swaps
at December 31, 2002 and 2003.

As a result of adopting SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, (SFAS No. 133), effective
January 1, 2001, the Company transferred a liability
balance of approximately $456,000 related to the deferred gain
on the terminated swap portion of an interest rate swap to other
comprehensive income. This balance was fully amortized into
earnings as an adjustment to interest expense during 2001.

F-7



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Inventories

Inventories are stated at the lower of cost
(using the weighted average method that approximates FIFO) or
market.

Property, Plant and Equipment

Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using
the straight-line method over estimated useful lives. Major
expenditures for property, plant, equipment, and those which
substantially increase useful lives are capitalized. Direct
costs of developing software for internal use, including
programming and enhancements, are capitalized and amortized over
the estimated useful lives once the software is placed in
service. Software training costs, data conversion costs,
maintenance and repairs are expensed as incurred. When assets
are sold or otherwise disposed of, costs and related accumulated
depreciation are removed from the financial statements and any
resulting gains or losses are included in operating income.

Goodwill

Effective January 1, 2002, the Company
ceased amortizing goodwill as a result of adopting SFAS
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). An annual goodwill impairment
test is performed during the fourth quarter of each year to
determine if the estimated fair value of the reporting unit
exceeds net carrying value, including the applicable goodwill.
The estimated fair market value of each reporting unit is based
upon managements estimates of the present value of future
cash flows. Any impairment losses are reflected in operating
income. As of December 31, 2002 and 2003, no goodwill
impairment losses have been recorded.

Self Insurance

The Company is primarily self-insured for
workers compensation. Self-insurance liabilities are based
on claims filed and estimates for claims incurred but not
reported. These liabilities are not discounted.

Income Taxes

The Company files its federal income tax return
on a consolidated basis. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and income tax purposes, based upon enacted tax rates
in effect for the periods the tax differences are expected to be
settled or realized.

Revenue Recognition

As a result of adopting Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements (SAB 101), effective
January 1, 2000, revenue from product sales is recognized
upon receipt of shipment by Displayers. Revenue from the sale of
manufactured products to the outside sales market is recognized
when the products are picked up by the customers common
carrier at the manufacturing plants. Provisions for discounts,
returns, and other adjustments are provided for in the same
period the related sales are recorded. Deferred revenue is
recorded to the extent that shipments have not been received by
Displayers by period end.

Shipping and Handling

The Company absorbs the majority of the costs
associated with shipping and handling; however, the Company does
charge for shipping and handling when orders do not meet certain
pre-set minimum order sizes. This revenue is immaterial and has
been offset against the actual shipping and handling costs. The
costs

F-8



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

associated with shipping and handling reflected
in freight, warehouse, and distribution expense in the
consolidated statements of operations and comprehensive income
were $30.4 million, $45.7 million, and
$53.1 million for 2001, 2002, and 2003, respectively.

Foreign Currency Translation

The balance sheet accounts of the Companys
foreign operations are translated into U.S. dollars at the
exchange rate as of the balance sheet date. Revenues and
expenses are translated at the weighted average exchange rate
for each period. Translation gains and losses are included in
shareholders deficit. The total amount of transaction
gains (losses) included in Other Income (Expense) totaled
$115,000, ($338,000), and $(2.0) million for 2001, 2002, and
2003, respectively.

Reclassifications

Certain reclassifications have been made to prior
years balances to conform with current year presentation.

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 reported
amounts 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 million for 2001 and decreased by
$2.7 million for 2002.

Fair Value of Financial
Instruments

The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and other
current liabilities approximate fair market value due to their
short maturities. The carrying amounts of variable rate
long-term debt also approximate fair market value as their
interest rates are based on current interest rates. The Notes
had a carrying value of $149.1 million as of
December 31, 2002 and 2003. The Notes had a fair value of
approximately $138.7 million as of December 31, 2002 and
$150.8 million as of December 31, 2003 based upon
quoted market prices.

Benefit Plans

Employee Benefit Plans

The Companys 401(k) plan covers all
full-time employees who have at least six months of service and
are age 18 or older. Beginning in 1999, the 401(k) plan
generally allows employees to contribute up to 16% of their base
salary in various investment alternatives and provides for
Company matching contributions of up to 4%. The Companys
matching contributions totaled $803,000, $1.0 million, and
$1.1 million in 2001, 2002, and 2003, respectively.
Additionally, the Board may make discretionary contributions to
the 401(k) plan at any time. The Board approved discretionary
contributions of $1.5 million for 2001 and 2002, and
$1.0 million for 2003.

Stock-Based Compensation
Plans

The Company has adopted three stock option plans.
For Displayers and independent contractors, the Company has
adopted the Independent Contractor Stock Option
Plan. For key employees, the Company

F-9



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

has adopted the 1998 Key Employee Stock
Option Plan and the 2002 Key Employee Stock Option
Plan. Key information regarding the Companys
stock-based compensation plans is summarized below.



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

In connection with the Independent Contractor
Stock Option Plan, the Company sponsors a trust (the Stock
Option Trust) for the purpose of holding and distributing
stock options granted. Under the Stock Option Trust, the Company
is authorized to issue shares of common stock granted in the
form of non-qualified stock options. These options may be
granted to certain Displayers and other independent contractors
(the Non-Employees). Options granted have a ten-year
term, vesting ratably over five years and accelerated if an
initial public offering were to occur. There are 338,481 shares
of common stock available for grant under this plan. The Company
accounts for options issued under the Independent Contractor
Stock Option Plan and Stock Option Trust in accordance with
Statement of Accounting Financial Standards No. 123,
Accounting for Stock-Based Compensation (SFAS
No. 123). The fair value of options granted is
estimated on the date of grant using the Black-Scholes
option-pricing method with valuation assumptions for expected
term, expected dividend yield, and risk-free interest rate. An
expected volatility factor is also used in the Black-Scholes
option-pricing model. The weighted-average fair value of stock
options granted for 2001 was $5.43. The Company granted no stock
options to Non-Employees during 2002 and 2003. The exercise
price ranged from $18.05 to $21.33 for the stock options
outstanding as of December 31, 2003. Compensation expense
(credit) recognized totaled ($62,000), $483,000, and
$326,000 for 2001, 2002, and 2003, respectively.



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

The 1998 Key Employee Stock Option Plan
authorizes the Company to issue shares of common stock grants in
the form of incentive non-qualified stock options. According to
the plan, these options may be granted to key executives and
employees of the Company, including the officers of the Company
and the Companys subsidiaries. Options granted vest
ratably over five years and have a ten-year term. Additionally,
vesting may accelerate on the outstanding options upon a change
in control, as defined by the agreement. There are 1,353,924
shares of common stock available for grant under this plan. The
Company accounts for options issued under the 1998 Key Employee
Stock Option Plan in accordance with the Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Compensation expense, for
disclosure purposes only, is calculated in accordance with SFAS
No. 123 based upon the Minimum Value option-pricing method,
including assumptions for expected term, expected dividend
yield, and risk-free interest rate. The weighted-average fair
values of stock options granted in 2001, 2002, and 2003 were
$2.62, $4.59, and $3.35, respectively. The exercise price ranged
from $18.05 to $21.33 for the stock options outstanding as of
December 31, 2003.



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

On August 14, 2002, the Company executed the
2002 Key Employee Stock Option Plan which allows for the
issuance of incentive and non-incentive qualified options to key
executives and employees of the Company, including officers and
directors of the Company and the Companys subsidiaries.
There are 6,000,000 shares of common stock available for grant
under this plan with a limitation of no more than 2,000,000
options allowed to be issued to a single person. There are two
stock option grant types available under the plan. The first
represents grants to key employees with vesting over a five-year
period. The second represents performance-based options that
vest 20% annually upon cumulative achievement of certain
performance-based goals. The Company accounts for options issued
under the plan in accordance with APB 25 using the Minimum Value
option-pricing method including assumptions for expected term,
expected dividend yield and risk-free interest rate. The Company
issued only performance-based options under this plan during
2002 and 2003 and recognized compensation expense of $784,000
and $3.1 million, respectively. Additionally, vesting may
be accelerated on the outstanding stock options upon a change of
control, as defined by the agreement. The

F-10



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

weighted-average fair values of stock options
granted in 2002 and 2003 were $4.39 and $4.17, respectively. The
exercise price was $19.42 for the stock options outstanding as
of December 31, 2003.

Key information related to the Companys
stock-based compensation plans is summarized below:

|                                            |                         |              |           |           |   |              |       |          |  |              |           |           |   |   |       |       |  |  |           |           |   |   |       |       | 
|------------------------------------------- | ----------------------- | ------------ | --------- | --------- | - | ------------ | ----- | -------- |  | ------------ | --------- | --------- | - | - | ----- | ----- |  |  | --------- | --------- | - | - | ----- | ----- | 
|                                            |                         | 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, 2000 |                         |              | 311,397   |           |   | $            | 18.47 |          |  |              | 983,947   |           |   | $ | 18.16 |       |  |  |           |           |   |   |       |      
|                                            | Granted                 |              |           | 8,290     |   |              | $     | 21.33    |  |              |           | 25,000    |   |   | $     | 18.05 |  |  |           |           |   |   |       |       | 
|                                            | Exercised               |              |           |          |   |              |       |          |  |              |           |          |   |   |       |       |  |  |           |           |   |   |       |       | 
|                                            | Forfeited               |              |           | (11,363   | ) |              | $     | 18.72    |  |              |           | (25,484   | ) |   | $     | 18.05 |  |  |           |           |   |   |       |       | 
|                                            | Expired                 |              |           | (8,853    | ) |              | $     | 18.31    |  |              |           | (24,376   | ) |   | $     | 18.05 |  |  |           |           |   |   |       |       | 
|                                            |                         |              |           |           |   |              |       |          |  |              |           |           |   |   |       |       |  |  |           |           |   |   |       |      
|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 |      
|Options exercisable as of December 31, 2003 |                         |              | 261,422   |           |   | $            | 18.46 |          |  |              | 911,652   |           |   | $ | 18.16 |       |  |  | 688,000   |           |   | $ | 19.42 |      
|Weighted average remaining contractual life |                         |              | 4.8 years |           |   |              |       |          |  |              | 5.0 years |           |   |   |       |       |  |  | 8.8 years |           |   |   |       |      
|Valuation assumptions:                      |                         |              |           |           |   |              |       |          |  |              |           |           |   |   |       |       |  |  |           |           |   |   |       |      
|                                            | Expected term           |              |           | 3.1 years |   |              |       |          |  |              |           | 6.0 years |   |   |       |       |  |  |           | 6.0 years |   |   |       |       | 
|                                            | Expected dividend yield |              |           | 0.0       | % |              |       |          |  |              |           | 0.0       | % |   |       |       |  |  |           | 0.0       | % |   |       |       | 
|                                            | Expected volatility     |              |           | 37.9      | % |              |       |          |  |              |           |          |   |   |       |       |  |  |           |          |   |   |       |       | 
|                                            | Risk-free interest rate |              |           | 3.85      | % |              |       |          |  |              |           | 3.77      | % |   |       |       |  |  |           | 3.77      | % |   |       |       | 

F-11



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

SFAS No. 123 establishes a fair value basis
of accounting for stock-based compensation plans. The effects of
applying SFAS No. 123 as shown below are not indicative of
future amounts. Had the compensation cost for the Companys
1998 Key Employee Stock Option Plan and 2002 Key Employee Stock
Option Plan been determined consistent with SFAS No. 123,
the Companys compensation cost and net income for 2001,
2002 and 2003 would approximate (in thousands):

|                                                                                                                                                    |  |                        |       |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                                    |  |                       
|                                                                                                                                                    |  | Year Ended December 31
|                                                                                                                                                    |  |                       
|                                                                                                                                                    |  | 2001                   |       | 2002 |  | 2003
|                                                                                                                                                    |  |                        |       |      |  |     
|Net income, as reported                                                                                                                             |  | $                      | 3,560 |      |  | $    | 35,648 |   |  | $ | 32,361 |  
|Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                      |  |                        |      |      |  |      | 494    |   |  |   | 2,023  |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |                        | (576  | )    |  |      | (2,560 | ) |  |   | (2,386 | )
|                                                                                                                                                    |  |                        |       |      |  |      |        |   |  |   |        |  
|Pro forma net income                                                                                                                                |  | $                      | 2,984 |      |  | $    | 33,582 |   |  | $ | 31,998 |  
|                                                                                                                                                    |  |                        |       |      |  |      |        |   |  |   |        |  

3.     Acquisitions



| |                                     
| | ------------------------------------
| | Acquisition on December 31,
    2002

On December 31, 2002, the Company acquired
100% of the stock of Brenda Buell & Associates, Inc., a
wholesaler and designer of home décor products, for
approximately $5.7 million plus future earn-out payments of
$1.5 million, conditional upon future profitability above
certain thresholds. The future earn-out payments when earned
will be considered additional purchase price and will increase
the value assigned to goodwill. Existing cash resources were
used to fund the acquisition. At closing, the Company paid
$3.5 million in cash, of which $3.3 million was paid
in January 2003, and signed a three year $2.0 million note
payable. The acquisition of Brenda Buell & Associates, Inc.
was accounted for as a business acquisition in accordance with
Statement of Financial Accounting Standard No. 141
Business Combinations (SFAS
No. 141). The aggregate purchase price was allocated
to the underlying assets and liabilities, primarily accounts
receivable of $958,000 and accounts payable of $691,000 based
upon their respective fair market values at the date of
acquisition, and the excess of purchase price over the fair
value of the net assets acquired was recorded as goodwill. As a
result of this acquisition, goodwill recognized totaled
approximately $5.6 million. There was no activity from the
acquisition included in the 2002 statement of operations and
other comprehensive income due to it occurring at the close of
the Companys fiscal year. The assets acquired and
liabilities assumed have been included in the balance sheet at
December 31, 2002.



| |                                         
| | ----------------------------------------
| | Acquisitions after December 31,
    2002

On January 29, 2003, the Company acquired
100% of the assets of Tempus Corporation, S. A. de C.V., a
manufacturer of metal products located in Monterrey, Mexico, for
approximately $4.7 million, plus deferred payments of
$2.6 million, based upon the future profitability of the
acquired business above certain thresholds. Existing cash
resources were used to fund the acquisition. At closing, the
Company paid $2.0 million in cash. In February and March of
2003, the Company paid an additional $2.3 million in cash.
The acquisition of Tempus Corporation, S.A. de C.V. was
accounted for as a business acquisition in accordance with SFAS
No. 141. The aggregate purchase price was allocated to the
underlying assets purchased, primarily machinery and equipment
assets of $4.0 million, based upon their respective fair
market values at the date of acquisition, and the excess of
purchase price over the fair value of the net assets acquired
was recorded as goodwill. As a result of this acquisition,
goodwill recognized was approximately $218,000. In July of 2003,
the $2.6 million deferred payment obligation to the seller
was terminated.

F-12



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On February 7, 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 V.C., and Industrias Tromex
Corporation, S.A. de C.V. (collectively, Produr) for
approximately $6.5 million, plus a deferred payment of
$125,000, based upon the profitability of the acquired business
in the year 2003. Produr manufactures glass, ceramics, and metal
products and is located in Monterrey and Guadalajara, Mexico.
Existing cash resources were used to fund the acquisition. Prior
to closing, the Company had advanced approximately
$5.3 million under the terms of a promissory note that was
paid at closing. In connection with the closing, the Company
paid liabilities of the selling entities totaling $5.3 million.
The acquisition of Produr was accounted for as a business
acquisition in accordance with SFAS No. 141. The aggregate
purchase price was allocated to the underlying assets and
liabilities, primarily property and equipment of $5.6 million,
inventory of $423,000 and capital lease obligations of $662,000,
based upon their respective fair market values at the date of
acquisition. The excess of the purchase price over the fair
value of the new assets acquired was recorded as goodwill. As a
result of this acquisition goodwill recognized was approximately
$1.1 million.

On March 14, 2003, the Company acquired 100%
of the assets of Edward Marshall Boehm, Inc., a manufacturer of
porcelain products located in Trenton, New Jersey, for
approximately $1.8 million. Existing cash resources were
used to fund the acquisition. The acquisition was accounted for
as a business acquisition in accordance with SFAS No. 141.
The aggregate purchase price was allocated to the underlying
assets purchased, primarily machinery and equipment assets of
$461,000 and inventory of $949,000, based upon their respective
fair market values at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired
was recorded as goodwill. As a result of this acquisition,
goodwill recognized was approximately $411,000.

On September 10, 2003, the Company acquired
the assets of Gaines & Associates, Inc., a wholesaler and
designer of home décor products, for approximately
$1.1 million plus future earnouts based upon unit sales of
certain products through December 31, 2007. The acquisition
of Gaines & Associates, Inc. was accounted for as a business
acquisition in accordance with SFAS No. 141. All of the
purchase price was allocated to goodwill except for $7,000 that
was allocated to property and equipment. As a result of this
acquisition, goodwill recognized was approximately
$1.1 million.

4.     Accounts
Receivable, Net

Accounts receivable, net, consisted of the
following as of December 31 (in thousands):

|                                |  |      |        |      |  |   |        |  
|------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                |  | 2002 |        | 2003
|                                |  |      |        |     
|Trade receivables               |  | $    | 12,169 |      |  | $ | 19,028 |  
|Other                           |  |      | 3,700  |      |  |   | 5,443  |  
|                                |  |      |        |      |  |   |        |  
|                                |  |      | 15,869 |      |  |   | 24,471 |  
|Allowance for doubtful accounts |  |      | (2,288 | )    |  |   | (2,444 | )
|                                |  |      |        |      |  |   |        |  
|                                |  | $    | 13,581 |      |  | $ | 22,027 |  
|                                |  |      |        |      |  |   |        |  

F-13



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

5.     Inventories,
Net

Inventories, net, consisted of the following as
of December 31 (in thousands):

|                    |  |      |        |      |  |   |        |  
|------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                    |  | 2002 |        | 2003
|                    |  |      |        |     
|Raw materials       |  | $    | 4,975  |      |  | $ | 9,364  |  
|Work in process     |  |      | 1,175  |      |  |   | 2,458  |  
|Finished goods      |  |      | 57,075 |      |  |   | 66,212 |  
|                    |  |      |        |      |  |   |        |  
|                    |  |      | 63,225 |      |  |   | 78,034 |  
|Inventory allowance |  |      | (8,016 | )    |  |   | (4,899 | )
|                    |  |      |        |      |  |   |        |  
|                    |  | $    | 55,209 |      |  | $ | 73,135 |  
|                    |  |      |        |      |  |   |        |  

6.     Property,
Plant and Equipment, Net

Property, plant and equipment, net, consisted of
the following as of December 31 (in thousands):

|                                                                |  |             |            |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------- | ---------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                |  | Estimated   |            |      |  |     
|                                                                |  | Useful Life |            | 2002 |  | 2003
|                                                                |  |             |            |      |  |     
|Land                                                            |  |             |            |      |  | $    | 3,716   |   |  | $ | 5,765   |  
|Buildings and improvements                                      |  |             | 5-40 years |      |  |      | 35,735  |   |  |   | 37,495  |  
|Computer hardware and software                                  |  |             | 3-5 years  |      |  |      | 27,284  |   |  |   | 29,530  |  
|Equipment, furniture and fixtures                               |  |             | 3-10 years |      |  |      | 45,473  |   |  |   | 53,714  |  
|                                                                |  |             |            |      |  |      |         |   |  |   |         |  
|                                                                |  |             |            |      |  |      | 112,208 |   |  |   | 126,504 |  
|Accumulated depreciation                                        |  |             |            |      |  |      | (43,843 | ) |  |   | (52,325 | )
|                                                                |  |             |            |      |  |      |         |   |  |   |         |  
|                                                                |  |             |            |      |  |      | 68,365  |   |  |   | 74,179  |  
|Equipment, software and hardware implementations
    in process |  |             |            |      |  |      | 1,117   |   |  |   | 1,012   |  
|                                                                |  |             |            |      |  |      |         |   |  |   |         |  
|                                                                |  |             |            |      |  | $    | 69,482  |   |  | $ | 75,191  |  
|                                                                |  |             |            |      |  |      |         |   |  |   |         |  

Depreciation expense was $9.4 million,
$11.7 million, and $15.7 million for the years ended
2001, 2002, and 2003, respectively. As of December 31, 2002
and 2003 the total amount of equipment, furniture and fixtures
held under capital lease obligations was $8.8 million and
$8.1 million, respectively. Accumulated amortization
related to these assets held under capital lease obligations was
$3.9 million and $4.5 million as of December 31,
2002 and 2003, respectively. The Company capitalized interest,
primarily related to the new computer system of $387,000 in 2002
and $37,000 related to various small projects in 2003.

7.     Goodwill

The changes in the carrying amount of goodwill
for the year ended, December 31, 2003 are as follows:

|                                  |  |   |        | 
|--------------------------------- |  | - | ------ | 
|Balance as of January 1, 2003     |  | $ | 11,126 | 
|Goodwill acquired during the year |  |   | 3,393  | 
|                                  |  |   |        | 
|Balance as of December 31, 2003   |  | $ | 14,519 | 
|                                  |  |   |        | 

F-14



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

8.     Income
Taxes

The components of income before income tax
expense for the years ended December 31 are as follows (in
thousands):

|         |  |      |        |      |  |      |        |  |  |   |        |  
|-------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|         |  | 2001 |        | 2002 |  | 2003
|         |  |      |        |      |  |     
|Domestic |  | $    | 24,605 |      |  | $    | 54,692 |  |  | $ | 54,001 |  
|Foreign  |  |      | 2,388  |      |  |      | 1,619  |  |  |   | (4,692 | )
|         |  |      |        |      |  |      |        |  |  |   |        |  
|         |  | $    | 26,993 |      |  | $    | 56,311 |  |  | $ | 49,309 |  
|         |  |      |        |      |  |      |        |  |  |   |        |  

The components of income tax expense for the
years ended December 31 are as follows (in thousands):

|              |  |      |        |      |  |      |        |   |  |   |        |  
|------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|              |  | 2001 |        | 2002 |  | 2003
|              |  |      |        |      |  |     
|Current:      |  |      |        |      |  |      |        |   |  |   |        |  
|Federal       |  | $    | 23,699 |      |  | $    | 20,215 |   |  | $ | 19,516 |  
|Foreign       |  |      | 69     |      |  |      | 352    |   |  |   | 8      |  
|State         |  |      | 1,136  |      |  |      | 1,134  |   |  |   | (4,422 | )
|              |  |      |        |      |  |      |        |   |  |   |        |  
|              |  |      | 24,904 |      |  |      | 21,701 |   |  |   | 15,102 |  
|Deferred, net |  |      | (1,471 | )    |  |      | (1,038 | ) |  |   | 1,846  |  
|              |  |      |        |      |  |      |        |   |  |   |        |  
|              |  | $    | 23,433 |      |  | $    | 20,663 |   |  | $ | 16,948 |  
|              |  |      |        |      |  |      |        |   |  |   |        |  

A reconciliation of income tax expense computed
at the federal statutory rate applied to income before income
taxes and to income tax expense at the Companys effective
tax rate for the years ended December 31 is as follows (in
thousands):

|                                                                 |  |      |        |      |  |      |        |  |  |   |        |  
|---------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                                                 |  | 2001 |        | 2002 |  | 2003
|                                                                 |  |      |        |      |  |     
|Federal statutory rate applied to income before
    income taxes |  | $    | 9,448  |      |  | $    | 19,709 |  |  | $ | 17,258 |  
|State income taxes, net of federal benefit                       |  |      | 452    |      |  |      | 929    |  |  |   | (2,874 | )
|Valuation allowance                                              |  |      |       |      |  |      |       |  |  |   | 2,354  |  
|Other                                                            |  |      | 13,533 |      |  |      | 25     |  |  |   | 210    |  
|                                                                 |  |      |        |      |  |      |        |  |  |   |        |  
|                                                                 |  | $    | 23,433 |      |  | $    | 20,663 |  |  | $ | 16,948 |  
|                                                                 |  |      |        |      |  |      |        |  |  |   |        |  

F-15



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The components of the net deferred tax balances
as of December 31 are as follows (in thousands):

|                                                          |  |      |        |      |  |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                          |  | 2002 |        | 2003
|                                                          |  |      |        |     
|Inventories                                               |  | $    | 3,269  |      |  | $ | 2,290  |  
|Allowance for doubtful accounts                           |  |      | 656    |      |  |   | 771    |  
|Debt issuance costs and stock options                     |  |      | 862    |      |  |   | 2,451  |  
|Accrued employee benefits and displayer incentives        |  |      | 4,482  |      |  |   | 2,974  |  
|Net operating loss carry forwards                         |  |      |       |      |  |   | 2,236  |  
|Other                                                     |  |      | 5,651  |      |  |   | 5,355  |  
|                                                          |  |      |        |      |  |   |        |  
|Gross deferred tax assets                                 |  |      | 14,920 |      |  |   | 16,077 |  
|Valuation allowance                                       |  |      |       |      |  |   | (2,236 | )
|                                                          |  |      |        |      |  |   |        |  
|Gross deferred tax assets, net of valuation
    allowance |  |      | 14,920 |      |  |   | 13,841 |  
|Deferred gain on sale of facilities                       |  |      | (5,045 | )    |  |   | (4,909 | )
|Property, plant and equipment                             |  |      | (4,372 | )    |  |   | (4,225 | )
|Other                                                     |  |      | (458   | )    |  |   | (1,287 | )
|                                                          |  |      |        |      |  |   |        |  
|Net deferred tax asset                                    |  |      | 5,045  |      |  |   | 3,420  |  
|Less current deferred tax asset                           |  |      | 8,399  |      |  |   | 6,006  |  
|                                                          |  |      |        |      |  |   |        |  
|Non-current deferred income tax liability                 |  | $    | 3,354  |      |  | $ | 2,586  |  
|                                                          |  |      |        |      |  |   |        |  

A valuation allowance is required against
deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Realization of
deferred tax assets associated with net operating loss
carryforwards (NOLs) is dependent upon generating
sufficient taxable income prior to their expiration in 2013. The
Company believes it is more likely than not that the NOLs
generated by the Mexico manufacturing companies may expire
unused and, accordingly, has a valuation allowance for Mexico
taxes of $2.2 million against the carryforwards at
December 31, 2003.

9.     Former
Corporate Headquarters Facility

On January 3, 2000, the Company entered into
a ten-year lease for a new corporate headquarters location in
Dallas, Texas. The Companys offices occupied approximately
75,000 square feet of office space at an annual rent of
approximately $1.6 million. Tenant improvements to
customize the space totaled approximately $2.9 million, of
which approximately $2.0 million was borne by the landlord
as improvement allowances. In December 2000, the Company moved
the corporate headquarters from these facilities into the new
warehouse and distribution facility.

In 2001, the Company signed an agreement to
sublease approximately 44,000 square feet of the former
corporate headquarters commencing on February 2001 through
January 2010. The sublease rental charge begins at $67,000 per
month and increases to $80,000 per month over the life of the
lease. The Company also agreed to provide the subtenant with an
allowance for tenant improvements of $150,000.

In 2003, the Company signed agreements to
sublease approximately 18,000 square feet of the corporate
headquarters commencing in May 2003 through January 2010 to two
of the Companys wholly owned subsidiaries. As of December
31, 2003, there remains 13,000 square feet of space available
for lease.

Included in other long-term liabilities is the
net present value of the abandoned lease commitments, net of
sublease, of approximately $3.2 million and
$2.3 million as of December 31, 2002 and 2003,
respectively.

F-16



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

10.     Other Current
Liabilities

Other current liabilities consisted of the
following as of December 31 (in thousands):

|                          |  |      |        |      |  |   |        | 
|------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                          |  | 2002 |        | 2003
|                          |  |      |        |     
|Interest                  |  | $    | 1,241  |      |  | $ | 1,258  | 
|Book overdraft            |  |      | 3,995  |      |  |   | 4,913  | 
|Accrued employee benefits |  |      | 4,741  |      |  |   | 4,443  | 
|Income taxes payable      |  |      |       |      |  |   | 2,934  | 
|Sales taxes               |  |      | 3,980  |      |  |   | 3,498  | 
|Other taxes               |  |      | 1,455  |      |  |   | 1,535  | 
|Deferred revenue          |  |      | 1,274  |      |  |   | 2,033  | 
|Related parties           |  |      | 1,441  |      |  |   | 600    | 
|Other                     |  |      | 1,127  |      |  |   | 1,933  | 
|                          |  |      |        |      |  |   |        | 
|                          |  | $    | 19,254 |      |  | $ | 23,147 | 
|                          |  |      |        |      |  |   |        | 

11.     Long-Term
Debt and Capital Lease Obligations

Long-Term Debt

In June of 1998 the Company issued
$200.0 million of senior subordinated notes (the
Notes) and entered into a $340.0 million senior
credit facility (the Senior Credit Facility). The
Senior Credit Facility provides for a $200.0 million term
loan (the Tranche A Loan), a $100.0 million
term loan (the Tranche B Loan), and
$40.0 million of revolving loans (the Revolving
Loans). The Company may use the Revolving Loans for
letters of credit of up to $15.0 million.

Debt Restructure 2001

In January 2001, a limited partnership that
includes an affiliate of Hicks Muse, certain members of the
Donald J. Carter Jr. family (the Carter Family), and
their respective affiliates (the Note Limited
Partnership) acquired, in the open market,
$50.9 million aggregate principal amount of the
Companys Notes for approximately $23.0 million plus
accrued interest. In March 2001, another limited partnership
that includes an affiliate of Hicks Muse, certain members of the
Carter Family, and their respective affiliates (the Debt
Limited Partnership) purchased $44.9 million of the
Companys senior bank debt for approximately
$35.6 million. This transaction is discussed further below
and in Note 15.

Effective March 30, 2001, the Company
entered into an amendment to the Senior Credit Facility which,
among other things: (i) reduced the Revolving Loans
available to the Company from $40.0 million to
$30.0 million; (ii) increased pricing by 75 basis points
above previous levels; (iii) provided for an amendment fee
of 25 basis points immediately payable to the Lenders who
executed the amendment prior to March 31, 2001;
(iv) provided for a fee of $3.0 million payable to the
Lenders, with the payment of such fee deferred until
September 30, 2001, and which such fee was forgiven in the
event that certain existing equity holders or their affiliates
contribute $40.0 million in equity to the Borrower prior to
September 30, 2001; (v) reset the leverage and
interest coverage ratios applicable through the fiscal quarter
ended December 31, 2001; and (vi) added additional
financial covenants with respect to minimum liquidity and
Adjusted EBITDA. Further limitations related to capital lease
obligations, liens, acquisitions, payment of management fees to
affiliates, letters of credit, loans and advances to suppliers,
and asset sales were also added to the Senior Credit Facility.
Payment terms of interest changed from quarterly payments to
monthly payments. Additionally, the amendment to the Senior
Credit Facility waived compliance with the minimum interest
coverage and maximum leverage ratios of the Senior Credit
Facility for the quarter ended December 31, 2000.

F-17



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In connection with the amendment to the Senior
Credit Facility, the Company incurred debt issuance costs of
$200,000 that were deferred, and the Company incurred
$1.5 million in legal and consulting fees, which are
included in general and administrative expense for the year
ended December 31, 2001.

On July 16, 2001, the Company completed the
2001 debt restructure through the following transactions:



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transfer of $50.9 million aggregate
    principal amount of Notes from the Note Limited Partnership to
    the Company in exchange for 50,900.00 shares of 12.5% Senior
    Convertible Preferred Stock, par value $.01 per share, issued by
    the Company (Senior Preferred Stock).          
|
| |  | Transfer of $44.9 million of the
    Companys senior bank debt from the Debt Limited
    Partnership to the Company in exchange for 44,927.98 shares of
    Senior Preferred Stock.                                                                                                              
|
| |  | The Debt Limited Partnership purchased an
    additional 231 shares of Senior Preferred Stock for $231,000 in
    cash.                                                                                                                                                                           
|
| |  | The Company converted $44.9 million of the
    Tranche A Loan of the Senior Credit Facility into the Tranche B
    Loan of the Senior Credit Facility.                                                                                                                                            
|
| |  | The Companys Senior Credit Facility was
    amended and restated to provide for, among other things, an
    increase of $10 million in the revolving credit line and
    the extension of the maturity dates of the Tranche A Loan and
    the Tranche B Loan for an additional six month period.

As a result of the debt restructure, the Company
recognized a $2.4 million loss related to unamortized debt
issuance costs and $12.8 million of income tax expense for
the year ended December 31, 2001. Included in general and
administrative expenses for the year ended December 31,
2001 are approximately $1.9 million in costs related to
legal and consulting fees. The Company also incurred additional
debt issuance costs of $1.3 million, which were deferred,
and $1.9 million in costs and advisory fees related to the
Senior Preferred Stock issuance, which were recorded as a
reduction to Senior Preferred Stock.

The Company will not report significant net
taxable income in respect of the debt restructuring transactions
and the issuance of the Senior Preferred Stock. However, if tax
is found to be due and payable by the Company with respect to
such transactions prior to the termination of the Senior Credit
Facility, the Note Limited Partnership and the Debt Limited
Partnership are required, at their option: (i) to make a
cash contribution to the capital of the Company; (ii) to
purchase shares of common stock of the Company at the
then-current market value; or (iii) to purchase additional
shares of Senior Preferred Stock, in each case in an aggregate
amount equal to the net amount of tax paid by the Company in
connection with the 2001 debt restructuring.

Debt Restructure 2002

On July 29, 2002, the Company completed the
2002 debt restructure through the following transactions:



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

F-18



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As a result of the 2002 debt restructure, the
Company reported a loss of $7.2 million and an income tax
benefit of $2.7 million. The loss was comprised of
$3.3 million in unamortized debt issuance costs and
$3.9 million of fees paid to creditors.

Borrowings under the Senior Credit Facility
require quarterly principal and interest payments. The Tranche A
Loan and Revolving Loans mature on December 31, 2004. The
Tranche B Loan matures on December 31, 2006. The Company
may, at its option, prepay the term loans without premium or
penalty. Additionally, the Company may reduce or eliminate its
revolving loan commitment prior to maturity. The Senior Credit
Facility is guaranteed unconditionally on a senior basis by the
Companys wholly owned domestic subsidiaries and is
collateralized by a lien on substantially all assets of the
Company and its wholly-owned subsidiaries. There are no material
restrictions on the Companys ability to obtain funds from
its wholly owned subsidiaries by dividend or otherwise.

The loans under the Senior Credit Facility bear
interest, at the Companys election, at either the LIBOR
rate plus an applicable margin, the Base Rate Basis plus an
applicable margin or at a Swing Line Rate that is equal to the
Base Rate less a 0.5% commitment fee. The Base Rate Basis is the
higher of the prime rate of Bank of America or the federal funds
effective rate plus 0.5%. The applicable LIBOR margin and Base
Rate margin are subject to adjustments, upwards or downwards,
based upon the leverage ratio as defined by the Amended and
Restated Credit Agreement. The interest rates on all borrowings
outstanding under the Senior Credit Facility were based on LIBOR
as of December 31, 2002 and Base Rate as of
December 31, 2003. The weighted-average interest rate on
the Tranche A and Tranche B borrowings outstanding at
December 31, 2002 and 2003 was 5.81% and 7.45% respectively.

The Revolving Loans are subject to a commitment
fee based on the undrawn portion of the Revolving Loans. The
commitment fee is eligible for certain performance pricing
step-downs and was 0.5% per annum as of December 31, 2002
and 2003. Commitment fees of approximately $107,600, $141,000
and $133,500 are included in interest expense in the year ended
December 31, 2001, 2002 and 2003, respectively. Outstanding
letters of credit totaled $3.5 million and $4.9 million as
of December 31, 2002 and 2003, respectively.

The Notes bear interest at 10.125% per year,
payable semi-annually in arrears on June 1 and December 1 of
each year. The Notes mature on June 1, 2008 and are
guaranteed, unconditionally, jointly and severally, on an
unsecured senior subordinated basis by all of the Companys
wholly owned domestic subsidiaries. Except as set forth below,
the Notes are not redeemable by the Company prior to
June 1, 2003. Thereafter, the Notes are subject to
redemption by the Company, in whole or in part, at specified
redemption prices. There were no Note redemptions made by the
Company during 2003.

The terms of the Notes and Senior Credit Facility
include significant operating and financial restrictions, such
as limits on the Companys ability to incur indebtedness,
create liens, sell assets, engage in mergers, acquisitions or
consolidations, make investments and pay dividends. In addition,
under the Senior Credit Facility, the Company is required to
comply with specified financial ratios and tests, including
fixed charge coverage ratios, maximum leverage ratios, capital
expenditure measurements, and Adjusted EBITDA measurements.
Subject to the financial ratios and tests, the Company would be
required to make mandatory prepayments of the term loans on an
annual basis beginning in March 2003. In March of 2003, the
Company made a mandatory prepayment of $12.4 million.

Capital Leases

In December 1999, the Company entered into
capital leases for certain equipment associated with the
automated order fulfillment system being used in the new
warehouse and distribution facility. The lessor funded the
equipment purchase when construction of the automated order
fulfillment system was completed in April 2000. The initial term
of each of the leases is seven years. Interest is imputed at a
weighted average rate of 6.1% per annum. Total cost of the
equipment funded under this lease was approximately
$6.2 million.

F-19



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company also leases certain office furniture
and equipment under capital lease obligations. Future minimum
lease payments for the Companys assets held under capital
lease obligations as of December 31, 2003 are as follows
(in thousands):

Years Ending December 31:

|                                           |  |   |        |  
|------------------------------------------ |  | - | ------ | -
|2004                                       |  | $ | 1,369  |  
|2005                                       |  |   | 1,355  |  
|2006                                       |  |   | 1,344  |  
|2007                                       |  |   | 479    |  
|2008                                       |  |   |       |  
|Thereafter                                 |  |   |       |  
|                                           |  |   |        |  
|Total minimum lease obligations            |  |   | 4,547  |  
|Less: amounts representing interest        |  |   | (453   | )
|                                           |  |   |        |  
|Present value of minimum lease obligations |  |   | 4,094  |  
|Less: current maturities                   |  |   | (1,145 | )
|                                           |  |   |        |  
|Long-term capital lease obligations        |  | $ | 2,949  |  
|                                           |  |   |        |  

A summary of long-term debt and capital lease
obligations as of December 31 is as follows (in thousands):

|                                                                                                                                       |  |      |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                                                                                       |  | 2002 |         | 2003
|                                                                                                                                       |  |      |         |     
|Notes, interest at 10.125% with semi-annual
    interest payments due on June 1 and December 1                                         |  | $    | 149,100 |      |  | $ | 149,100 |  
|Tranche A Loan, interest at LIBOR plus an
    applicable margin (4.9%)                                                                 |  |      | 16,184  |      |  |   |        |  
|Tranche A Loan, interest at Base Rate plus an
    applicable margin (6.5%)                                                             |  |      |        |      |  |   | 8,953   |  
|Tranche B Loan, interest at LIBOR plus an
    applicable margin (5.9%)                                                                 |  |      | 171,505 |      |  |   |        |  
|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, rates ranging from
    5.21% to 7.80% |  |      | 5,351   |      |  |   | 4,094   |  
|Other                                                                                                                                  |  |      | 751     |      |  |   |        |  
|                                                                                                                                       |  |      |         |      |  |   |         |  
|                                                                                                                                       |  |      | 342,891 |      |  |   | 321,876 |  
|Less current maturities                                                                                                                |  |      | (21,017 | )    |  |   | (10,099 | )
|                                                                                                                                       |  |      |         |      |  |   |         |  
|                                                                                                                                       |  | $    | 321,874 |      |  | $ | 311,777 |  
|                                                                                                                                       |  |      |         |      |  |   |         |  

The following table represents a summary of the
maturities of debt and capital lease obligations as of
December 31 (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 10,099  | 
|2005       |  |   | 71,847  | 
|2006       |  |   | 90,358  | 
|2007       |  |   | 472     | 
|2008       |  |   | 149,100 | 
|Thereafter |  |   |        | 
|           |  |   |         | 
|           |  | $ | 321,876 | 
|           |  |   |         | 

F-20



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

12.     12.5% Senior
Convertible Preferred Stock

In connection with the Debt Restructuring, the
Company designated 96,058.98 shares of Senior Preferred Stock.
The shares of Senior Preferred Stock have a par value of $0.01
per share and a liquidation preference of $1,000 per share,
together with all declared or accrued and unpaid dividends
thereon. In the event of any liquidation of the Company, holders
of shares of Senior Preferred Stock shall be paid the
liquidation preference plus all accrued dividends to the date of
liquidation before any payments are made to the Common Stock
holders. Dividends, as and if declared by the Companys
Board of Directors, are cumulative and payable quarterly
beginning October 1, 2001 at the rate of 12.5% of the
liquidation preference per annum. Each share of Senior Preferred
Stock is convertible at any time at the option of the holder for
51.49330587 shares of the Companys Common Stock. In 2002,
the Company recorded a $1.4 million liability to a related
party for financial advisory fees associated with services
rendered in connection with the 2001 Senior Preferred Stock
issuance.

Holders of Senior Preferred Stock are entitled to
the number of votes equal to the number of shares of the
Companys Common Stock into which such shares of Senior
Preferred Stock are convertible on the record date for such
vote. Each holder has a preemptive right to purchase a pro rata
share of future securities issuances, excluding public
securities issued under applicable securities laws, securities
issued to employees and Displayers for incentive compensation
and securities issued in exchange for assets in the normal
course of business.

The table below presents the net income
(loss) applicable to common shareholders for the years
ended December 31 (in thousands):

|                                                        |  |      |        |      |  |      |        |  |  |   |        | 
|------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                        |  | 2001 |        | 2002 |  | 2003
|                                                        |  |      |        |      |  |     
|Net income, as reported                                 |  | $    | 3,560  |      |  | $    | 35,648 |  |  | $ | 32,361 | 
|Less: 12.5% cumulative preferred stock dividends        |  |      | 5,527  |      |  |      | 12,007 |  |  |   | 12,007 | 
|                                                        |  |      |        |      |  |      |        |  |  |   |        | 
|Net income (loss) applicable to common
    shareholders |  | $    | (1,967 | )    |  | $    | 23,641 |  |  | $ | 20,354 | 
|                                                        |  |      |        |      |  |      |        |  |  |   |        | 

The cumulative preferred stock dividends in
arrears total $29.5 million as of December 31, 2003.
No dividends have been paid or declared as of December 31, 2002
and 2003.

13.     Operating
Leases

The Company has entered into operating lease
agreements for office and manufacturing space with unrelated
third parties. Total rent expense for 2001, 2002, and 2003 was
$634,000, $1.4 million, and $3.7 million,
respectively. Future minimum rents due under noncancelable
operating leases with initial terms greater than twelve months
are as follows (in thousands):

|                         |  |                          |       |             |  |             |       |  |  |   |        | 
|------------------------ |  | ------------------------ | ----- | ----------- |  | ----------- | ----- |  |  | - | ------ | 
|                         |  | Former Corporate         |       |             |  |            
|Year Ending December 31, |  | Offices, Net of Sublease |       | Other Rents |  | Total Rents
|                         |  |                          |       |             |  |            
|2004                     |  | $                        | 713   |             |  | $           | 2,136 |  |  | $ | 2,849  | 
|2005                     |  |                          | 765   |             |  |             | 2,339 |  |  |   | 3,104  | 
|2006                     |  |                          | 744   |             |  |             | 1,477 |  |  |   | 2,221  | 
|2007                     |  |                          | 722   |             |  |             | 1,317 |  |  |   | 2,039  | 
|2008                     |  |                          | 700   |             |  |             | 1,041 |  |  |   | 1,741  | 
|Thereafter               |  |                          | 678   |             |  |             | 508   |  |  |   | 1,186  | 
|                         |  |                          |       |             |  |             |       |  |  |   |        | 
|                         |  | $                        | 4,322 |             |  | $           | 8,818 |  |  | $ | 13,140 | 
|                         |  |                          |       |             |  |             |       |  |  |   |        | 

F-21



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

14.     Restructuring,
Redundancy and Reorganization

Redundant Warehouse and Distribution
Cost

The Companys previously announced plan to
consolidate its several distribution centers into a single
facility was contingent upon timely integration and
implementation of its automated order fulfillment system. This
plan anticipated a significant warehouse and distribution
headcount reduction in connection with the consolidation
process. The Company encountered delays and problems associated
with the design and implementation of the automated order
fulfillment system and the overall productivity of the
consolidated distribution facility. These delays forced the
Company to hire additional temporary laborers and retain
existing warehouse employees longer than originally anticipated.

In addition, the Company continued to operate two
of its older manual order fulfillment distribution facilities
longer then was anticipated. In October 2000, one of the two
manual operations was moved into the consolidated distribution
facility. The Company extended the lease term on the other
manual distribution facility for a period of five years.

Redundant warehouse and distribution costs
resulting from the issues discussed above were approximately
$1.2 million for the year ended December 31, 2001.
These costs consist primarily of incremental labor associated
with productivity issues at the new consolidated distribution
facility, costs of operating certain manual distribution centers
longer than anticipated and consolidation of the manual
distribution centers into the new distribution facility. There
were no redundant warehouse and distribution costs incurred
during 2002 and 2003.

Reorganization Cost

During 2000, the Company implemented a corporate
reorganization plan that included, among other things, staff
reductions and the elimination of excess facility costs. As part
of the reorganization, the Company downsized various
departments. In December 2000, the Company relocated its
corporate headquarters to a new warehouse and distribution
facility. The Company sublet approximately 44,000 square feet of
the former corporate headquarters and accelerated amortization
of the related leasehold improvements.

During 2001, in addition to redundant headquarter
facility costs associated with the Companys reorganization
plan, the Company incurred non-capitalizable legal fees related
to obtaining a waiver for the Senior Credit Facility and Debt
Restructuring.

During 2002, in addition to expenses incurred
related to the Companys reorganization plan, the Company
incurred non-capitalized expenses, such as training, data
conversion, and consulting fees, related to an implementation of
a new computer system.

During 2003, in addition to expenses incurred
related to the Companys reorganization plan, the Company
incurred non-recurring costs related to the integration of the
new international manufacturing entities and entity wide
compliance costs associated with the Sarbanes-Oxley Act of 2002.

F-22



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Included in cost of goods sold and, selling, and
general and administrative expenses in the consolidated
statements of operations and comprehensive income are the
following amounts associated with the Companys
reorganization plan as of December 31:

|                                                               |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                               |  | 2001 |       | 2002 |  | 2003
|                                                               |  |      |       |      |  |     
|Staff reductions, excess facilities cost and other             |  | $    | 3,177 |      |  | $    | 786   |  |  | $ | 1,982 | 
|Integration costs of international manufacturing
    companies |  |      |      |      |  |      |      |  |  |   | 4,970 | 
|Non-capitalized computer system implementation
    costs       |  |      |      |      |  |      | 2,106 |  |  |   |      | 
|Compliance costs, Sarbanes-Oxley Act 2002                      |  |      |      |      |  |      |      |  |  |   | 378   | 
|Debt restructuring fees                                        |  |      | 3,419 |      |  |      |      |  |  |   |      | 
|                                                               |  |      |       |      |  |      |       |  |  |   |       | 
|                                                               |  | $    | 6,596 |      |  | $    | 2,892 |  |  | $ | 7,330 | 
|                                                               |  |      |       |      |  |      |       |  |  |   |       | 

15.     Related Party
Transactions

During 2003, in connection with the
Companys asset purchase of Gaines & Associates, Inc.,
the Company paid a related party approximately $965,000.
Simultaneously with the asset purchase transaction the
stockholders of Gaines & Associates, Inc. became employees
of the Company. Per the terms of the asset purchase agreement,
the related party is entitled to earn-out payments starting in
the third quarter 2003 and ending in the first quarter of 2007.
Earn-out payments made to the related party totaled $10,700
during 2003. As of December 31, 2003 the Company owed the
related party $99,800 in earn-out payments.

During 2002, in connection with the
Companys purchase of 100% of the stock of Brenda Buell
& Associates, Inc., the Company paid a related party
$200,000 and signed a three-year $2.0 million note payable.
Simultaneously with the transaction, the former stock owner of
Brenda Buell & Associates, Inc. became an officer of the
Company. Per the terms of the asset purchase agreement, the
related party is entitled to earn-out payments starting in the
first quarter of 2004 and ending in the first quarter 2007.
During 2003, the Company paid $3.3 million to the related
party and made a principal and interest payment of $700,000
against the note payable. There were no earn-out payments made
during 2003. As of December 31, 2003, the remaining note
payable due to the related party totaled $1.4 million and
$500,000 of earn-out payments is due to the related party.

During 2002, the Company loaned $77,600 to one of
the Companys subsidiaries officers. The amount due
to the Company from the officer was $34,000 as of
December 31, 2002. During 2003, the loan was paid in full.

A shareholder of the Company owns a company that
supplies inventory items to the Company. The Company paid the
supplier approximately $16.4 million, $12.2 million,
and $6.5 million during 2001, 2002, and 2003 for inventory
purchases. During 2002 and 2003, the Company also paid
approximately $224,000 and $227,000, respectively, for warehouse
space that was leased from this supplier. Amounts due to this
supplier totaled approximately $508,000 as of December 31,
2002. There were no amounts due at December 31, 2003.

Another shareholder of the Company owns a company
that supplies inventory items to the Company. The Company paid
the supplier approximately $2.5 million, $2.3 million,
and $2.0 million during 2001, 2002, and 2003. Amounts
payable to this supplier totaled approximately $109,000 and
$181,000 as of December 31, 2002 and 2003, respectively.

In conjunction with the June 1998
Recapitalization, the Company entered into an agreement
requiring payment of a quarterly management fee to Hicks Muse
and reimbursement of general expenses. The management fee will
be adjusted annually, but in no event will the annual fee be
less than $1.0 million or exceed $1.5 million.
Management fees and reimbursements of general expenses totaled
$1.0 million, $1.0 million and $1.2 million
during 2001, 2002, and 2003, respectively. In addition, if the
Board and the

F-23



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Company requests Hicks Muse to perform additional
financial advisory services in the future, Hicks Muse will
receive a financial advisory fee. The management agreement with
Hicks Muse terminates on June 4, 2008 or earlier under
certain circumstances. The Company paid $1.4 million in
advisory fees during 2003. Amounts due to Hicks Muse were
approximately $1.4 million at December 31, 2002. There
were no amounts due to Hicks Muse at December 31, 2003.

On June 4, 1998, the Company entered into a
five-year executive employment agreement with its former chief
executive officer with annual compensation of $200,000, plus
reimbursement for certain expenses. The agreement generally
requires the Company to pay the former chief executive
officers salary throughout the five-year term unless he
voluntarily terminates his employment during such term. The
agreement, which contains a covenant not to compete with the
Company during the employment term and for three years
thereafter, could be voluntarily terminated only by the
employee. The agreement expired in accordance with its terms,
but the Company has continued to compensate the employee since
its expiration on the same terms and conditions pursuant to an
oral arrangement. In 2001, 2002, and 2003 the Company paid the
former chief executive officer approximately $266,000, $263,000
and $200,000 pursuant to the terms and conditions of his
executive employment agreement.

During 2001, 2002 and 2003, Board fees were paid
to certain outside Directors that totaled $24,000, $33,500 and
$34,300, respectively. There were no amounts due to these
Directors at December 31, 2002 and 2003.

During 2002 and 2003, an outside Director was
paid $22,000 and $11,000, respectively, for reimbursement of
general expenses and assignment fees. As of December 31,
2002 and 2003, there were no amounts outstanding to this
Director.

During 2001, 2002 and 2003, the Company
contributed approximately $784,000, $1.5 million and
$966,000, respectively, to a not-for-profit charity organization
that was established in September 2001. The Company and the
charity share some of the same officers. Amounts due to this
charitable organization totaled approximately $56,000 and
$104,000 as of December 31, 2002 and 2003.

During 2001 and 2002, the Company paid a related
party for marketing related expenses of approximately $10,000
and $65,000, respectively. This agreement expired on
December 31, 2002. There were no amounts due to the related
party as of December 31, 2002.

During 2002 a shareholder of the Company was a
partner of a law firm that renders various legal services for
the Company. The Company paid this law firm approximately
$67,000 and $58,000 for legal services during 2001 and 2002.
There was approximately $8,000 due to this law firm as of
December 31, 2002.

During 2003, the Company paid a related party
approximately $116,300 for the development of a product branding
strategy. As of December 31, 2003 there were no amounts due
to this related party.

In 2001, the Company engaged the services of a
freight company controlled by shareholders of the Company to
handle a small portion of its freight. The Company paid this
freight company $25,000 during 2001 for its services. There were
no amounts due to this supplier as of December 31, 2002 or
2003.

In January 2001, the Note Limited Partnership
acquired in the open market $50.9 million aggregate
principal amount of the Companys Notes for approximately
$23.0 million plus accrued interest. In March 2001, the
Debt Limited Partnership purchased $44.9 million of the
Companys senior bank debt for approximately
$35.6 million. (see Note 11.)

16.     Commitments
and Contingencies

The Company is engaged in various legal
proceedings incidental to its normal business activities.
Management believes that the amounts, if any, which ultimately
may be due in connection with such lawsuits

F-24



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and claims would not have a material effect upon
the Company, because most of the claims are covered by insurance.

The Company is also engaged in product recall
campaigns related to its normal business activities. Management
believes that the costs, if any, associated with the product
recalls would not have a material effect upon the Company.

The Company previously purchased certain assets
of House of Lloyd entities in bankruptcy. Such assets included
that certain letter agreement dated October 23, 2001, among
Richmont Corporation and its affiliates and representatives, and
House of Lloyd Management, LLC (the Letter
Agreement).

On April 25, 2002, the Company in the name
of several House of Lloyd entities, filed a petition against
Richmont Corporation, Richmont International, Inc. d/b/a
Richmont House and John P. Rochon (Defendants)
asserting various claims arising from, inter alia, the Letter
Agreement. Defendants answered the lawsuit and, on
September 12, 2002, filed an Original, Counterclaim and
Third Party Petition against the House of Lloyd entities, as
counter-defendants, and the Company and Mr. Donald J.
Carter Jr., as third-party defendants, pursuant to which
Defendants asserted claims for tortuous interference with
prospective business relations, tortuous interference with
existing business relations, a business disparagement,
conspiracy and malicious prosecution, and were seeking actual
damages and punitive damages in the amount of $100 million.
The House of Lloyd entities, the Company and Mr. Carter
answered the Original Counterclaim and third party petition, and
filed an additional action against the Defendants in the United
States Bankruptcy Court for the Western District of Missouri,
Kansas City Division (the Bankruptcy Court).

On March 10, 2003, the Defendants entered
into a Settlement Agreement and General Release (the
Settlement Agreement) in favor of the Company and
Donald J. Carter, Jr. which disposes of and fully resolves the
pending claims without the payment of any material amounts by
any of the parties. All orders of dismissals have been submitted
and entered and all settlement documents have been signed.

On June 6, 2003, the Company entered into a
twelve-year license agreement (the License
Agreement) with Meredith Corporation. The License
Agreement governs the development, manufacture, marketing and
distribution of products to be sold by the Company under the
trademark Better Homes and Gardens. The agreement
provides for earned royalty payments to Meredith Corporation
determined by a percentage of net sales and guaranteed annual
minimum royalty payments that escalate through the term of the
License Agreement.

On February 24, 2004, the Company entered
into a commitment letter with two financial institutions
pursuant to which the Company intends to refinance loans
outstanding under its existing Senior Credit Facility. The
financial institutions commitments to make such facilities
available to the Company are subject to conditions precedent
that are customary for a financing of this type. Pursuant to the
commitment letter, the financial institutions named therein have
committed to provide the Company with a term loan facility of up
to $320 million and a $50 million revolving credit
facility (which represents an increase over the Companys
existing term loan and revolving credit facilities of
$168.7 million and $30.0 million, respectively). It is
anticipated that the proceeds of the new term loan and revolving
credit facilities will be used (i) to refinance the
Companys existing senior debt, including partial year
interest thereon (approximately $169.8 million),
(ii) to repurchase all of the Companys outstanding
Senior Preferred Stock (approximately $139.0 million),
(iii) for general working capital purposes (approximately
$2.0 million) and (iv) to pay transaction fees and
expenses (approximately $9.2 million). The Companys
outstanding Senior Preferred Stock is currently held by
affiliates of the Companys controlling shareholders. On a
pro forma basis after giving effect to the refinancing as
currently contemplated and the anticipated use of the proceeds
from the refinancing, as of December 31, 2003, the Company
would have had approximately $474.6 million in total debt
(as compared to approximately $323.2 million in total debt
as of December 31, 2003 on an actual basis).

F-25



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

17.     Segment
Reporting

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



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

The Company evaluates the performance of its
segments and allocates resources to them based on earnings
before interest, taxes, the effects of SAB 101, depreciation and
amortization, reorganization and redundancy costs, non-cash
expense (credit) for stock options, losses on debt
restructure, (gains) losses on disposition of assets, and
other income (expense) (defined as Adjusted EBITDA).
The Company also uses Adjusted EBITDA as a performance measure
due to the Companys required compliance thresholds for
Adjusted EBITDA covenants under the Senior Credit Agreement. The
accounting principles of the segments are the same as those
described in Note 2. Segment data includes intersegment sales
and intercompany net receivable balances. Eliminations consist
primarily of intersegment sales between Domistyle and the direct
selling segments, as well as the elimination of the investment
in each subsidiary for consolidation purposes. The table below
presents information about reportable segments used by the
Companys chief operating decision maker as of and for the
years ended December 31 (in thousands):

|                            |  |          |         |               |  |           |        |              |  |              |         |  |  |   |          |   |  |   |         | 
|--------------------------- |  | -------- | ------- | ------------- |  | --------- | ------ | ------------ |  | ------------ | ------- |  |  | - | -------- | - |  | - | ------- | 
|                            |  | Direct   |         | Direct        |  |           |        |              |  |             
|                            |  | Selling  |         | Selling       |  |           |        |              |  |             
|                            |  | Domestic |         | International |  | Domistyle |        | Eliminations |  | Consolidated
|                            |  |          |         |               |  |           |        |              |  |             
|2001                        |  |          |         |               |  |           |        |              |  |              |         |  |  |   |          |   |  |   |         | 
|Net sales to non-affiliates |  | $        | 438,241 |               |  | $         | 21,881 |              |  | $            | 1,567   |  |  | $ |         |   |  | $ | 461,689 | 
|Net sales to affiliates     |  |          | 10,142  |               |  |           |       |              |  |              | 116,947 |  |  |   | (127,089 | ) |  |   |        | 
|Adjusted EBITDA             |  |          | 49,287  |               |  |           | 2,567  |              |  |              | 33,856  |  |  |   | (768     | ) |  |   | 84,942  | 
|Total assets                |  |          | 137,048 |               |  |           | 3,630  |              |  |              | 73,407  |  |  |   | (59,331  | ) |  |   | 154,754 | 
|Goodwill                    |  |          |        |               |  |           |       |              |  |              | 5,540   |  |  |   |         |   |  |   | 5,540   | 
|Capital expenditures        |  |          | 11,452  |               |  |           | 83     |              |  |              | 3,553   |  |  |   |         |   |  |   | 15,088  | 
|2002                        |  |          |         |               |  |           |        |              |  |              |         |  |  |   |          |   |  |   |         | 
|Net sales to non-affiliates |  | $        | 528,710 |               |  | $         | 36,723 |              |  | $            | 9,187   |  |  | $ | (121     | ) |  | $ | 574,499 | 
|Net sales to affiliates     |  |          | 17,173  |               |  |           |       |              |  |              | 136,149 |  |  |   | (153,322 | ) |  |   |        | 
|Adjusted EBITDA             |  |          | 57,025  |               |  |           | 3,033  |              |  |              | 46,824  |  |  |   | (409     | ) |  |   | 106,473 | 
|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 |              |  | $            | 30,335  |  |  | $ |         |   |  | $ | 617,444 | 
|Net sales to affiliates     |  |          | 28,950  |               |  |           |       |              |  |              | 145,801 |  |  |   | (174,751 | ) |  |   |        | 
|Adjusted EBITDA             |  |          | 55,108  |               |  |           | 6,699  |              |  |              | 44,908  |  |  |   | (1,427   | ) |  |   | 105,288 | 
|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  | 

F-26



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table represents a reconciliation
of net income to consolidated Adjusted EBITDA for the years
ended December 31 (in thousands):

|                                     |  |      |        |      |  |      |         |   |  |   |         |  
|------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                     |  | 2001 |        | 2002 |  | 2003
|                                     |  |      |        |      |  |     
|Net income                           |  | $    | 3,560  |      |  | $    | 35,648  |   |  | $ | 32,361  |  
|Effect of SAB 101                    |  |      | 990    |      |  |      | (1,003  | ) |  |   | 395     |  
|Depreciation and amortization        |  |      | 9,762  |      |  |      | 11,715  |   |  |   | 15,663  |  
|Loss on debt restructure             |  |      | 2,437  |      |  |      | 7,188   |   |  |   |        |  
|(Gain) loss on disposition of assets |  |      | 495    |      |  |      | (361    | ) |  |   | 108     |  
|Stock option expense (credit)        |  |      | (62    | )    |  |      | 1,267   |   |  |   | 4,207   |  
|Redundant warehouse and distribution |  |      | 1,197  |      |  |      |        |   |  |   |        |  
|Reorganization costs                 |  |      | 3,177  |      |  |      | 2,892   |   |  |   | 7,330   |  
|Debt restructuring and waiver fees   |  |      | 3,419  |      |  |      |        |   |  |   |        |  
|Interest income                      |  |      | (1,017 | )    |  |      | (472    | ) |  |   | (359    | )
|Interest expense                     |  |      | 38,476 |      |  |      | 27,497  |   |  |   | 27,506  |  
|Other income (expense), net          |  |      | (925   | )    |  |      | 1,439   |   |  |   | 1,129   |  
|Income tax provision                 |  |      | 23,433 |      |  |      | 20,663  |   |  |   | 16,948  |  
|                                     |  |      |        |      |  |      |         |   |  |   |         |  
|Adjusted EBITDA                      |  | $    | 84,942 |      |  | $    | 106,473 |   |  | $ | 105,288 |  
|                                     |  |      |        |      |  |      |         |   |  |   |         |  

18. Guarantor Financial Data

Dallas Woodcraft Company, LP, DWC GP, Inc., GIA,
Inc., Homco, Inc., Spring Valley Scents, Inc., Laredo Candle
Company, L.P., Domistyle, Inc., EM Boehm, Inc., Home Interiors
de Puerto Rico, Inc. and HIG Investments, Inc. (collectively,
the Guarantors) unconditionally, on a joint and
several basis, guarantee Home Interiors & Gifts, Inc.s
(Borrower) credit agreement with its principal
lenders (the Senior Credit Agreement), and the Debt
Holders 10 1/8% Senior Subordinated Notes due 2008 in the
amount of $149.1 million (the Notes). The
Companys other subsidiaries, Home Interiors de Mexico, S.
de R.L. de C.V., Home Interiors Services de Mexico, S.A. de
C.V., HI Ceramics, S.A. de C.V., HI Metals, S.A. de C.V., HI
Glass, S.A. de C.V., HI Trading Mexicana, S.A. de C.V., and Home
Interiors & Gifts of Canada, Inc. (collectively, the
Non-Guarantors) have not guaranteed the Senior
Credit Facility or the Notes. Guarantor and Non-Guarantor
financial statements on an individual basis are not significant
and have been

F-27



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

omitted. Accordingly, the following table
presents financial information of the Guarantors and
Non-Guarantors on a consolidating basis (in thousands):

Condensed Consolidating Statement of
Operations and Comprehensive Income (Loss)

For the Year Ended December 31,
2001


|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |         | 
|--------------------------------------------------------------- | --------------------------------- | -------- | ------- | ---------- | - | -------------- | ------- | ------------ |  | ------------ | ------ | ----- |  | - | -------- | ------- | - | - | ------- | ------- | 
|                                                                |                                   | Borrower |         | Guarantors |   | Non-Guarantors |         | Eliminations |  | Consolidated
|                                                                |                                   |          |         |            |   |                |         |              |  |             
|Net sales                                                       |                                   | $        | 448,815 |            |   | $              | 119,996 |              |  | $            | 19,961 |       |  | $ | (127,083 | )       |   | $ | 461,689 |        
|Cost of good sold                                               |                                   |          | 235,007 |            |   |                | 81,885  |              |  |              | 10,313 |       |  |   | (126,316 | )       |   |   | 200,889 |        
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        
|                                                                | Gross profit                      |          |         | 213,808    |   |                |         | 38,111       |  |              |        | 9,648 |  |   |          | (767    | ) |   |         | 260,800 | 
|Total selling, general and administrative                       |                                   |          | 182,921 |            |   |                | 6,919   |              |  |              | 7,433  |       |  |   |         |         |   |   | 197,273 |        
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        
|                                                                | Operating income (loss)           |          |         | 30,887     |   |                |         | 31,192       |  |              |        | 2,215 |  |   |          | (767    | ) |   |         | 63,527  | 
|Other income (expense), net                                     |                                   |          | (37,604 | )          |   |                | 1,139   |              |  |              | (69    | )     |  |   |         |         |   |   | (36,534 | )      
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        
|                                                                | Income (loss) before income taxes |          |         | (6,717     | ) |                |         | 32,331       |  |              |        | 2,146 |  |   |          | (767    | ) |   |         | 26,993  | 
|Income tax provision                                            |                                   |          | (11,157 | )          |   |                | (11,805 | )            |  |              | (471   | )     |  |   |         |         |   |   | (23,433 | )      
|Equity in income (loss) of affiliated
    companies, net of tax |                                   |          | 22,195  |            |   |                | 17      |              |  |              |       |       |  |   | (22,212  | )       |   |   |        |        
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        
|                                                                | Net income (loss)                 |          |         | 4,321      |   |                |         | 20,543       |  |              |        | 1,675 |  |   |          | (22,979 | ) |   |         | 3,560   | 
|Other comprehensive loss                                        |                                   |          |        |            |   |                |        |              |  |              | (37    | )     |  |   |         |         |   |   | (37     | )      
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        
|                                                                | Comprehensive income (loss)       |          | $       | 4,321      |   |                | $       | 20,543       |  |              | $      | 1,638 |  |   | $        | (22,979 | ) |   | $       | 3,523   | 
|                                                                |                                   |          |         |            |   |                |         |              |  |              |        |       |  |   |          |         |   |   |         |        

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 income (loss)                               |                                   |          | 11      |            |  |                |        |              |  |              | (173   | )      |  |   |         |         |   |   | (162    | )      
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |  |   |          |         |   |   |         |        
|                                                                | Comprehensive income (loss)       |          | $       | 36,114     |  |                | $       | 29,163       |  |              | $      | 990    |  |   | $        | (30,781 | ) |   | $       | 35,486  | 
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |  |   |          |         |   |   |         |        

F-28



---



##### Table of Contents



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 |              |  | $            | 65,563 |        |   | $ | (179,627 | )       |   | $ | 617,444 |        
|Cost of good sold                                               |                                   |          | 307,084 |            |  |                | 112,356 |              |  |              | 46,993 |        |   |   | (178,200 | )       |   |   | 288,233 |        
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |   |   |          |         |   |   |         |        
|                                                                | Gross profit                      |          |         | 255,778    |  |                |         | 56,290       |  |              |        | 18,570 |   |   |          | (1,427  | ) |   |         | 329,211 | 
|Total selling, general and administrative                       |                                   |          | 218,383 |            |  |                | 11,732  |              |  |              | 21,511 |        |   |   |         |         |   |   | 251,626 |        
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |   |   |          |         |   |   |         |        
|                                                                | Operating income (loss)           |          |         | 37,395     |  |                |         | 44,558       |  |              |        | (2,941 | ) |   |          | (1,427  | ) |   |         | 77,585  | 
|Other income (expense), net                                     |                                   |          | (26,945 | )          |  |                | 459     |              |  |              | (1,750 | )      |   |   | (40      | )       |   |   | (28,276 | )      
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |   |   |          |         |   |   |         |        
|                                                                | Income (loss) before income taxes |          |         | 10,450     |  |                |         | 45,017       |  |              |        | (4,691 | ) |   |          | (1,467  | ) |   |         | 49,309  | 
|Income tax benefit (provision)                                  |                                   |          | (687    | )          |  |                | (15,923 | )            |  |              | (699   | )      |   |   | 361      |         |   |   | (16,948 | )      
|Equity in income (loss) of affiliated
    companies, net of tax |                                   |          | 23,703  |            |  |                | (7,127  | )            |  |              |       |        |   |   | (16,576  | )       |   |   |        |        
|                                                                |                                   |          |         |            |  |                |         |              |  |              |        |        |   |   |          |         |   |   |         |        
|                                                                | 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-29



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Condensed Consolidating Balance
Sheet

As of December 31, 2002


|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |          |          |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ---------- | -------- | -------------- | ------ | ------------- | ------ | ------------ | --- | ------------ | ----- |  | ------- | -------- | -------- | - | ------- | ------- | ------- | - | ------- | -------- | -------- | -
|                                                                            |                                                                        | Borrower                                                 |         | Guarantors |          | Non-Guarantors |        | Consolidating |        | Eliminations |     | Consolidated
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |             
|ASSETS                                                                     
|Current assets:                                                             |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            | Cash                                                                   |                                                          | $       | 66,775     |          |                | $      | 317           |        |              | $   | 1,019        |       |  | $       | 68,111   |          |   | $       |        |         |   | $       | 68,111   |         
|                                                                            | Accounts receivable, net                                               |                                                          |         | 9,694      |          |                |        | 2,214         |        |              |     | 1,673        |       |  |         | 13,581   |          |   |         |        |         |   |         | 13,581   |         
|                                                                            | Inventories, net                                                       |                                                          |         | 47,186     |          |                |        | 7,473         |        |              |     | 3,875        |       |  |         | 58,534   |          |   |         | (3,325  | )       |   |         | 55,209   |         
|                                                                            | Other current assets                                                   |                                                          |         | 10,268     |          |                |        | 954           |        |              |     | 174          |       |  |         | 11,396   |          |   |         |        |         |   |         | 11,396   |         
|                                                                            | Due from (due to) affiliated companies                                 |                                                          |         | (56,142    | )        |                |        | 58,569        |        |              |     | (2,427       | )     |  |         |         |          |   |         |        |         |   |         |         |         
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total current assets                                     |         |            | 77,781   |                |        |               | 69,527 |              |     |              | 4,314 |  |         |          | 151,622  |   |         |         | (3,325  | ) |         |          | 148,297  |  
|Property, plant and equipment, net                                          |                                                                        |                                                          | 51,044  |            |          |                | 18,079 |               |        |              | 359 |              |       |  | 69,482  |          |          |   |        |         |         |   | 69,482  |         
|Investment in affiliates                                                    |                                                                        |                                                          | 74,805  |            |          |                | 29     |               |        |              |    |              |       |  | 74,834  |          |          |   | (74,834 | )       |         |   |        |         
|Debt issuance costs and other assets, net                                   |                                                                        |                                                          | 5,665   |            |          |                | 11,149 |               |        |              |    |              |       |  | 16,814  |          |          |   |        |         |         |   | 16,814  |         
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total assets                                             |         | $          | 209,295  |                |        | $             | 98,784 |              |     | $            | 4,673 |  |         | $        | 312,752  |   |         | $       | (78,159 | ) |         | $        | 234,593  |  
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|LIABILITIES AND SHAREHOLDERS EQUITY
    (DEFICIT)                         
|Current liabilities:                                                        |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            | Accounts payable                                                       |                                                          | $       | 28,596     |          |                | $      | 3,160         |        |              | $   | 457          |       |  | $       | 32,213   |          |   | $       | 631     |         |   | $       | 32,844   |         
|                                                                            | Current maturity of related party note payable                         |                                                          |         | 663        |          |                |        |              |        |              |     |             |       |  |         | 663      |          |   |         |        |         |   |         | 663      |         
|                                                                            | Current maturities of long-term debt and capital
    lease obligations |                                                          |         | 20,266     |          |                |        | 751           |        |              |     |             |       |  |         | 21,017   |          |   |         |        |         |   |         | 21,017   |         
|                                                                            | Other current liabilities                                              |                                                          |         | 38,703     |          |                |        | 21,289        |        |              |     | 1,464        |       |  |         | 61,456   |          |   |         |        |         |   |         | 61,456   |         
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total current liabilities                                |         |            | 88,228   |                |        |               | 25,200 |              |     |              | 1,921 |  |         |          | 115,349  |   |         |         | 631     |   |         |          | 115,980  |  
|Long-term related party note payable, net of
    current maturity           |                                                                        |                                                          | 1,362   |            |          |                |       |               |        |              |    |              |       |  | 1,362   |          |          |   |        |         |         |   | 1,362   |         
|Long-term debt and capital lease obligations, net
    of current maturities |                                                                        |                                                          | 321,874 |            |          |                |       |               |        |              |    |              |       |  | 321,874 |          |          |   |        |         |         |   | 321,874 |         
|Other liabilities                                                           |                                                                        |                                                          | 21,044  |            |          |                | 1,612  |               |        |              | 422 |              |       |  | 23,078  |          |          |   |        |         |         |   | 23,078  |         
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total liabilities                                        |         |            | 432,508  |                |        |               | 26,812 |              |     |              | 2,343 |  |         |          | 461,663  |   |         |         | 631     |   |         |          | 462,294  |  
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|Commitments and contingencies (Note 16)                                     |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|Shareholders equity (deficit):                                             |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            | Preferred stock                                                        |                                                          |         | 94,196     |          |                |        |              |        |              |     |             |       |  |         | 94,196   |          |   |         |        |         |   |         | 94,196   |         
|                                                                            | Common stock                                                           |                                                          |         | 1,524      |          |                |        | 1,001         |        |              |     | 14           |       |  |         | 2,539    |          |   |         | (1,015  | )       |   |         | 1,524    |         
|                                                                            | Additional paid-in capital                                             |                                                          |         | 180,829    |          |                |        | 35,436        |        |              |     | 1,014        |       |  |         | 217,279  |          |   |         | (36,450 | )       |   |         | 180,829  |         
|                                                                            | Retained earnings (accumulated deficit)                                |                                                          |         | (499,773   | )        |                |        | 35,535        |        |              |     | 1,832        |       |  |         | (462,406 | )        |   |         | (41,325 | )       |   |         | (503,731 | )       
|                                                                            | Accumulated other comprehensive income (loss)                          |                                                          |         | 11         |          |                |        |              |        |              |     | (530         | )     |  |         | (519     | )        |   |         |        |         |   |         | (519     | )       
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total shareholders equity (deficit)                     |         |            | (223,213 | )              |        |               | 71,972 |              |     |              | 2,330 |  |         |          | (148,911 | ) |         |         | (78,790 | ) |         |          | (227,701 | )
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         
|                                                                            |                                                                        | Total liabilities and shareholders equity
    (deficit) |         | $          | 209,295  |                |        | $             | 98,784 |              |     | $            | 4,673 |  |         | $        | 312,752  |   |         | $       | (78,159 | ) |         | $        | 234,593  |  
|                                                                            |                                                                        |                                                          |         |            |          |                |        |               |        |              |     |              |       |  |         |          |          |   |         |         |         |   |         |         

F-30



---



##### Table of Contents



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                                                            |                                                          |         | 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 subsidiaries                                                  |                                                                        |                                                          | 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 16)                                     |                                                                        |                                                          |         |            |          |                |        |               |        |              |        |              |        |  |         |          |          |   |         |         |         |   |         |         
|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 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-31



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Condensed Consolidating Cash Flow
Statement

|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |         |         |  
|----------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------- | ------- | ---------- | ------- | -------------- | ----- | ------------ | ------ | ------------ | --- | --- | --- | - | - | - | - | - | ------- | ------- | ------- | -
|                                          |                                                             |                                                        
|                                          |                                                             | For the Year Ended December 31, 2001                   
|                                          |                                                             |                                                        
|                                          |                                                             | Borrower                                                |         | Guarantors |         | Non-Guarantors |       | Eliminations |        | Consolidated
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |             
|Net cash provided by operating activities |                                                             | $                                                       | 37,814  |            |         | $              | 2,329 |              |        | $            | 152 |     |     | $ |  |   |   | $ | 40,295  |        
|Cash flows from investing activities:     |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|                                          | Purchases of property, plant and equipment                  |                                                         |         | (11,452    | )       |                |       | (3,553       | )      |              |     | (83 | )   |   |   |  |   |   |         | (15,088 | )      
|                                          | Proceeds from the sale of property, plant and
    equipment |                                                         |         |           |         |                |       | 250          |        |              |     |    |     |   |   |  |   |   |         | 250     |        
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|                                          |                                                             | Net cash used in investing activities                   |         |            | (11,452 | )              |       |              | (3,303 | )            |     |     | (83 | ) |   |   |  |   |         |         | (14,838 | )
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|Cash flows from financing activities:     |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|                                          | Cash overdraft                                              |                                                         |         | 2,855      |         |                |       | 680          |        |              |     |    |     |   |   |  |   |   |         | 3,535   |        
|                                          | Payments of principal under capital lease
    obligations   |                                                         |         | (1,324     | )       |                |       |             |        |              |     |    |     |   |   |  |   |   |         | (1,324  | )      
|                                          | Payments of principal under Senior Credit Facility          |                                                         |         | (20,339    | )       |                |       |             |        |              |     |    |     |   |   |  |   |   |         | (20,339 | )      
|                                          | Proceeds from borrowings under revolving loan
    facility  |                                                         |         | 14,000     |         |                |       |             |        |              |     |    |     |   |   |  |   |   |         | 14,000  |        
|                                          | Payments under revolving loan facility                      |                                                         |         | (44,000    | )       |                |       |             |        |              |     |    |     |   |   |  |   |   |         | (44,000 | )      
|                                          | Debt issuance costs                                         |                                                         |         | (1,574     | )       |                |       |             |        |              |     |    |     |   |   |  |   |   |         | (1,574  | )      
|                                          | Proceeds from issuance of preferred stock                   |                                                         |         | 231        |         |                |       |             |        |              |     |    |     |   |   |  |   |   |         | 231     |        
|                                          | Preferred stock issuance costs                              |                                                         |         | (422       | )       |                |       |             |        |              |     |    |     |   |   |  |   |   |         | (422    | )      
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|                                          |                                                             | Net cash provided by (used in) financing
    activities |         |            | (50,573 | )              |       |              | 680    |              |     |     |    |   |   |   |  |   |         |         | (49,893 | )
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|                                          | Effect of cumulative translation adjustment                 |                                                         |         |           |         |                |       |             |        |              |     | (37 | )   |   |   |  |   |   |         | (37     | )      
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|Net increase (decrease) in cash           |                                                             |                                                         | (24,211 | )          |         |                | (294  | )            |        |              | 32  |     |     |   |  |   |   |   | (24,473 | )      
|Cash at beginning of year                 |                                                             |                                                         | 40,823  |            |         |                | 432   |              |        |              | 465 |     |     |   |  |   |   |   | 41,720  |        
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        
|Cash at end of year                       |                                                             | $                                                       | 16,612  |            |         | $              | 138   |              |        | $            | 497 |     |     | $ |  |   |   | $ | 17,247  |        
|                                          |                                                             |                                                         |         |            |         |                |       |              |        |              |     |     |     |   |   |   |   |   |         |        

F-32



---



##### Table of Contents



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 |                                           |        | 574        |         |                |       |             |        |              |       |     |     |   |   |  |   |   |        | 574     |        
|                                          | Other                                                       |                                           |        | (10        | )       |                |       |             |        |              |       |     |     |   |   |  |   |   |        | (10     | )      
|                                          |                                                             |                                           |        |            |         |                |       |              |        |              |       |      |     |   |   |   |   |   |        |        
|                                          |                                                             | 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-33



---



##### Table of Contents



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  |        
|                                                        |                                                             |                                                         |         |            |         |                |        |              |         |              |       |        |        |   |   |   |   |   |         |        

19. Quarterly Results (unaudited)

The following table presents quarterly results
(in thousands) during 2001.

|                  |  |          |        |         |  |              |         |             |  |       |         |   |  |   |         |  |  |   |         | 
|----------------- |  | -------- | ------ | ------- |  | ------------ | ------- | ----------- |  | ----- | ------- | - |  | - | ------- |  |  | - | ------- | 
|                  |  | March 31 |        | June 30 |  | September 30 |         | December 31 |  | Total
|                  |  |          |        |         |  |              |         |             |  |      
|Net sales         |  | $        | 94,443 |         |  | $            | 106,088 |             |  | $     | 100,113 |   |  | $ | 161,045 |  |  | $ | 461,689 | 
|Gross profit      |  |          | 52,722 |         |  |              | 60,101  |             |  |       | 56,204  |   |  |   | 91,773  |  |  |   | 260,800 | 
|Operating income  |  |          | 6,714  |         |  |              | 17,209  |             |  |       | 9,098   |   |  |   | 30,506  |  |  |   | 63,527  | 
|Net income (loss) |  |          | (2,615 | )       |  |              | 3,887   |             |  |       | (13,040 | ) |  |   | 15,328  |  |  |   | 3,560   | 

F-34



---



##### Table of Contents



HOME INTERIORS & GIFTS, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table presents quarterly results
(in thousands) during 2002.

|                 |  |          |         |         |  |              |         |             |  |       |         |  |  |   |         |  |  |   |         | 
|---------------- |  | -------- | ------- | ------- |  | ------------ | ------- | ----------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  | 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  | 
|Net income       |  |          | 8,189   |         |  |              | 11,142  |             |  |       | 2,381   |  |  |   | 13,936  |  |  |   | 35,648  | 

The following table presents quarterly results
(in thousands) during 2003.

|                 |  |          |         |         |  |              |         |             |  |       |         |  |  |   |         |  |  |   |         | 
|---------------- |  | -------- | ------- | ------- |  | ------------ | ------- | ----------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  | March 31 |         | June 30 |  | September 30 |         | December 31 |  | Total
|                 |  |          |         |         |  |              |         |             |  |      
|Net sales        |  | $        | 126,121 |         |  | $            | 151,149 |             |  | $     | 147,301 |  |  | $ | 192,873 |  |  | $ | 617,444 | 
|Gross profit     |  |          | 71,244  |         |  |              | 84,622  |             |  |       | 70,483  |  |  |   | 102,862 |  |  |   | 329,211 | 
|Operating income |  |          | 18,553  |         |  |              | 22,102  |             |  |       | 5,521   |  |  |   | 31,409  |  |  |   | 77,585  | 
|Net income       |  |          | 7,233   |         |  |              | 9,853   |             |  |       | 2,126   |  |  |   | 13,149  |  |  |   | 32,361  | 

20. Recently Issued Accounting
Standards

In May of 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity (SFAS No. 150). SFAS No. 150
establishes standards for classification and measurement of
financial instruments issued by entities that have the
characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. The Company adopted SFAS
No. 150 on May 31, 2003 and there was not a financial
accounting impact associated with its adoption.

In April of 2003, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS
No. 149). SFAS No. 149 clarifies the definition
of a derivative and amends the implementation guidance and of
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 149
is effective for contracts entered into or modified after
June 30, 2003, except for hedging relationships designated
after June 30, 2003. The provisions of SFAS No. 149,
which amend implementation guidance of SFAS No. 133, are
effective for fiscal quarters that began prior to June 15,
2003. The Company adopted certain provisions of SFAS
No. 149 and determined that there is not a financial impact
on the quarter ended, March 31, 2003. The Company adopted
the remaining provisions of SFAS No. 149 on June 30,
2003 and there was not a financial impact associated with its
adoption.

In December of 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure (SFAS
No. 148). SFAS No. 148 amends FASB Statement
No. 123 Accounting for Stock-Based Compensation
to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation and amends the disclosure
requirements of Statement 123 to require prominent disclosure
about the effects on reported net income of an entitys
accounting policy decisions with respect to stock-based employee
compensation. SFAS No. 148 also amends APB Opinion
No. 28 Interim Financial Reporting, to require
disclosure about those effects in interim financial information.
SFAS No. 148 is effective for fiscal year ended
December 31, 2002. The Company has elected to continue
accounting for the employee stock options plans under APB 25;
however, the Company has adopted the new disclosure requirements
of SFAS No. 148. The Company has decided not to adopt the
fair value based method of accounting for stock-based employee
compensation.

F-35



---



##### Table of Contents



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, 2001 |                        |  | 1,967              |  |                  |  | 2,254         |  |               |  |  |  |  |  | (2,207 | ) |  |  | 2,014 | 
|                                 | 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 | 



---



|    |                                                               
|--- | --------------------------------------------------------------
|(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, 2001 |                        |  | 4,856              |  |                  |  | 2,803         |   |               |  |  |  |  |  | (3,137 | ) |  |  | 4,522 | 
|                    | 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 | 



---



|    |                                  
|--- | ---------------------------------
|(A) | Represents provisions for losses.



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

F-36



---



##### Table of Contents



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   |  |  |            |  | Credit Agreement, dated as of June 4, 1998, among
    the Company, the Lenders from time to time party thereto, The
    Chase Manhattan Bank, as syndication agent, National Westminster
    Bank, PLC, as documentation agent, The Prudential Insurance
    Company of America, as a co-agent, Societe Generale, as a
    co-agent, Citicorp USA, Inc., as a co-agent, and Nationsbank,
    N.A., as administrative agent for the Lenders (incorporated by
    reference to Exhibit 10.1 of the Companys
    Registration Statement on Form S-4, No. 333-62021).                                            
|        | 10.1.1 |  |  |            |  | First Amendment to Credit Agreement, dated as of
    December 18, 1998, among the Company, the Lenders from time to
    time party thereto, The Chase Manhattan Bank, as syndication
    agent, National Westminster Bank, PLC, as documentation agent,
    The Prudential Insurance Company of America, as a co-agent,
    Societe Generale, as a co-agent, Citicorp USA, Inc., as a
    co-agent, and Nationsbank, N.A., as administrative agent for the
    Lenders (incorporated by reference to Exhibit 10.1.1 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    March 16, 1999).
|        | 10.1.2 |  |  |            |  | Second Amendment to Credit Agreement, dated as of
    March 12, 1999, among the Company, the Lenders from time to time
    party thereto, The Chase Manhattan Bank, as syndication agent,
    National Westminster Bank, PLC, as documentation agent, The
    Prudential Insurance Company of America, as a co-agent, Societe
    Generale, as a co-agent, Citicorp USA, Inc., as a co-agent, and
    Nationsbank, N.A., as administrative agent for the Lenders
    (incorporated by reference to Exhibit 10.1.2 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    March 16, 1999).  



---



##### Table of Contents



|        |        |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ------ |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |            
|Number  |        |  |  | Description
|        |        |  |  |            
|        | 10.1.3 |  |  |            |  | Third Amendment to Credit Agreement, dated as of
    November 19, 1999, among the Company, the Lenders from time to
    time party thereto, The Chase Manhattan Bank, as syndication
    agent, National Westminster Bank, PLC, as documentation agent,
    The Prudential Insurance Company of America, as a co-agent,
    Societe Generale, as a co-agent, Citicorp USA, Inc., as a
    co-agent, and Nationsbank, N.A., as administrative agent for the
    Lenders(incorporated by reference to Exhibit 10.1.3 of the
    Companys Annual Report on Form 10-K, No. 333-65201, filed
    March 14, 2000).                     
|        | 10.1.4 |  |  |            |  | Fourth Amendment to Credit Agreement dated as of
    July 26, 2000, but effective as of July 3, 2000, among the
    Company, the various lenders that are parties thereto, The Chase
    Manhattan Bank, as syndication agent, National Westminster Bank
    PLC, as documentation agent, The Prudential Insurance Company of
    America, Societe Generale, and Citicorp USA, Inc., as co-agents,
    and Bank of America, N.A., as administrative agent (incorporated
    by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed August 14,
    2000).                           
|        | 10.1.5 |  |  |            |  | Fifth Amendment to Credit Agreement dated as of
    March 30, 2001, among the Company, the various lenders that are
    parties thereto, The Chase Manhattan Bank, as syndication agent,
    National Westminster Bank, PLC, as documentation agent, The
    Prudential Insurance Company of America, as a co-agent, Societe
    Generale, as a co-agent, Citicorp USA, Inc. as a co-agent and
    Bank of America, N.A., formerly known as NationsBank, N.A., as
    administrative agent. (incorporated by reference to Exhibit
    10.1.5 of the Companys Annual Report on Form 10-K,
    No. 333-62021, filed April 4, 2001).
|        | 10.1.6 |  |  |            |  | Amended and Restated Credit Agreement dated as of
    June 30, 2001, by and among the Company, Bank of America, N.A.,
    The Chase Manhattan Bank, Citicorp USA, Inc., Societe General
    and the lenders named thereto (incorporated by reference to
    Exhibit 10.2 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed August 9, 2001).                                                                                                                                                                                                                                                                
|        | 10.1.7 |  |  |            |  | First Amendment to the Amended and Restated
    Credit Agreement dated as of June 30, 2001 by and among the
    Company, Bank of America N.A., The Chase Manhattan Bank,
    Citicorp USA, Inc., Societe General and the lenders named
    thereto (incorporated by reference to Exhibit 99.1 of the
    Companys Current Report on Form 8-K, No. 333-62021, filed
    on August 1, 2002).                                                                                                                                                                                                                                       
|        | 10.2   |  |  |            |  | 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).                                                                                                                                                                                                                                           
|        | 10.2.1 |  |  |            |  | 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).                                                                                                                                                                                                   
|        | 10.3   |  |  |            |  | 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).                                                                                                                                                                                                                                      
|        | 10.3.1 |  |  |            |  | 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).                                                                                                                                                                                             
|        | 10.4   |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.5   |  |  |            |  | Executive Employment Agreement, dated June 4,
    1998, between the Company and Donald J. Carter (incorporated by
    reference to Exhibit 10.6 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                                          



---



##### Table of Contents



|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ------- |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|        | 10.6    |  |  |            |  | Amendment to Executive Employment Agreement,
    dated December 13, 2000, between Barbara J. Hammond and the
    Company (incorporated by reference to Exhibit 10.29.3 of the
    Companys Annual Report on Form 10-K, No. 333-62021 filed
    April 4, 2001.)                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.7    |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.7.1  |  |  |            |  | Second Amended and Restated Employment Agreement,
    dated December 36, 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.)                                                                                                                                                                                                                                                                                                                                                       
|        | 10.8    |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                
|        | 10.9    |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.10   |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.11   |  |  |            |  | ISDA Master Agreement, dated as of June 25, 1998,
    by and between NationsBank, N.A. and the Company (incorporated
    by reference to Exhibit 10.13 of the Companys Registration
    Statement on Form S-4, No. 333-62021).                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.12   |  |  |            |  | 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).
|        | 10.13   |  |  |            |  | Consulting Services Agreement dated as of June 3,
    1999, between the Company and Tompkins Associates Incorporated
    (incorporated by reference to Exhibit 10.1 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on August
    13, 1999).                                                                                                                                                                                                                                                                                                                                                               
|        | 10.13.1 |  |  |            |  | First Amendment to Consulting Services Agreement
    dated September 2000, between the Company and Tompkins
    Associates Incorporated (incorporated by reference to Exhibit
    10.16.1 of the Companys Annual Report on Form 10-K, No.
    333-62021, filed April 4, 2001).                                                                                                                                                                                                                                                                                                                                                     
|        | 10.14   |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.15   |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.15.1 |  |  |            |  | 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).                                                                                                                                                                                                                                                                                                                                                              
|        | 10.15.2 |  |  |            |  | 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).                                                                                                                                                                                                                                                                                           
|        | 10.16   |  |  |            |  | Employment Agreement, dated May 24, 2000, between
    Michael D. Lohner and the Company (incorporated by reference to
    Exhibit 10.5 of the Companys Quarterly Report on Form
    10-Q, No. 333-62021, filed on August 14, 2000).                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.16.1 |  |  |            |  | Amended and Restated Employment Agreement, dated
    December 31, 2000, between Michael D. Lohner and the Company
    (incorporated by reference to Exhibit 10.28.1 of the
    Companys Annual Report on Form 10-K, No. 333-62021, filed
    April 4, 2001).                                                                                                                                                                                                                                                                                                                                                                       



---



##### Table of Contents



|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                                               
|------- | ------- |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|        | 10.16.2 |  |  |            |  | Second Amended and Restated Employment Agreement,
    dated July 30, 2001, between Michael D. Lohner and the Company.
    (incorporated by reference to Exhibit 10.1 of the Companys
    Quarterly Reporting Form 10-Q, No. 333-62021 filed on November
    9, 2001.)                                                                        
|        | 10.17   |  |  |            |  | 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).                                                                                       
|        | 10.18   |  |  |            |  | Vectrix Customer Agreement, dated July 21, 2000,
    executed by Vectrix Business Solutions, Inc. and the Company
    (incorporated by reference to Exhibit 10.7 of the Companys
    Quarterly Report on Form 10-Q, No. 333-62021, filed on November
    10, 2000).                                                                          
|        | 10.19   |  |  |            |  | 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).                    
|        | 10.20   |  |  |            |  | 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).                                                               
|        | 10.21   |  |  |            |  | Employment Agreement, dated November 1, 2001,
    between Nora Serrano and the Company. (incorporated by reference
    to Exhibit 10.21 of the Companys Annual Report on Form
    10-K, No. 333-62021, filed March 26, 2002).                                                                                                                
|        | 10.21.1 |  |  |            |  | Amendment to Employment Agreement between the
    Company and Nora Serrano, entered into as of December 12, 2002
    and effective as of November 1, 2002 (incorporated by reference
    to Exhibit 10.21.1 of the Companys Annual Report on
    Form 10-K, No. 333-62021, filed March 14, 2003).                                            
|        | 10.21.2 |  |  |            |  | Separation Agreement and Release between the
    Company and Nora I. Serrano, entered into and effective as of
    August 15, 2003 (incorporated by reference to Exhibit 10.1 of
    the Companys Quarterly Reporting Form 10-Q, No. 333-62021,
    filed November 6, 2003).                                                                 
|        | 10.22   |  |  |            |  | 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).                                            
|        | 10.23   |  |  |            |  | 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.)
|        | 10.24   |  |  |            |  | 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.)                                                                                                                
|        | 10.25   |  |  |            |  | 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).                                                                       
|        | 10.26   |  |  |            |  | 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).                                                                                                
|        | 10.27   |  |  |            |  | 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).                                                                                                                              
|        | 10.28   |  |  |            |  | 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).                                                                                                                              
|        | 10.29   |  |  |            |  | 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).                                                                                      



---



##### Table of Contents



|        |        |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                     
|------- | ------ |  |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |            
|Number  |        |  |  | Description
|        |        |  |  |            
|        | 10.30  |  |  |            |  | 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.)                                                               
|        | 10.31  |  |  |            |  | 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).                                                                                                                                      
|        | 10.32  |  |  |            |  | 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).                                                                                                
|        | 10.33  |  |  |            |  | 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).                                   
|        | 10.34  |  |  |            |  | 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).
|        | 10.36  |  |  |            |  | 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.
    333-6201, filed on May 12, 2003).                                                                             
|        | 10.37* |  |  |            |  | Employment and Non-Competition Agreement between
    the Companys subsidiary, Domistyle, Inc., and Charles L.
    Elsey, effective as of September 9, 2003.                                                                                                                                                                                                        
|        | 14.1*  |  |  |            |  | Home Interiors & Gifts, Inc. Code of Ethics
    for Senior Financial Management                                                                                                                                                                                                                                                                                     
|        | 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.