<PAGE>   1

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                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)
       [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
                                       OR
       [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM           TO
                        COMMISSION FILE NUMBER 333-62021

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

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

           1649 FRANKFORD ROAD, W
              CARROLLTON, TEXAS                                    75007
  (Address of principal executive offices)                      (Zip Code)
</TABLE>

       Registrant's Telephone Number, Including Area Code: (972) 386-1000
        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 [X]  No [ ]

     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.  [X]

     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 April 4, 2001, 15,240,218 shares of the Company's common stock, par
value $0.10 per share, were outstanding.
                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      NONE

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<PAGE>   2

                                     PART I

ITEM 1. BUSINESS.

GENERAL

     Founded in 1957, Home Interiors & Gifts, Inc., a Dallas based Texas
corporation (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 framed artwork and mirrors, candles and candle holders,
plaques, figurines, planters, artificial floral displays, wall shelves and
sconces (the "Products"). The Company sells the Products to non-employee,
independent contractor sales representatives ("Displayers") who resell the
Products primarily using the "party-plan" method to conduct in-home
presentations or shows ("Shows") for potential customers. The Company believes
that in-home Shows provide a comfortable environment where the unique benefits
and attributes of the Company's Products can be demonstrated in a more effective
manner than in the typical retail setting. As of December 31, 2000, the Company
sold its Products to approximately 59,300 active Displayers located in the
United States; the Company is also represented in Mexico and Puerto Rico.

     The Company purchases Products from a select number of independent
suppliers and from its subsidiaries. Approximately 36% of the dollar volume of
Products purchased by the Company in 2000 was purchased from, and manufactured
by, the Company's subsidiaries. The Company's subsidiaries sell substantially
all of their products to the Company. The following is a brief description of
the Company's subsidiaries, each of which is wholly-owned:

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

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

     - Laredo Candle Company L.P. ("Laredo Candle") manufactures candles using
       custom-designed equipment. Laredo Candle is a Texas limited partnership
       formed following the Company's purchase of the remaining 40% ownership
       interest in Laredo Candle Company L.L.P. from the minority interest
       holder in July 2000.

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

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

     Since its inception, the Company has sold a coordinated line of Products to
Displayers, a group of independent and self-confident 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, motivation and selling strategies. The Company believes that this
philosophy has contributed to its ability to attract and to 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 through enhancing the home environments of their customers.

PRODUCTS

     Product Line.  The Company's product line consists of approximately 1,000
items. The best selling Products include framed artwork and mirrors, candles and
candle holders, plaques, figurines, sconces and artificial floral displays. 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

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general, the Products fit within design categories favored by Displayers and
their customers, such as Casual Comfort, Romantic Living, Timeless Elegance and
Today's Lifestyle. The Company expanded its Product offerings in 2000 to provide
a broader assortment, which offers consumers a comprehensive and coordinated
system for decorating and which appeals to larger segments of the population,
particularly a younger consumer base. Contemporary and Ethnic Products were
added in 2000, and the Company expects to add a line of children's products in
the near future. The Company also offers a selection of seasonal Products for
holiday decorating.

     Prices.  Products are targeted to individuals who are interested in
decorating their homes, but have a limited budget. Products primarily are sold
throughout the continental United States at suggested retail prices 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 retail prices. The
Company believes that the suggested retail prices for the Products are lower
than the prices 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 agents shipping costs, the Company delivers its
Products to the Displayers free of shipping charges if minimum order sizes are
met.

     Product Design and Introduction Process.  Because the Company believes that
it is important to its success to develop and to introduce new Products that
anticipate and reflect changing consumer preferences, the Company's merchandise
department regularly coordinates new Product introductions. Members of the
merchandise department attend furniture and home-furnishings trade markets,
frequently meet with Displayers and suppliers, and assemble information from
retail stores and retail research sources to determine consumer buying trends.
This market research enables the Company's marketing professionals to analyze
the marketability of existing Products and to identify and design new Products.
Products are frequently evaluated to determine whether they should be modified
or removed from the product line. The Company annually tests proposed or
prototype items with selected Displayers. The tests include a determination of
whether the proposed suggested retail prices are attractive. Based on that
review, the Company historically has replaced approximately one third of its
Products annually with new items.

SALES METHODS AND ORGANIZATION

     Displayers.  The Company's marketing and sales strategy is focused on
motivating Displayers to purchase the Company's Products, hold Shows and
demonstrate the Products, and resell the Products to their customers. Because
the Company does not use mail-order catalogs, retail outlets or other methods of
distribution, it is entirely dependent on Displayers to purchase and resell the
Products. As independent contractor sales representatives, each Displayer is
responsible for operating such Displayer's own business. Displayers generally
work on a 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, is their principal
source of income from the Company. If Displayers sell the Products at the
Company's suggested retail prices, they generally can realize a 45% gross
profit. Displayers also can earn money and other incentives based on the dollar
amount of Products they, and the Displayers they have recruited, purchase from
the Company. In addition, Displayers can benefit from periodic discounts offered
by the Company. See "Training and Sales Support."

     Generally, Displayers pay for Products ordered from the Company at the time
an order is placed, although the Company typically provides each Displayer with
an unsecured line of credit of up to $4,000. The Company periodically modifies
each Displayer's credit limit based on sales volumes. In late 1999, the Company
implemented an internet order entry system ("Home Online") to simplify the
ordering process for its Displayers and also began to accept credit card
payments on Internet orders. During 2000, Home Online was further enhanced as a
business-to-business website. Approximately 70% of orders from Displayers were
being received through Home Online at the end of 2000. In February 2001, the
Company launched Displayer websites to assist Displayers in their selling
efforts. Displayers now have the option of having their own

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websites, which are linked to Home Online, to allow the Displayers to better
communicate with and service their customers. As of April 4, 2001, approximately
11% of Displayers have their own website.

     Displayers are contractually prohibited from marketing any goods other than
the Products at Shows at which the Company's Products will be sold. In addition,
Displayers who become qualified trainers ("Trainers") or Directors are
prohibited from working for, 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, by
arrangement with the Displayers, 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 several hours, a Displayer will display
representative groups of Products and color brochures showing the Company's new
products and/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 to 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 after 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.

     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. Historically, to
reward the Hostess for the Hostess' efforts, the Displayer gave the Hostess
products from an exclusive, but limited, Product line based on the sales volume
generated at the Show. Beginning in March 2000, the Company implemented a new
Hostess Program which simplified the reward process for Displayers and
Hostesses. Under the new Hostess Program, Hostesses who meet certain sales
thresholds receive Products in an amount equal to 20% of the sales generated at
the Show. The new Hostess Program enables Hostesses to select merchandise from
the entire Product Line, rather than from a limited number of exclusive Hostess
Products as was offered under the previous Hostess Program Hostesses also
qualify for 55% discount bonus buys and can receive additional gifts for
bookings. The Company believes that, in addition to simplifying the reward
process, the new Hostess Program benefits Displayers and Hostesses by increasing
the Product selection for customers since Products previously available only to
Hostesses are now available to all customers.

     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.

TRAINING AND SALES SUPPORT

     Field Organization.  The Company's training and sales support for
Displayers is designed to promote contact between less experienced Displayers
and more experienced or more active Displayers. The Company groups Displayers
into "Units" for training and motivational purposes. In the United States, the
number of Displayers in a Unit ranges from 22 to 210, with an average of
approximately 65 Displayers per Unit. Approximately 1,000 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 4 to 23, with an average of approximately 10 Units per Branch. As of
December 31, 2000, there were approximately 100 Branches in the United States,
each of which was headed by a Branch Director. In addition, Branches are grouped
into "Districts," and 12 District Directors travel throughout the United States,
Mexico and Puerto Rico motivating, training and inspiring Branch Directors. All
Directors are independent contractors and are not employees of the Company.

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<PAGE>   5

     Recruiting and Training.  It is vital to the Company's success to
consistently recruit new Displayers since the average annual turnover of
Displayers over the last three years approximated 58%. Accordingly, the Company
provides Displayers with both additional financial rewards and the possibility
of promotions to different Director categories based upon their ability to
recruit and train productive Displayers. The Company's ability to recruit,
train, motivate, and retain Displayers depends upon, among other things:

     - the managerial capabilities and personal charisma of the Company's senior
       management;

     - the Displayers' ability to earn acceptable profits;

     - the Company's ability to provide adequate and timely recruiting and
       training incentives to existing Displayers;

     - the introduction of new Products and marketing concepts;

     - the effectiveness of the Company's Hostess Program;

     - the effectiveness of the Company's commission and incentive programs and
       discounts; and

     - general economic conditions.

     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 qualified person in the
recruiting Displayer's Unit typically 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 at the Company's headquarters. The Company has certified approximately
2,700 of its Displayers as Trainers. In 2000, Trainers earned commissions
totaling $3.3 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 the Products and typically requires all
recruits to participate in an intensive sales-education program. The Company
encourages Displayers to recruit new Displayers who will sell Products to
customers rather than merely purchasing items for personal consumption. In
contrast, the Company believes that many other direct selling companies
encourage recruiting of new sales people irrespective of the future sales
potential of the new recruits. The training program primarily includes
instruction by a Trainer and observing several Shows conducted by experienced
Displayers. One-on-one training sessions or group training sessions are
conducted by a Certified Trainer, and a marketing and service guide was created
as a reference manual for Displayers. New Displayers also receive detailed
instructions from their Trainer about the Products, fundamental elements of home
decorating and methods for conducting successful Shows. In February 2001, the
Company introduced the "Show Flip Chart," another tool to help the Displayer
conduct successful Show presentations.

     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 two-day annual seminar
for all Displayers. At that seminar, the Company provides motivational speakers,
Product displays, entertainment and meals, and conducts recognition ceremonies
to highlight Displayer achievements. The Company also sponsors one-day or
two-day "rallies" every August, at locations across the United States, to
introduce the Company's fall and Christmas Product lines. To further support the
training and motivation of Displayers, the Company is using motivational
speakers throughout 2001 to assist Branch Directors.

     Every two weeks, 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

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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. Branch and
Unit Directors earned commissions, including performance bonuses, amounting to
$44.9 million in 2000. District Directors also receive a monthly amount for each
Unit they service plus an annual payment based on the percentage of their
District's annual increase in Product purchases. District Directors earned $2.2
million in 2000. In addition, District Directors, Branch Directors, and certain
Unit Directors are reimbursed for certain travel and other expenses. Reimbursed
expenses totaled $2.6 million in 2000.

PRODUCT SUPPLY AND MANUFACTURING

     Approximately 36% of the dollar volume of Products purchased by the Company
in 2000 were purchased from, and manufactured by, the Company's subsidiaries.
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.

     In April 2000, the Company closed its Homco facility in McKinney, Texas due
to low utilization rates. The Company consolidated Homco's operations with GIA,
its manufacturing operations located in Grand Island, Nebraska. Both Homco and
GIA manufactured molded plastic products. The consolidation has generated new
efficiencies in the production of molded plastic products and has improved
capacity at the GIA facility.

     Products not manufactured by the Company are purchased from numerous
foreign and domestic suppliers. During 1999, the Company increased its number of
overseas suppliers in conjunction with the expansion of its Product line,
particularly its Ethnic Products. The number of suppliers remained constant in
2000 as compared to 1999. The Company is either the largest or the only customer
of many of its suppliers, and many 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
the recent years. However, because the Company generally does not enter into
supply agreements with its suppliers, these relationships generally may be
terminated at any time by either party. The Company believes that its
relationships with its suppliers are good. The Company has not had any material
interruptions in the supply of Products it purchases from suppliers. Other than
H.T. Ardinger & Son Company, which supplied the Company with 11.5% of its
Products in 2000, no third-party supplier furnished the Company with more than
10% of its purchased Products during 2000.

PRODUCT DISTRIBUTION

     Displayers typically submit orders 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 purchase order is then forwarded to the Company's distribution
center, where it is filled and shipped, generally on the same day it is
received.

     In May 2000, the Company implemented an automated order fulfillment system
which includes a new conveyor system, special racks and storage bins and a
warehouse management software system. The Company also consolidated its
distribution centers from six facilities to two facilities. The Company
encountered delays

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and problems associated with the design and implementation of the automated
order fulfillment system and the overall productivity of the consolidated
distribution facility. The Company has identified and is in the process of
correcting any system design problems and is improving the overall productivity
of the consolidated distribution facility. The Company expects to have fully
consolidated distribution into one facility by December 31, 2001, upon
improvement of the operational effectiveness of the Company's automated order
fulfillment system.

     To minimize shipping costs, the Company uses a two-step process in which
approximately 100 common carriers ship full truck loads of Products to
approximately 200 regional delivery sites where locally-based freight
distributors ("Local Distributors") sort the full loads and deliver the Products
to each Displayer. Approximately 78% 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 or UPS directly to Displayers.

     When the Displayer receives a bulk packaged order, she unwraps, inspects
and repackages the Products for individual customers and typically delivers them
to the Hostesses, who in turn deliver the Products to customers. Displayers
sometimes 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.

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-sales
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. This
allows Displayers to charge prices 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 Products, in recruiting and
retaining Displayers. 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.

EMPLOYEES

     As of April 4, 2001, the Company employed approximately 1,200 persons,
principally in the Dallas, Texas metropolitan area. None of the employees of the
Company is represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.

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ITEM 2. PROPERTIES.

     As of December 31, 2000, the Company owned the following properties, which
are used for the purposes set forth below:

<TABLE>
<CAPTION>
                                                                                   APPROXIMATE
LOCATION(1)                                     PURPOSE                           SQUARE FOOTAGE
-----------                                     -------                           --------------
<S>                     <C>                                                       <C>
                        Corporate headquarters; warehouse and distribution           660,000
Carrollton(2).........  facility
Dallas................  DWC manufacturing facility                                   209,000
Grand Island,           GIA manufacturing facility                                   140,000
  Nebraska............
Laredo................  Laredo Candle manufacturing facility                         103,000
Coppell(3)............  Vacant land                                                  317,500
Dallas(4).............  Vacant land near DWC manufacturing facility                  237,400
</TABLE>

(1) All cities are located in Texas, except as noted.

(2) In 2000, the Company purchased an undivided 100% interest in a 660,000
    square-foot warehouse and distribution facility in Carrollton, Texas from
    Argent Frankford L.P. ("Argent") for approximately $21.4 million. In
    December 2000, the Company relocated its corporate staff from its former
    leased headquarters at Granite Tower, Dallas, Texas to the Company's
    warehouse and distribution facility in Carrollton, Texas. In February 2001,
    the Company subleased approximately 40,000 square feet of the Company's
    former leased headquarters to a subtenant. The Company has hired consultants
    to assist in subleasing the remaining unused space to its current subtenant
    or to another subtenant or to complete a buyout of the remaining lease
    obligation by December 31, 2001.

(3) Approximately 317,500 square-feet of vacant land located in Coppell, Texas
    was contracted for sale to Lincoln Property Company Commercial, Inc. on
    January 3, 2001, with an anticipated closing date of May 9, 2001.

(4) Approximately 237,400 square-feet of vacant land near the DWC manufacturing
    facility in Dallas, Texas was contracted for sale to S&A Enterprises, Inc.
    on November 17, 2000, with an anticipated closing date of April 30, 2001.

     The Company entered into a 60-month Industrial Lease with Parker
Metropolitan, L.P. ("Parker") for land, building and related facilities located
at 815 South Coppell, Coppell, Texas. As a result of the commencement of this
lease on August 1, 2000, the Company terminated two existing leases, one in
Frisco, Texas and the other in Coppell, Texas.

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. The Company is also subject to certain environmental
proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 2000.

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                                    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 April 4, 2001, the Company had
outstanding 15,240,218 shares of common stock held by approximately 188
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. Dividends of $0.075 were paid during the first
quarter of 1998. The Company has not paid any dividends on its common stock
since the closing in June 1998 of the transactions that were the subject of the
Agreement and Plan of Merger dated April 13, 1998, by and between the Company
and Crowley Investments, Inc. ("CII") (the "Merger Agreement"). The Company also
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"). Since the terms of the
Notes and the Company's Senior Credit Facility restrict the Company's ability to
pay dividends, the Company does not anticipate the payment of dividends in the
foreseeable future.

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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.

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                         -----------------------------------------------------
                                           1996       1997       1998        1999       2000
                                         --------   --------   ---------   --------   --------
                                                 (IN THOUSANDS, EXCEPT DISPLAYER DATA)
<S>                                      <C>        <C>        <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net sales..............................  $434,299   $468,845   $ 490,223   $503,344   $460,440
Cost of goods sold.....................   225,137    239,664     242,343    240,390    223,514
                                         --------   --------   ---------   --------   --------
Gross profit...........................   209,162    229,181     247,880    262,954    236,926
Selling, general and administrative:
  Selling..............................    69,964     74,010      81,124     89,721     81,668
  Freight, warehouse and
     distribution......................    37,842     41,844      44,718     49,860     46,333
  General and administrative(1)........    20,096     23,921      20,641     27,270     48,047
  Gains on the sale of assets..........    (2,077)      (198)     (6,375)   (10,650)    (2,738)
  Stock option expense (credit)........        --         --         563        912       (351)
  Homco restructuring..................        --         --          --         --      1,027
  Redundant warehouse and
     distribution......................        --         --          --         --      6,089
  Recapitalization expenses(2).........        --         --       6,198         --         --
                                         --------   --------   ---------   --------   --------
          Total selling, general and
            administrative.............   125,825    139,577     146,869    157,113    180,075
                                         --------   --------   ---------   --------   --------
Operating income.......................    83,337     89,604     101,011    105,841     56,851
Other income (expense):
  Interest income......................     5,113      7,985       5,563      2,978      2,208
  Interest expense.....................      (503)      (362)    (27,532)   (44,081)   (45,496)
  Other income (expense)...............       456      2,884       1,020       (183)     2,116
                                         --------   --------   ---------   --------   --------
Other income (expense), net............     5,066     10,507     (20,949)   (41,286)   (41,172)
                                         --------   --------   ---------   --------   --------
Income before income taxes.............    88,403    100,111      80,062     64,555     15,679
Income taxes...........................    33,957     37,919      31,807     22,967      5,892
                                         --------   --------   ---------   --------   --------
Net income.............................  $ 54,446   $ 62,192   $  48,255   $ 41,588   $  9,787
                                         ========   ========   =========   ========   ========
OTHER FINANCIAL DATA:
Gross profit percentage................      48.2%      48.9%       50.6%      52.2%      51.5%
EBITDA(3)..............................  $ 84,610   $ 92,019   $ 104,567   $100,135   $ 75,259
EBITDA margin(4).......................      19.5%      19.6%       21.3%      19.9%      16.3%
Cash flows provided by (used in):
  Operating activities.................  $ 57,507   $ 60,285   $  59,147   $ 28,073   $ 28,001
  Investing activities.................    (8,808)   (67,023)     69,083     (6,685)   (20,625)
  Financing activities.................    (6,086)   (21,760)   (191,329)   (30,274)     2,299
Depreciation and amortization..........     3,350      2,613       3,170      4,032      8,837
Capital expenditures...................     2,126      4,617       8,443     12,703     34,135
Dividends paid(5)......................     6,086     22,190       9,554         --         --
DOMESTIC DISPLAYER DATA:
Number of orders shipped...............   710,008    732,202     765,967    921,636    821,716
Average order size(6)..................  $    610   $    635   $     632   $    536   $    542
Active Displayers at end of
  period(7)............................    37,800     42,800      50,100     68,300     59,300
Average number of active Displayers
  during period(7).....................    39,900     41,400      45,600     59,000     61,900
</TABLE>

                                        10
<PAGE>   11

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                            -------------------------------------------------------
                                              1996       1997       1998        1999        2000
                                            --------   --------   ---------   ---------   ---------
                                                                (IN THOUSANDS)
<S>                                         <C>        <C>        <C>         <C>         <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................  $132,848   $104,262   $  41,024   $  32,406   $  41,720
Property, plant and equipment, net........    15,481     17,353      21,774      30,473      60,600
Total assets..............................   195,774    244,190     132,448     161,541     165,398
Total debt (including current
  maturities).............................        --         --     487,000     455,546     465,333
Shareholders' equity (deficit)............   141,227    189,931    (414,074)   (371,186)   (362,111)
</TABLE>

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

(1) General and administrative expenses increased from $27.3 million in 1999 to
    $48.0 million in 2000 as a result of an increase in corporate headquarter
    rental expense of $1.3 million, an increase in credit card fees of $4.7
    million in connection with Home Online and an increase in depreciation
    expense of $3.9 million in connection with a higher level of capital
    expenditures. Certain additional non-recurring costs of $5.5 million
    associated with staff reductions and excess facilities are also included in
    general and administrative expense for the year ended December 31, 2000.
    There were no non-recurring costs of this nature included in general and
    administrative for the year ended December 31, 1999. The increase was also
    partially attributable to a reduction in income of $1.5 million from
    unredeemed Hostess merits in 2000 as compared to 1999.

(2) Recapitalization expenses consist of amounts paid to the Company's financial
    and legal advisors in connection with the Recapitalization.

(3) EBITDA represents operating income plus depreciation and amortization,
    Recapitalization expenses, Homco restructuring expenses, redundant warehouse
    and distribution expenses and non-cash expenses for stock options, and
    excludes certain non-recurring costs of $5.5 million associated with
    corporate reorganization included in general and administrative expense and
    any gains on the sale of assets. EBITDA generally is considered to provide
    information regarding a company's ability to service and/or incur 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. 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.

(4) Defined as EBITDA as a percentage of net sales.

(5) Since the terms of the Notes and the Senior Credit Facility restrict the
    Company's ability to pay dividends, the Company does not anticipate the
    payment of dividends in the foreseeable future.

(6) Average order size is calculated based on net sales divided by number of
    orders. For purposes of this calculation, international sales of
    approximately $4.1 million, $6.4 million, $9.1 million and $15.1 million for
    1997, 1998, 1999 and 2000 have been excluded from net sales, respectively.
    There were no international sales in 1996.

(7) An active Displayer must have placed an order with the Company within the
    prior 14 weeks.

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.

                                        11
<PAGE>   12

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

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

COMPANY BACKGROUND

     The Company believes it is the largest direct seller of home decorative
accessories in the United States, as measured by sales. As of December 31, 2000,
the Company sold its Products to approximately 59,300 active Displayers located
in the United States; the Company is also represented in Mexico and Puerto Rico.
The Company's sales are dependent upon the number of Displayers selling the
Company's Products and their resulting productivity. Displayer productivity
fluctuates from time to time based on seasonality and special marketing
programs, which offer Displayers new incentives and discounts timed to generate
additional sales.

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

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

     The Company believes that the increase in Displayer turnover during the
year ended December 31, 2000 is due to the adoption of revised recruiting and
training criteria in early 1999 and, to a lesser extent, a policy change in 2000
that requires a Displayer to place an order at least once in each quarter to be
considered "active." Among other things, the Company increased opportunities for
new Displayers by reducing initial purchase requirements and time commitments
and by lowering certain other barriers to entry. These changes resulted in a
significant increase in the number of new Displayers, and the active Displayer
base grew from 50,100 as of December 31, 1998 to 68,300 as of December 31, 1999.
This growth resulted in a greater percentage of newer, less experienced, and
therefore, less productive sales representation. As of December 31, 2000, the
active Displayer base was 59,300.

     Additionally, in June 1999, the Company lowered its minimum order
requirement, and, as a result, experienced a further decline in average order
sizes. The Company believes that many of the new Displayers recruited in 1999
were former Hostesses who became Displayers in order to purchase merchandise at
a discount. A majority of these personal purchases occurred during the
seasonable period in the fourth quarter of 1999. The Company is in the process
of re-establishing productivity standards and higher expectations for its new
Displayers through a more targeted training program. While the Company intends
to continue its training focus, it realizes that training is an intensive
process that may take time away from potential sales activity. The Company
believes that this factor, combined with fewer Displayers than the prior year,
may result in lower sales during the first quarter of 2001 as compared to the
comparable period in 2000.
                                        12
<PAGE>   13

     Historically, the Company has benefited from relatively stable gross profit
and operating profit margins. Once a Product is introduced into the Company's
product line, the price at which the Company purchases the Product from its
suppliers and the price at which the Company sells the Product to Displayers
seldom changes. The Company has steadily improved its gross profit margin since
mid-1997, when the markup on all new Products was increased. Prior to that time,
the Company seldom changed Product markups. During 2000, the Company expanded
its Product line with new Product categories which are targeted to appeal to a
broader market. The Company also is reviewing its pricing policies and, in the
future, may purchase a larger percentage of Products directly from overseas
vendors, which the Company believes will improve its gross profit margins.

     The Company delivers its Products to Displayers via common carrier, UPS and
a regional network of locally-based freight distributors ("Local Distributors").
Unlike many other direct sales companies that the Company believes charge their
customers shipping costs, the Company delivers its Products to Displayers free
of shipping charges if minimum order sizes are met. The Company realizes
substantial cost savings from volume discounts it receives from its common
carriers and its use of Local Distributors. The use of Local Distributors
enables the Company to avoid the premiums charged by common carriers for
delivery to private residences, where most Displayers receive their deliveries.
In addition, the Company believes that, as a result of its good relationships
with its common carriers and the Local Distributors, it is able to quickly
deliver its Products with minimal shipping errors or product damage.

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

THE RECAPITALIZATION

     The Company completed a recapitalization (the "Recapitalization") on June
4, 1998, through the following simultaneous transactions:

     - contribution of $182.6 million by Hicks, Muse, Tate & Furst Incorporated
       ("Hicks Muse") in exchange for 10,111,436 shares of common stock, or
       approximately 66% of all outstanding shares upon completion of the
       Recapitalization;

     - issuance of the Notes in the amount of $200.0 million;

     - borrowing of $300.0 million under the Senior Credit Facility; and

     - use of the above proceeds, together with available cash of $169.3
       million, to:

      -- redeem 45,836,584 shares of common stock for $827.6 million; and

      -- pay fees and expenses of $24.3 million associated with the
         Recapitalization consisting of:

        - $11.2 million financial advisory fee paid to Hicks Muse for its role
          in obtaining financing for the Recapitalization;

        - $11.6 million of debt issuance costs paid primarily to the bank
          syndicate group for the Senior Credit Facility and the initial
          purchasers of the Notes; and

        - $1.5 million of legal and accounting fees
                                        13
<PAGE>   14

     In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid additional financial advisory and legal fees
of approximately $6.2 million in connection with the Recapitalization. The
Company paid its financial advisor approximately $5.7 million to assist with the
development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These financial
advisory and legal fees were expensed as incurred, and are reflected as
Recapitalization expenses in the accompanying consolidated statement of
operations and comprehensive income.

RESULTS OF OPERATIONS

  2000 Compared to 1999

     Net sales decreased $42.9 million, or 8.5%, to $460.4 million in 2000 from
$503.3 million in 1999. Although the average number of active Displayers
increased 4.9% to approximately 61,900 in 2000 from 59,000 in 1999, the number
of active Displayers declined 13.2% to 59,300 at December 31, 2000 as compared
to 68,300 at December 31, 1999. The number of orders shipped decreased 10.8% to
821,716 orders in 2000 from 921,636 orders in 1999. The decline in orders was
offset by a 1.1% increase in the average order size of $542 in 2000 from $536 in
1999. The Company believes that Displayer productivity for the year ended
December 31, 2000 was impacted at certain times during the year by a change in
the Company's incentive-driven sales. During the initial six months of the year
ended December 31, 2000, the Company provided no significant discounts,
promotions or incentives and focused on improving the Hostess program. The
Company resumed more of an incentive-driven sales strategy in the last six
months of the year ended December 31, 2000.

     Displayer productivity was also impacted at certain times during the year
by a significant decline in the historical merchandise fulfillment rate. The
Company believes that many factors contributed to the increase in the percentage
of items within each order that were not shipped to the Displayer. These factors
include, but are not limited to, an increase in the number of product SKUs to a
level that nearly exceeded the capacity of the Company's distribution
facilities; an increased reliance on products manufactured overseas that require
longer lead times than products manufactured by domestic suppliers; the use of
less experienced temporary laborers in the distribution centers due to the
problems experienced in the consolidated distribution facility; and the
inability of certain domestic suppliers to deliver sufficient products in a
timely manner primarily as a result of their working capital constraints. As of
June 30, 2000, the order fulfillment rate was approximately 87% as compared to
the order fulfillment rate of 96% as of December 31, 2000. As of April 4, 2001,
the order fulfillment rate was 99%.

     Gross profit decreased $26.1 million, or 9.9%, to $236.9 million in 2000
from $263.0 million in 1999. As a percentage of net sales, gross profit declined
to 51.5% in 2000 from 52.2% in 1999. The decrease in the gross profit percentage
was primarily due to charges to cost of goods sold recorded in the fourth
quarter of 2000 related to inventory. An inventory write-off of $1.1 million was
recorded to adjust to the physical inventory count as of December 31, 2000. In
addition, the reserve for obsolete inventory increased $3.5 million to $4.9
million as of December 31, 2000 from $1.3 million as of December 31, 1999. The
reserve for obsolete inventory has increased primarily to address Christmas and
other less-productive Products marked to be discontinued.

     Selling expense decreased $8.0 million, or 9.0%, to $81.7 million in 2000
from $89.7 million in 1999. As a percentage of net sales, selling expense
remained relatively constant at 17.7% in 2000 as compared to 17.8% in 1999.
Selling expense decreased as a result of lower reimbursed selling expenses,
reduced incentive costs and lower bonus accruals for sales directors. However
this decrease was offset as a result of an increase due to higher effective
commission rates, which began to increase in March 2000 in connection with the
implementation of the new Hostess program when substantially all products were
made commissionable.

     Freight, warehouse and distribution expense decreased $3.6 million, or
7.1%, to $46.3 million in 2000 from $49.9 million in 1999. These costs were
10.0% of net sales in 2000 compared to 9.9% in 1999. This increase in percentage
was primarily due to an increase in the percentage of heavier products shipped
in the 2000 period. Redundant warehouse and distribution costs of $6.1 million,
primarily relating to duplicate

                                        14
<PAGE>   15

facility costs and redundant temporary labor, have been reclassified to a
separate operating expense line item in the accompanying Consolidated Statements
of Operations and Comprehensive Income.

     General and administrative expense increased $20.7 million, or 76.2%, to
$48.0 million in 2000, from $27.3 million in 1999. This increase was primarily
due to an increase in corporate headquarter rental expense of $1.3 million, an
increase in credit card fees of $4.7 million in connection with Home Online and
an increase in depreciation expense of $3.9 million in connection with a higher
level of capital expenditures. Certain additional non-recurring costs of $5.5
million associated with staff reductions and excess facilities are also included
in general and administrative expense for the year ended December 31, 2000.
There were no non-recurring costs of this nature included in general and
administrative for the year ended December 31, 1999. The increase was also
partially attributable to a reduction in income of $1.5 million from unredeemed
Hostess merits in 2000 as compared to 1999.

     Gains on the sale of assets of approximately $2.7 million were recorded in
2000 from the sales of distribution facilities and associated land and
investments held for sale, as compared to $10.7 million in 1999 principally from
the sale of office, warehouse and distribution facilities and associated land.

     Stock option credits of approximately $351,000 were recorded in 2000 as
compared to an expense of approximately $912,000 as a result of a decrease in
the weighted average fair value of options outstanding as of December 31, 2000
as compared to December 31, 1999.

     Homco restructuring expense of approximately $1.0 million was recorded in
2000 as a result of non-recurring costs related to the consolidation of Homco's
operations into GIA.

     Redundant warehouse and distribution expenses of $6.1 million were recorded
in 2000 and 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.

     Interest income decreased $0.8 million, or 25.9%, to $2.2 million in 2000
from $3.0 million in 1999 due to lower average investment balances.

     Interest expense increased $1.4 million, or 3.2%, to $45.5 million in 2000
up from $44.1 million in 1999. This increase was the result of interest due on
the Notes and the Senior Credit Facility which increased as a result of the
increase in the LIBOR rate during 2000. In addition, the Company incurred
interest expense of $0.7 million on the borrowings outstanding under the
Revolving Loans during 2000.

     Other income (expense) in 2000 includes income of approximately $1.2
million to adjust to fair market value the option provision of the Company's
interest rate swap agreement.

     Income taxes decreased $17.1 million to $5.9 million in 2000 from $23.0
million in 1999. Income taxes, as a percentage of income before income taxes,
was 37.6% in 2000 compared to 35.6% in 1999. The difference in rates relates
primarily to prior year refunds applied in 1999, thereby lowering the 1999
effective rate. Due to the anticipated recognition during 2001 of certain
cancellation of indebtedness income, the Company anticipates that its income
taxes for 2001 may increase over 2000. See "Liquidity and Capital Resources  --
Related Party Note Purchase."

  1999 Compared to 1998

     Net sales increased $13.1 million, or 2.7%, to $503.3 million in 1999 from
$490.2 million in 1998. This growth primarily was attributable to an increase in
the number of orders shipped, up 20.3% from 765,967 orders in 1998 to 921,636
orders in 1999. This growth more than offset a 15.2% reduction in the average
order size of $536 in 1999 from $632 in 1998. The change in composition and
growth of the Displayer network was a major factor in the overall sales
production; the average number of active Displayers for the year increased 29.4%
to 59,000 in 1999 from 45,600 in 1998. Growth in the Displayer base resulted in
an increased percentage of less experienced, and therefore, less productive
sales representation. Orders per active Displayer decreased slightly.

                                        15
<PAGE>   16

     Gross profit increased $15.1 million, or 6.1%, to $263.0 million in 1999
from $247.9 in 1998. As a percentage of net sales, gross profit improved to
52.2% in 1999 from 50.6% in 1998, as the Company continued to benefit from the
introduction of new Products with higher margins; however, the Company
experienced significant manufacturing inefficiencies in the latter half of 1999.
Most of the inefficiencies were related to product mix, low production volumes
and unexpectedly high amounts of scrap material. While the manufacturing
inefficiencies have been identified and corrective cost reduction actions have
been taken, volume declines have continued.

     Selling expense increased $8.6 million, or 10.6%, to $89.7 million in 1999
from $81.1 million in 1998. As a percentage of net sales, selling expense
increased to 17.8% in 1999 from 16.5% in 1998. This increase was primarily
attributable to higher commission rates for certain Unit Directors and a
non-recurring cost of approximately $1.0 million associated with the
discontinuation of an expense reimbursement program for certain Unit Directors.

     Freight, warehouse and distribution expense increased $5.2 million, or
11.5%, to $49.9 million in 1999 from $44.7 million in 1998. These costs were
9.9% of net sales in 1999 compared to 9.1% in 1998. Freight expense is typically
based on pounds shipped, which increased at a greater rate than sales in 1999
compared to 1998. This increase was partially offset through the increase in
handling charges on small orders beginning in September 1999 and the expansion
of Local Distributors during the year. Warehouse and distribution expense
increased in 1999 due to a 20.3% increase in the number of orders shipped during
1999 compared to 1998, which required hiring additional labor to service the
higher level of ordering activity.

     General and administrative expense increased $6.7 million, or 32.1%, to
$27.3 million in 1999, from $20.6 million in 1998. This was due to higher costs
related to personnel and professional fees, an increase in the provision for
doubtful accounts, payment of credit card fees in connection with Home Online
orders and other credit card transactions, the full period impact of a
monitoring and oversight fee payable to Hicks Muse and increased depreciation
and amortization expense. Sales force growth and modernization of the Company's
computer systems required the Company to hire additional employees with
specialized skills, which contributed to higher personnel costs.

     Gains on the sale of assets of approximately $10.7 million were recorded in
1999 from the sale of office, warehouse and distribution facilities and
associated land, as compared to $6.4 million in 1998 principally from the sale
of two aircraft and a building.

     Interest income decreased $2.6 million, or 46.5%, to $3.0 million in 1999
from $5.6 million in 1998 due to lower average investment balances.

     Interest expense increased $16.6 million, or 60.1%, to $44.1 million in
1999 up from 1998's $27.5 million. This increase was the result of interest due
on the Notes and the Senior Credit Facility that was incurred for the entire
1999 period compared to only a seven-month period in 1998.

     Income taxes decreased $8.8 million, or 27.8%, to $23.0 million in 1999
from $31.8 million in 1998. Income taxes, as a percentage of income before
income taxes, was 35.6% in 1999 compared to 39.7% in 1998. This decrease was
primarily due to certain 1998 income tax provision adjustments made in 1999.
Those adjustments primarily related to a prior-year refund applied in 1999 and
to costs associated with the Recapitalization.

SEGMENT PROFITABILITY

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

                                        16
<PAGE>   17

     Consolidated net sales decreased $42.9 million, or 8.5%, to $460.4 million
in 2000 from $503.3 million in 1999 due to the $46.7 million decrease in the
Company's domestic direct sales. International sales increased $6.0 million, or
66.5%, to $15.1 million in 2000 from $9.1 million in 1999 due to expansion of
the international Displayer network. Manufacturing related sales decreased $0.5
million, or 0.6%, to $87.6 million in 2000 from $88.1 million in 1999 due to
overall volume declines in wood-framed prints and plastic products in the
Company's domestic direct sales business. Consolidated net sales increased $13.1
million, or 2.7%, to $503.3 million in 1999 from $490.2 million in 1998 largely
due to an increase in the Company's domestic direct sales of $13.1 million. In
1999, manufacturing related sales grew at a slightly reduced rate than the
Company's domestic direct sales business. International sales increased $2.7
million, or 42.2%, to $9.1 million in 1999 from $6.4 million in 1998 due to
expansion of the international Displayer network.

     Consolidated EBITDA decreased $24.8 million, or 24.8%, to $75.3 million in
2000 from $100.1 million in 1999 primarily due to decreased sales volume
resulting from a less profitable Displayer base and to higher selling, general
and administrative costs in the Company's domestic direct sales business
relative to sales. Manufacturing related EBITDA remained relatively constant in
2000 as compared to 1999. Consolidated EBITDA decreased $4.5 million, or 4.2%,
to $100.1 million in 1999 from $104.6 million in 1998 primarily due to higher
selling, general and administrative costs in the Company's domestic direct sales
business relative to sales and significant manufacturing inefficiencies in 1999.
Manufacturing related EBITDA decreased $2.4 million, or 11.7%, to $18.0 million
in 1999 from $20.4 million in 1998 due to lower production volumes and product
mix in the latter half of 1999.

SEASONALITY

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

LIQUIDITY AND CAPITAL RESOURCES

     Net cash provided by operating activities decreased $0.1 million during
2000 as compared to 1999. Net income, as adjusted for non-cash items, decreased
$21.5 million from $43.9 million in 1999 to $22.4 million in 2000. Changes in
assets and liabilities increased cash provided by operating activities by $5.6
million in 2000 as compared to a decrease of $15.8 million in 1999. A decrease
in accounts receivable of $1.5 million in 2000 primarily resulted from a
promotion at December 31, 2000 to encourage payment of Displayer receivable
balances. A decrease in inventories of $10.0 million in 2000 was primarily a
result of the consolidation of manufacturing and distribution facilities, which
eliminated the need to maintain duplicate inventory sites. These changes were
offset by decreases in accounts payable of $3.3 million and decreases in
royalties payable of $5.2 million. Accounts payable decreased as a result of the
timing of invoice payments at year end compared to the prior year, and royalties
payable decreased as a result of lower sales compared to prior year.

     Net cash used in investing activities increased to $20.6 million from $6.7
million in 2000 and 1999, respectively. Capital expenditures in 2000 totaled
$34.1 million compared to $12.7 million in 1999. The increase in capital
expenditures in 2000 was primarily due to the purchase and construction of the
consolidated warehouse and distribution facility. The Company purchased an
undivided 100% interest in a new warehouse and distribution facility for
approximately $21.4 million and incurred approximately $2.5 million in
improvements to construct office space in the facility. Proceeds of $14.6
million from the sale of properties and facilities in December 1999 and proceeds
of $5.4 million from the sale of the Homco facility and another facility, in
2000, were used to pay for substantially all of the costs associated with the
consolidated distribution facility. Capital expenditures of $14.5 million in
2000 were incurred related to costs associated with the
                                        17
<PAGE>   18

automated order fulfillment system in the consolidated distribution facility and
upgrades for the Company's new computer system and internet capabilities.

     The Company estimates that its capital expenditures for the year ended
December 31, 2001 will decrease significantly compared to 2000. The Company
expects to incur additional costs associated with the correction of operational
effectiveness of the automated order fulfillment system. During 2000, the
Company experienced delays and problems associated with the design and
implementation of the automated order fulfillment system and the overall
productivity of the consolidated distribution facility. The Company has
identified and is in the process of correcting the identified system design
problems and improving the overall productivity of the consolidated distribution
facility. As a result of existing system limitations and virtual extinction of
the programming language, the Company also expects to incur approximately $5.5
million in capital expenditures associated with the implementation of a new
enterprise resource planning ("ERP") system in 2001.

     The Company has contracted with an e-commerce consulting firm to assist the
Company in enhancing its internet capabilities, including improvements to the
Home Online order entry system for Displayers. See Item
13, "Certain Relationships and Related Transactions." The initial phase of the
e-commerce strategy was completed in February 2001 with the relaunch of the
Company's website and the addition of Displayer webpages. The Company spent
approximately $2.3 million for the year ended December 31, 2000 on
e-commerce-related improvements. The second phase of the e-commerce strategy
consists of providing the Displayer's customers the ability to order from the
Displayer over the internet and is expected to be completed in June 2001. The
Company expects to spend approximately $1.2 million for the year ended December
31, 2001 on e-commerce-related improvements.

     In July 2000, the Company purchased the remaining 40% minority interest in
Laredo Candle for cash of $8.7 million. Of the total purchase price, $900,000 is
held in escrow and is subject to offset if certain performance standards are not
satisfied by Laredo Candle during the twelve months ending June 30, 2001. The
Company accounted for the acquisition using the purchase method of accounting.
Goodwill of $4.2 million, representing the excess of cost over the fair value of
net assets acquired, is being amortized over 15 years.

     Investing activities in 1999 resulted in a net outflow of $6.7 million
compared to a net inflow of $69.1 million in 1998. Capital expenditures in 1999
totaled $12.7 million compared to $8.4 million in 1998. The increase in capital
expenditures in 1999 was primarily due to the Company's 60% share of building
costs and equipment purchases for Laredo Candle. Investment in the Company's new
computer system, including Internet capabilities, also was included in 1999.
Investing activities were enhanced by payments on notes receivable which
increased to $6.5 million during 1999, compared to $2.0 million in 1998, due to
early payoff of certain notes. During 1998, the Company sold two aircraft and a
building for proceeds of $7.8 million.

     Net cash provided by financing activities was $2.3 million in 2000 as
compared to the Company's use of cash for financing activities of $30.3 million
in 1999. This change was primarily as a result of the $30.0 million of Revolving
Loans borrowed during 2000.

     The Company's use of cash for financing activities decreased to $30.3
million during 1999 from $191.3 million in 1998. This reduction in the use of
cash was due to the Recapitalization. The Company used proceeds of $182.6
million from the contribution of equity by Hicks Muse, $200.0 million from the
issuance of the Notes and $300.0 million of borrowings under the Senior Credit
Facility, together with proceeds from the sale of investments as described
above, to pay $827.6 million for the redemption of common stock and to pay $24.3
million in fees and expenses associated with the Recapitalization. Prior to the
Recapitalization, the Company's primary financing activity was the payment of
dividends.

     Payments on the Notes and the Senior Credit Facility represent significant
cash requirements for the Company. Interest payments on the Notes commenced in
December 1998 and will continue semi-annually until the Notes mature in 2008.
Borrowings under the Senior Credit Facility require quarterly interest and
principal payments. In addition, the Senior Credit Facility includes $30.0
million of Revolving Loans, which mature on June 30, 2004.

     The Company paid a total of $69.6 million in debt service for 2000,
consisting of principal payments under the Senior Credit Facility of $27.2
million, interest under the Senior Credit Facility of approximately $21.4
million, interest of $20.3 on the Notes and interest of $0.7 million on the
Revolving Loans. The
                                        18
<PAGE>   19

Company anticipates that its debt service requirements will total $75.4 million
in 2001, consisting of principal payments due under the Senior Credit Facility
of $32.2 million, interest due under the Senior Credit Facility of $20.1
million, interest of $20.3 million due on the Notes, and interest of $2.8
million on the Revolving Loans.

     The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability to
incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including minimum interest coverage and maximum
leverage ratios. Subject to the financial ratios and tests, the Company will be
required to make certain mandatory prepayments of the term loans on an annual
basis. The Company prepaid $7.7 million on the term loans as of March 31, 1999.
No prepayments were made in 2000.

     As a result of the timing and the magnitude of working capital requirements
and capital expenditures, the Company utilized the Revolving Loans at varying
times during 2000, primarily to meet working capital needs and to make capital
expenditures. As of December 31, 2000, $30.0 million was outstanding on the
Revolving Loans.

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

     The Company's near and long-term operating strategies focus on
strengthening the Displayer base and addressing operational inefficiencies. The
Company has retained financial advisors who are reviewing the financial
alternatives available to the Company, including without limitation a possible
debt restructuring. The Company believes that cash on hand, net cash flow from
operations and borrowings under the Revolving Loans will be sufficient to fund
its cash requirements over the next twelve months, which will consist primarily
of payment of principal and interest on outstanding indebtedness, working
capital requirements and capital expenditures. The Company's future operating
performance and ability to service or refinance its current indebtedness will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.

     Related Party Note Purchase.  The Company has been notified that, in
January 2001, a limited partnership that includes Hicks Muse, certain members of
the Carter family, and their respective affiliates purchased $50.9 million
aggregate principal amount of Notes in the open market for approximately $22.1
million. As a result of these purchases of Notes at a discount, the Company
anticipates that it will recognize cancellation of indebtedness income during
2001 which could, absent any offsetting deductions or

                                        19
<PAGE>   20

credits that may be available to it, generate an additional income tax liability
to the Company for 2001. In addition to the purchases that were made in January
2001, there can be no assurance that Hicks Muse, any members of the Carter
family, or any other affiliate of the Company will not purchase additional Notes
or other indebtedness of the Company at a discount in the future, which
purchases could also result in additional cancellation of indebtedness income
and income tax liabilities to the Company during 2001. The Company is in the
process of reviewing the tax implications of these transactions, both for 2001
and future periods, but in any event believes that any cancellation of
indebtedness income incurred by the Company could potentially be offset (in
whole or in part) by deductions that become available to the Company in the
event the Company engages in a restructuring of its existing indebtedness and/or
raises additional debt or equity capital during 2001. The availability of any
such deductions would depend, among other things, on the manner in which any
such restructuring occurs and whether the Hicks Muse affiliate continues to hold
the Notes after giving effect to the restructuring.

     New Warehouse and Distribution Facility.  On December 1, 1999, the Company
sold substantially all of its owned properties and facilities in the Dallas
area, including all of its warehouse and distribution facilities and its
corporate headquarters, for approximately $14.7 million. During 2000, the
Company used the $14.7 million in net proceeds from this sale and $5.4 million
from the sale of the Homco facility and another facility to purchase an
undivided 100% interest in the new warehouse and distribution facility from
Argent. The new warehouse and distribution facility was purchased for a total of
approximately $21.4 million, and the Company incurred approximately $2.5 million
in improvements to construct office space in the facility. Capital expenditures
of $14.5 million in 2000 were incurred related to costs associated with the
automated order fulfillment system in the consolidated distribution facility and
upgrades for the Company's new computer system and internet capabilities.

     The new warehouse and distribution facility allowed the Company to
consolidate its previous warehouse and distribution operations from several
smaller facilities into a single larger facility, with the exception of one
additional facility in Coppell, Texas which the Company plans to close by
December 31, 2001. In May 2000, the Company implemented an automated order
fulfillment system which includes a new conveyor system, special racks and
storage bins and a warehouse management software system. The Company encountered
delays and problems associated with the design and implementation of the
automated order fulfillment system and the overall productivity of the
consolidated distribution facility. The Company has identified and is correcting
the identified system design problems and improving the overall productivity of
the consolidated distribution facility. The Company anticipates that it will
incur additional capital expenditures to improve the operational effectiveness
of the automated order fulfillment system.

     In December 1999, the Company entered into a capital lease obligation with
Bank One Leasing for certain equipment associated with the automated order
fulfillment system being used in the new warehouse and distribution facility.
The initial term of the lease is 7 years. Interest is imputed at approximately
6.10%. Total cost of the equipment was approximately $6.6 million as of December
31, 2000. Total annual payments equal $1.4 million, which is payable in monthly
installments. The amounts are funded by the lessor as the equipment is
purchased.

     On December 1, 1999, the Company entered into lease agreements to lease
back the properties and facilities sold to Parker until the Company's new
warehouse and distribution facility was ready for partial occupancy, which
occurred in May 2000 at which time the lease agreements were terminated.

     The sale of the old facilities and properties in exchange for the purchase
of an undivided 100% interest in the new warehouse and distribution facility
qualified as a non taxable Section 1031 like-kind exchange under the United
States Internal Revenue Code of 1986, as amended (the "IRC"). The Company
recorded a pre-tax gain of approximately $3.2 million on the sale of its
properties and facilities for financial reporting purposes in 2000. See Item 13,
"Certain Relationships and Related Transactions."

     The transactions described above required the consent of the Company's
senior lenders, which the Company obtained in November 1999. Additionally, the
Senior Credit Facility was amended to exclude these transactions from certain
debt covenant requirements.

                                        20
<PAGE>   21

     Corporate Headquarters Facility.  On January 3, 2000, the Company entered
into a ten year lease with Granite 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.
Additionally, on December 30, 1999, the Company entered into a $1.2 million
capital lease obligation for certain furniture and fixtures to be used in the
new corporate headquarters. In December 2000, the Company moved the corporate
headquarters from these facilities to the new warehouse and distribution
facility. The Company subleased approximately 40,000 square feet of the
Company's former leased headquarters to a subtenant. The Company has hired
consultants to assist in subleasing the remaining unused space to its current
subtenant or to another subtenant or to complete a buyout of the remaining lease
obligation by December 31, 2001.

MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT

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

     The Company is exposed to market risks related to changes in interest
rates. In July 1998, the Company entered into an interest rate swap agreement
that expires in December 2001 to limit the effect of changes in interest rates
on long-term borrowings. Under the swap, the Company pays interest at 5.50% on a
notional amount of $75.0 million and receives interest thereon at three-month
LIBOR on a quarterly basis when the three-month LIBOR rate exceeds 5.50% and is
below 6.44%. If LIBOR is greater than 6.44% at the commencement of any quarterly
reset period, a knockout provision provides that the Company will receive no
payment under the swap during such period and the Company pays interest at the
floating rate.

     During 2000, the Company terminated the swap portion of the $75.0 million
interest rate swap for approximately $1.0 million leaving only the knockout
portion of the swap outstanding at December 31, 2000. The knockout portion of
the swap was adjusted to market on a quarterly basis. The total adjustment was a
loss of approximately $816,000 in 1999 and a gain of approximately $1.2 million
in 2000, which is included in other income. The level of variable-rate debt,
after the effect of the swap (at December 31, 1999) has been considered, is
approximately 39% and 55% of the total interest-bearing debt outstanding at
December 31, 1999 and 2000, respectively. Through May 2000 when the option was
sold, the average rate received on the notional amount of the swap was 6.13% and
the average rate paid was 5.50%. During 1999, the average rate received on the
notional amount of the swap was 5.29% and the average rate paid was 5.57%.

     The following table presents principal cash flows of variable rate debt by
maturity date and the related average interest rates. The table also presents
the notional amount of the knockout provision and its expected future interest
rate. The interest rates are weighted between the Tranche A and Tranche B loans
based on debt outstanding and are estimated based on implied forward rates using
a yield curve as of December 31, 2000.

<TABLE>
<CAPTION>
                                                        EXPECTED MATURITY DATE
                                     ------------------------------------------------------------                FAIR
                                      2001      2002      2003      2004      2005     THEREAFTER    TOTAL     VALUE(1)
                                     -------   -------   -------   -------   -------   ----------   --------   --------
                                                                       (IN THOUSANDS)
<S>                                  <C>       <C>       <C>       <C>       <C>       <C>          <C>        <C>
Liabilities
Variable-rate debt.................  $57,179   $37,179   $42,179   $49,650   $46,625    $24,314     $257,126   $257,126
Average interest rate..............     8.78%     8.62%     8.93%     9.19%     9.37%      9.35%          --         --
Interest Rate Derivatives:
Interest rate knockout provision:
Contract amount....................  $75,000        --        --        --        --         --     $ 75,000   $    (38)
Weighted average strike price......     6.44%       --        --        --        --         --           --         --
</TABLE>

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

(1) The fair value of the knockout provision represents the estimated amount the
    Company would pay to terminate this provision.

                                        21
<PAGE>   22

     The Company sells its products in Mexico, and as a result, is subject to
market risk exposure of foreign currency devaluation. Because the Company's
international operations are not significant, any decrease in value of the peso
would not have a material adverse effect on the Company's results of operations
or liquidity.

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 1998, 1999 or 2000.

RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

     In June 1999, the Financial Accounting Standards Board voted to delay the
effective date for implementation of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
standard is effective for fiscal years beginning after June 15, 2000. The
Company will adopt this new standard in the first quarter of fiscal 2001 and
management anticipates that, due to the limited use of derivative instruments ,
the new standard will not have a significant impact on its financial statements.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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 14(a) of this report. Such consolidated financial statements are included
herein beginning on page F-1.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

     Not Applicable.

                                        22
<PAGE>   23

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

     Set forth below is certain information as of April 4, 2001 with respect to
those individuals who are serving as members of the Board or as executive
officers of the Company.

<TABLE>
<CAPTION>
NAME                                        AGE                    POSITION
----                                        ---                    --------
<S>                                         <C>   <C>
Donald J. Carter, Jr. ....................  40    Chairman of the Board and Chief Executive
                                                    Officer
Barbara J. Hammond........................  70    Director and Vice Chairman
Christina L. Carter Urschel...............  37    Director and President
Michael D. Lohner.........................  38    Executive Vice President and Chief
                                                  Operating Officer
Kenneth J. Cichocki.......................  48    Vice President of Finance and Chief
                                                  Financial Officer
Thomas O. Hicks...........................  55    Director
Jack D. Furst.............................  42    Director
Lawrence D. Stuart, Jr. ..................  55    Director
Joseph Colonnetta.........................  40    Director
Sheldon I. Stein..........................  47    Director
Robert H. Dedman, Jr. ....................  43    Director
Gretchen M. Williams......................  44    Director
</TABLE>

     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. has served as Chief Executive Officer of the Company
since October 1997 and in June 1998 became Chairman of the Board following the
Recapitalization. Mr. Carter provides leadership in sales, marketing and
operational areas of the Company. 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 son of
Donald J. Carter and the brother of Christina L. Carter Urschel.

     Barbara J. Hammond has served as Vice Chairman of the Company since
February 2000, and, as of January 1, 2001, is responsible on a part-time basis
as a special advisor to the Chairman and CEO 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 1986 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 C. Crowley, and rose to become one
of the Company's top Displayers and Directors.

     Christina L. Carter Urschel has served the Company as President since
February 2000, and has been a Director of the Company since May 1995. Ms.
Urschel is responsible for all domestic sales, development of incentive
programs, training and motivation of the Displayers and Directors. 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.
Ms. Urschel is currently on a temporary leave of absence. Ms. Urschel is the
daughter of Donald J. Carter and the sister of Donald J. Carter, Jr.

     Michael D. Lohner has served the Company as Sr. Vice President and Chief
Operating Officer since May 24, 2000 and as Executive Vice President and Chief
Operating Officer since January 10, 2001. Mr. Lohner held various positions,
including President and CEO, at Evergreen Alliance Golf Limited from

                                        23
<PAGE>   24

1991 through 1999. Mr. Lohner has also been in the "Executive in Residence"
program of Hicks, Muse, Tate and Furst, Incorporated.

     Kenneth J. Cichocki has served the Company as Vice President of Finance and
Chief Financial Officer since November 1999. From 1993 to October 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.

     Thomas O. Hicks has been a Director of the Company since June 1998. Mr.
Hicks is Chairman of the Board and Chief Executive Officer 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 Vice-Chairman and
Director of Clear Channel Communications, Inc., and as Chairman and Director of
Triton Energy Corporation, and is a Director of Cooperative Computing Inc., CIN
Television Corporation, Lamar Advertising Company, CorpGroup Limited, MVS
Corporation, Apogent Technologies (formerly Sybron International Corporation),
Teligent, Inc. and Viasystems Group, Inc.

     Jack D. Furst has been a Director of the Company since June 1998. Mr. Furst
is a Partner of Hicks, Muse, Tate & Furst Incorporated. Mr. Furst has
approximately 20 years of experience in leveraged acquisitions and private
investments. Mr. Furst is involved in all aspects of the Hicks, Muse, Tate &
Furst Incorporated business and has been actively involved in originating,
structuring and monitoring its investments. 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 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 Pricewaterhouse, LLP. Mr. Furst
serves on the Board of Directors of Viasystems Group, Inc., Triton Energy
Limited, Hedstrom Holdings, Inc., International Wire Holding Company,
Cooperative Computing, Inc., LLS Corp. and Globix Corporation.

     Joseph Colonnetta has been a Director of the Company since August 1999. Mr.
Colonnetta has served as a Principal of Hicks, Muse, Tate & Furst Incorporated
since January 1999. From 1995 to 1998, Mr. Colonnetta served as a Managing
Principal of a management affiliate of Hicks, Muse, Tate & Furst Incorporated.
From 1994 to 1995, Mr. Colonnetta was an Operating Partner and Chief Executive
Officer of Triangle FoodService and StarMark Foods. From 1989 to 1994, Mr.
Colonnetta was the Chief Financial Officer of TRC, a company specializing in
repositioning and growing food-related companies. Mr. Colonnetta is also a
Director of Cooperative Computing, Inc., Regal Cinemas, Inc., Grupo Minsa,
Safeguard Systems and Darling International.

     Lawrence D. Stuart, Jr. became a Director of the Company in June 1998. Mr.
Stuart has been a Partner of Hicks, Muse, Tate & Furst Incorporated since 1995.
At Hicks, Muse, Tate & Furst Incorporated, Mr. Stuart coordinates all aspects of
negotiating and closing the firm's leveraged acquisition transactions and
managing the firm's relationships with professional service firms. Prior to
joining Hicks, Muse, Tate & Furst Incorporated Mr. Stuart had served for over 20
years as the principal outside legal counsel for the investment firms and
portfolio companies led by Thomas O. Hicks. From 1989 to 1995, Mr. Stuart was
the Managing Partner of the Dallas office of Weil, Gotshal & Manges L.L.P. Prior
thereto, he was a Partner at Johnson & Gibbs, where he was employed from 1973 to
1989. Prior to joining Johnson & Gibbs, he was employed at Rain, Harrell, Emery,
Young & Doke. Mr. Stuart serves on the Board of Directors of Microtune, Inc.

     Sheldon I. Stein became a Director in July 1998.  Mr. Stein is a Senior
Managing Director and oversees United States Regional 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., Vectrix Business
Solutions, Inc. and Fitz and Floyd. He is a member of the Board of Trustees of
the Greenhill School and is a Trustee of Brandeis University.

                                        24
<PAGE>   25

     Robert H. Dedman, Jr. became a Director of the Company in May 1999. Mr.
Dedman is President 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. In 1987 he returned to ClubCorp as CFO
and was named President and Chief Operating Officer in January 1989. Mr. Dedman
serves on the Board of Directors of ClubCorp, PGA European Tour Courses PLC,
Clublink Corporation, National Golf Foundation, LifeCast.com, Inc., Texas
Research League, Southern Methodist University Alumni Center Planning Committee,
and The University of Texas at Austin Development Board.

     Gretchen M. Williams became 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 1978. Ms. Williams also serves as a Director of Chase Bank of Texas
N.A.

     The Hicks Muse Shareholders 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
Recapitalization, which provides that the Board will consist of. 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, Lawrence D.
Stuart, Jr., Joseph 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. As of April 4, 2001, Hicks
Muse is still entitled to designate one additional Director.

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. Additionally, the Company has not been subject to the filing
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, for the past 90 days.

                                        25
<PAGE>   26

ITEM 11. EXECUTIVE COMPENSATION.

     The following table sets forth the compensation paid during each of the
three years, or as applicable, in the period ended December 31, 2000, to the
Chief Executive Officer and the other four most highly compensated executive
officers who were serving as executive officers at December 31, 2000.

<TABLE>
<CAPTION>
                                                                                       LONG-TERM
                                                                                      COMPENSATION
                                                                                      ------------
                                                            ANNUAL COMPENSATION        SECURITIES
                                                        ---------------------------    UNDERLYING
NAME AND PRINCIPAL POSITION                             YEAR   SALARY($)   BONUS($)   OPTIONS/SARS
---------------------------                             ----   ---------   --------   ------------
<S>                                                     <C>    <C>         <C>        <C>
Donald J. Carter, Jr. ................................  2000    500,000         --           --
  Chairman of the Board and...........................  1999    500,324         --           --
  Chief Executive Officer.............................  1998    371,787    262,500      338,481
Barbara J. Hammond....................................  2000    343,750         --           --
  Vice Chairman and Director..........................  1999    475,519         --           --
                                                        1998    443,753    249,375           --
Christina L. Carter Urschel...........................  2000    443,750         --           --
  President and Director..............................  1999    400,267         --           --
                                                        1998    313,453    210,000      338,481
Michael D. Lohner.....................................  2000    178,891     50,000           --
  Executive Vice President and........................  1999         --         --           --
  Chief Operating Officer.............................  1998         --         --           --
Kenneth J. Cichocki...................................  2000    254,167     25,000           --
  Vice President of Finance and.......................  1999     41,667     20,000           --
  Chief Financial Officer.............................  1998         --         --           --
</TABLE>

SUMMARY OF OPTION GRANTS

     The following table provides certain summary information concerning grants
of options to the Named Executive Officers of the Company during the 2000 fiscal
year:

<TABLE>
<CAPTION>
                                NUMBER OF     PERCENT OF
                               SECURITIES    TOTAL OPTIONS
                               UNDERLYING     GRANTED TO
                                 OPTIONS     EMPLOYEES IN    EXERCISE PRICE                           GRANT DATE PRESENT VALUE
NAME                           GRANTED (#)    FISCAL YEAR    PER SHARE ($)       EXPIRATION DATE         PER SHARE ($) (1)
----                           -----------   -------------   --------------   ---------------------   ------------------------
<S>                            <C>           <C>             <C>              <C>                     <C>
Donald J. Carter, Jr. .......        --           --                 --                          --               --
Barbara J. Hammond...........        --           --                 --                          --               --
Christina L. Carter
  Urschel....................        --           --                 --                          --               --
Michael D. Lohner............    50,000           --             $18.05                    05/24/10            $5.79
Kenneth J. Cichocki..........    10,000           --             $18.05                    07/31/10            $2.63
Kenneth J. Cichocki..........     5,540                          $18.05                    11/01/10            $2.34
</TABLE>

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

(1) The grant date present value was determined using the Minimum Value method
    of option pricing with the following assumptions: dividend yield of zero,
    risk-free interest rate of 6.41% and expected term of six years.

COMPENSATION OF DIRECTORS

     Persons serving as independent Directors on the Board are paid $2,500 per
Board meeting, and $750 per Committee Meeting ($250 for telephone
participation). The independent Directors serving on the Board in 2000 were
Sheldon I. Stein, Gretchen M. Williams and Robert H. Dedman, Jr. Mr. Stein and
Ms. Williams also serve on the Audit Committee.

     During 2000, Board and Board Committee fees were paid to certain outside
Directors in the amount of $33,000 as follows: Mr. Stein received $14,250, Ms.
Williams received $11,250, and Mr. Dedman received $7,500.

                                        26
<PAGE>   27

     In addition, the initial independent 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. Ms. Williams purchased 2,770 shares of common stock in
1998 for an aggregate purchase price of $50,000 and was granted options for
2,770 shares of common stock at an exercise price equal to $18.05451. Mr.
Stein's purchase of common stock, in 1998, indirectly through a limited
partnership, qualified him to receive options for 5,540 shares at an exercise
price of $18.05451. Mr. Dedman purchased 4,688 shares of common stock in 1999
for an aggregate purchase price of $100,000 and was granted options for 4,688
shares of common stock at an exercise price equal to $21.33. Ms. Williams and
Mr. Stein were granted options on December 14, 1998. Mr. Dedman was granted
options on May 10, 1999, and on July 31, 2000, Mr. Dedman was granted additional
options for 851 shares of common stock at an exercise price equal to $18.05451.
All such options vest in 20% increments in five equal, consecutive annual
installments on each anniversary of the grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company's Compensation Committee is comprised of Donald J. Carter Jr.,
Christina L. Carter Urschel, Thomas O. Hicks, and Jack D. Furst. All decisions
regarding compensation of executive officers are made by the Compensation
Committee.

EXECUTIVE EMPLOYMENT AND CONSULTING AGREEMENTS

     On June 4, 1998, following the Recapitalization, the Company entered into
Executive Employment Agreements with each of Donald J. Carter, Jr., Barbara J.
Hammond and Christina L. Carter Urschel. Pursuant to the terms of his Executive
Employment Agreement, Donald J. Carter, Jr. will be 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. Pursuant to the terms of her Executive
Employment Agreement, Barbara J. Hammond was employed as President of the
Company for two years with a base salary of $475,000 and with total annual
compensation (including bonuses) that ranged from $475,000 to $1,068,750.
Effective July 14, 2000, Barbara J. Hammond's Employment Agreement was revised,
calling for a reduced work schedule and an annual salary of $124,998 plus
reimbursement for expenses. On December 31, 2000, Barbara Hammond retired from
full-time employment although she continues to serve as Vice Chairman and a
Director of the Company. Effective January 1, 2001, Barbara J. Hammond's
Employment Agreement was revised following her retirement, with total annual
compensation of $60,000. The last revised Employment Agreement of Barbara
Hammond is terminable by either party at any time on reasonable notice. Pursuant
to the terms of her Executive Employment Agreement Christina L. Carter Urschel
was employed as Executive Vice President and President of the Company for five
years with a base salary of $400,000 ($475,000 as President) and with total
annual compensation (including bonuses) that ranged from $400,000 to $900,000
($475,000 to $1,068,750 at such time as Mrs. Carter Urschel became President).
Pursuant to an arrangement with the Company effective January 1, 2001, Christina
L. Carter Urschel began working a reduced schedule with a reduced annual
compensation of $200,000. Christina L. Carter Urschel is expected to resume
full-time employment with the Company prior to December 31, 2001. The Executive
Employment Agreements with Donald J. Carter, Jr., and Christina L. Carter
Urschel each provide for lump sum severance payments in the event such
individuals are terminated by the Company without Cause (as defined in such
Executive Employment Agreements) or such individuals terminate their employment
for Good Reason (as defined in such Executive Employment Agreements). Subject to
certain exceptions, the amount of such lump sum severance payments equals (i)
five times the applicable executive's base salary if such executive is
terminated within one year after the Recapitalization 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 and (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, each executive has agreed pursuant
to his or her Executive Employment Agreement not to compete with the Company
during his or her employment and for a period of three years after termination
of such executive's employment for any reason.

                                        27
<PAGE>   28

     On November 1, 1999, the Company entered into an Employment Agreement with
Kenneth J. Cichocki. Mr. Cichocki is employed as Vice President of Finance and
Chief Financial Officer of the Company for one year with a base salary of
$250,000 and with total annual compensation (including bonuses) that ranges 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) that ranges from $275,000 to $428,125.
Mr. Cichocki's Employment Agreement may be extended for successive one year
periods.

     On May 24, 2000, the Company entered into an Employment Agreement with
Michael D. Lohner. Mr. Lohner was employed as Sr. 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) that ranged from $295,000
to $405,625. Effective December 31, 2000, Mr. Lohner's Employment Agreement was
amended and restated allowing for a $450,000 base salary and with total
compensation (including bonuses) that range from $450,000 to $618,750. Mr.
Lohner's Employment Agreement may be extended for successive one year periods.
Since January 10, 2001, Mr. Lohner has been employed as Executive Vice President
and Chief Operating Officer.

1998 STOCK OPTION PLAN FOR KEY EMPLOYEES

     On April 11, 1998, the Board adopted the 1998 Stock Option Plan for Key
Employees, pursuant to which options could be granted, after the consummation of
the Recapitalization, to key employees and eligible non-employees of the Company
and its subsidiaries for the purchase of shares of common stock. The 1998 Stock
Option Plan for Key Employees was approved by the shareholders of the Company at
its annual general meeting on May 16, 1998.

     The employees eligible for options under the 1998 Stock Option Plan for Key
Employees 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 Stock Option Plan for Key Employees. 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 Stock Option
Plan for Key Employees.

     Pursuant to the Merger Agreement and the applicable Executive Employment
Agreements, immediately after the consummation of the Recapitalization in June
1998, options for 338,481 shares were granted to each of Donald J. Carter, Jr.
and Christina L. Carter Urschel at an exercise price equal to $18.05451. The
options vest in 20% increments in five equal, consecutive annual installments on
each anniversary of the grant. On November 1, 1999, Kenneth J. Cichocki was
granted options totaling 9,376 shares at an exercise price of $21.33 per share.
On May 24, 2000, 50,000 options were granted to Michael D. Lohner at an exercise
price of $18.05451 per share. On July 31, 2000, 10,000 options were granted to
Kenneth J. Cichocki at an exercise price of $18.05451 per share. On November 1,
2000, 5,540 options were issued to Kenneth J. Cichocki at an exercise price of
$18.05451 per share. Each of these options were granted with substantially
similar terms, as had been granted to other executive officers of the Company,
except for the shares issued to Messrs. Lohner and Cichocki which, according to
executed Amendments to their Non-Qualified Stock Option Agreements, become
Vested Shares (i) upon the occurrence of a Change of Control or (ii) upon
termination of the executive without cause after the execution of a definitive
agreement which, upon consummation, would result in a change of control. As of
December 31, 2000, options for 1,060,823 of common stock at an exercise price of
$18.05451 and options for 42,192 shares of common stock at an exercise price of
$21.33 had been granted under the 1998 Stock Option Plan for Key Employees. In
2000, options for 103,556 shares of common stock were forfeited and no options
for shares of common stock were exercised at an exercise price of $18.05451. As
of December 31, 2000, options for 369,977 shares of common stock were available
for grant under the Stock Option Plan for Key Employees.

                                        28
<PAGE>   29

     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. 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. 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 (as defined in the 1998 Stock Option Plan for Key Employees). Both
incentive stock options and nonqualified stock options may be granted under the
1998 Stock Option Plan for Key Employees.

     Unless terminated sooner in accordance with its terms, the 1998 Stock
Option Plan for Key Employees will terminate on April 11, 2008, and no options
may be granted under the 1998 Stock Option Plan for Key Employees thereafter.
The Committee may amend, modify, suspend or terminate the 1998 Stock Option Plan
for Key Employees 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 Stock Option Plan for Key Employees, decrease
the minimum exercise price of any incentive stock options or modify the
requirements relating to eligibility with respect to incentive options. 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

     Except in the case of options held by Donald J. Carter, Jr. and Christina
L. Carter Urschel, 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) is less than 10% of the fully diluted common stock, the Company shall
have the right, but not the obligation, to purchase an optionee's options or any
shares of common stock acquired pursuant to the exercise of his or her options
in the event of an optionee's 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 or (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. 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 Stock Option Plan for Key Employees).

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 Stock Option
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
Stock Option Plan. As of December 31, 2000, options for 275,338 shares of common
stock at an exercise price of $18.05451, and options for 52,182 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, 2000, options for 10,961 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

                                        29
<PAGE>   30

underwritten initial public offering of common stock satisfying certain
requirements and the eighth anniversary of the consummation of the
Recapitalization. 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.

     The following table sets forth as of April 4, 2001, 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 executive officer of the
Company named in "Item 11. Executive Compensation" and (iv) all Directors and
executive officers of the Company as a group. The Company believes that each
such holder has sole voting and dispositive power over the shares of common
stock held, except as otherwise indicated.

<TABLE>
<CAPTION>
                                                              BENEFICIAL OWNERSHIP OF
                                                                    COMMON STOCK
                                                              ------------------------
                                                              AMOUNT AND
                                                              NATURE OF
                                                              BENEFICIAL    PERCENTAGE
                                                              OWNERSHIP      OF CLASS
                                                              ----------    ----------
<S>                                                           <C>           <C>
5% SHAREHOLDERS
Donald J. Carter............................................     942,151(1)     6.2%
  8024 FM 428
  Denton, Texas 76028
Hicks Muse Shareholders.....................................  10,111,436(2)    66.3%
  c/o Hicks, Muse, Tate & Furst Incorporated
  100 Crescent Court, Suite 1600
  Dallas, Texas 75201
DIRECTORS AND EXECUTIVE OFFICERS
Donald J. Carter, Jr........................................     733,949(3)     4.8%
Barbara J. Hammond..........................................     535,714(4)     3.5%
Christina L. Carter Urschel.................................     733,590(5)     4.8%
Thomas O. Hicks.............................................  10,111,436(2)    66.3%
Kenneth J. Cichocki.........................................       1,875(6)      --
Michael D. Lohner...........................................          --         --
Jack D. Furst...............................................          --(7)      --
Joseph Colonnetta...........................................          --         --
Sheldon I. Stein............................................       2,216(8)       *
Lawrence D. Stuart, Jr. ....................................          --(7)      --
Gretchen M. Williams........................................       3,878(9)       *
Robert H. Dedman, Jr. ......................................         938(10)       *
All Directors and executive officers as a group (15
  persons)..................................................  12,123,596       79.6%
</TABLE>

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

  *  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. Thomas O. Hicks is

                                        30
<PAGE>   31

     the sole member and Director of Home Interiors LLC and, accordingly, may be
     deemed to be the beneficial owner of common stock held by HIEP, HMIP and HM
     BST (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 135,392 shares of common
     stock subject to presently exercisable options.

 (4) Consists of 258,570 shares held in the name of Barbara J. Hammond and
     Howard L. Hammond, Trustees of the Hammond Family Trust, and 277,144 shares
     held in the name of David and Mary Crowley Family Partnership, Ltd. Barbara
     J. Hammond shares voting and dispositive power with Howard L. Hammond as
     Trustee of the Hammond Family Trust. Barbara J. Hammond is one of three
     Directors of David and Mary Crowley Corporation, a Texas corporation that
     is the sole general partner of David and Mary Crowley Family Partnership,
     Ltd., and therefore may be deemed to share voting and dispositive power
     with the other Directors. Barbara J. Hammond disclaims beneficial ownership
     of all shares held in the name of David and Mary Crowley Family
     Partnership, Ltd.

 (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 135,392 shares of common stock subject to presently
     exercisable options.

 (6) Includes 1,875 shares of common stock subject to presently exercisable
     options.

 (7) Each of Messrs. Furst and Stuart hold indirect minority limited partnership
     interests in HIEP. Each of Messrs. Furst and Stuart disclaims beneficial
     ownership of common stock owned of record by HIEP.

 (8) Consists of 2,216 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.

 (9) Includes 1,108 shares of common stock subject to presently exercisable
     options.

(10) Includes 938 shares of common stock subject to presently exercisable
     options.

THE SHAREHOLDERS' AGREEMENT

     The Hicks Muse Shareholders 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 "Shareholders Agreement") upon the consummation of the
Recapitalization, which 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
ten 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, after, if ever, 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, and 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.

                                        31
<PAGE>   32

     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
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 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 2000.

EXECUTIVE EMPLOYMENT AGREEMENT WITH DONALD J. CARTER

     In connection with the 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). In 2000, the Company paid Mr. Carter
approximately $200,000 pursuant to the terms and conditions of his Executive
Employment Agreement.

CARTER & SONS FREIGHTWAYS, INC.

     Ronald L. Carter, the brother of Donald J. Carter, Jr., Chief Executive
Officer, and Christina L. Carter Urschel, President, is President and Chief
Executive Officer of Carter & Sons Freightways, Inc. ("Carter & Sons"), a
trucking company that handles a small portion of the Company's freight. Ronald
L. Carter and Donald J. Carter own all of the outstanding stock of Carter &
Sons. During 2000, the Company paid Carter & Sons approximately $110,000 for its
services.

SALE OF HOMCO PROPERTY TO DONALD J. CARTER, JR.

     On May 15, 2000, the Company sold Homco's manufacturing and warehouse
facility to Donald J. Carter, Jr., the Company's Chairman of the Board and Chief
Executive Officer, for approximately $3.7 million. The Company used the proceeds
from the sale, together with approximately $1.7 million in proceeds from the
sale of another property, to purchase a portion of an undivided interest in the
Company's new warehouse and distribution facility. The Company expects that the
sale of these properties, in exchange for the purchase of an undivided interest
in the Company's new warehouse and distribution facility, will qualify as a
Section 1031 like-kind exchange under the Internal Revenue Code. The Company
recorded a pre-tax gain of approximately $3.2 million in the year ended December
31, 2000, on the sale of these properties for financial reporting purposes.

                                        32
<PAGE>   33

CERTAIN OTHER TRANSACTIONS

     In connection with the 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 $1.1 million for
monitoring and oversight services in 2000. As a result of the amendment to the
Senior Credit Facility dated March 30, 2001, these fees for monitoring and
oversight may be accrued but not paid until a future date to be determined.

     In addition, the Company entered into an agreement (the "Financial Advisory
Agreement") with Hicks Muse Partners pursuant to which Hicks Muse Partners
received a financial advisory fee in an amount equal to $11.2 million for its
services as financial advisor to the Company in connection with the
Recapitalization and the transactions related thereto. If the Board requests
financial advisory services from Hicks Muse Partners from time to time after the
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.

     In July, 2000, the Company and Vectrix Business Solutions, Inc. entered
into a Customer Agreement to upgrade the Company's website and for the purchase
of software licenses and supplies totaling $1.4 million. Certain affiliates of
Hicks Muse are the beneficial owners of a material interest in Vectrix Business
Solutions, Inc., and Sheldon Stein is a director of Vectrix Business Solutions,
Inc. The Company paid $1.4 million to Vectrix in the year ended December 31,
2000.

                                        33
<PAGE>   34

                                    PART IV

ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

  (a) Financial Statements:

     (1) and (2) Financial Statements and Schedules

          See "Index to Consolidated Financial Statements and Schedules" on page
     F-1.

     (3) Exhibits:

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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, filed on November 30, 1998).
         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, filed on November
                            30, 1998).
         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, filed on November
                            30, 1998).
         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, filed on November 30, 1998).
         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, filed on November 30, 1998).
         4.2             -- Purchase Agreement, dated as of May 28, 1998, among the
                            Company, as issuer, the Guarantors named therein and
                            Bear, Stearns & Co., Inc., Chase Securities, Inc., Morgan
                            Stanley Dean Witter and NationsBanc Montgomery Securities
                            LLC, as initial purchasers (incorporated by reference to
                            Exhibit 4.2 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
         4.3             -- Exchange and Registration Rights Agreement, dated as of
                            June 4, 1998, among the Company, the Guarantors named
                            therein and Bear, Stearns & Co., Inc., Chase Securities,
                            Inc., Morgan Stanley Dean Witter and NationsBanc
                            Montgomery Securities LLC. (incorporated by reference to
                            Exhibit 4.3 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
         4.4             -- 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).
        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, filed on November 30, 1998).
</TABLE>

                                        34
<PAGE>   35

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        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.
        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, filed on November 30, 1998).
        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.
</TABLE>

                                        35
<PAGE>   36

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        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, filed on November 30, 1998).
        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.
        10.4             -- Consulting Agreement, dated June 4, 1998, between Company
                            and Ronald L. Carter (incorporated by reference to
                            Exhibit 10.4 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
        10.5             -- 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).
        10.6             -- 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, filed on November
                            30, 1998).
        10.7             -- Executive Employment Agreement, dated June 4, 1998,
                            between the Company and Donald J. Carter Jr.
                            (incorporated by reference to Exhibit 10.7 of the
                            Company's Registration Statement on Form S-4, No.
                            333-62021, filed on November 30, 1998).
        10.8             -- Executive Employment Agreement, dated June 4, 1998,
                            between the Company and Barbara J. Hammond (incorporated
                            by reference to Exhibit 10.8 of the Company's
                            Registration Statement on Form S-4, No. 333-62021, filed
                            on November 30, 1998).
        10.9             -- 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, filed on November 30, 1998).
        10.10            -- 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, filed on November 30, 1998).
        10.11            -- 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, filed on November 30, 1998).
        10.12            -- 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, filed on November 30, 1998).
        10.13            -- 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, filed
                            on November 30, 1998).
</TABLE>

                                        36
<PAGE>   37

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.14            -- 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, filed on November
                            30, 1998).
        10.15            -- Agreement of Partnership of Laredo Candle Company, dated
                            as of December 14, 1998, between the Company and Miracle
                            Candle Company (incorporated by reference to Exhibit
                            10.15 of the Company's Annual Report on Form 10-K, No.
                            333-62021, filed March 16, 1999).
        10.15.1          -- First Amendment to Agreement of Partnership of Laredo
                            Candle Company, dated as of February 1, 1999, between the
                            Company and Miracle Candle Company (incorporated by
                            reference to Exhibit 10.15.1 of the Company's Annual
                            Report on Form 10-K, No. 333-62021, filed March 16,
                            1999).
        10.16            -- 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).
        10.16.1*         -- First Amendment to Consulting Services Agreement dated
                            September 2000, between the Company and Tompkins
                            Associates Incorporated.
        10.17            -- Real Estate Purchase Contract dated July 19, 1999,
                            between the Company and Parker Equities, Inc.
                            (incorporated by reference to Exhibit 10.2 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on August 13, 1999).
        10.17.1          -- First Amendment to Real Estate Purchase Contract dated
                            July 19, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.3 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on August 13, 1999).
        10.17.2          -- Second Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.1 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.17.3          -- Third Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.2 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.17.4          -- Fourth Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.3 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.18            -- Purchase and Sale Agreement dated July 19, 1999, between
                            Argent Frankford, L.P. and the Company (incorporated by
                            reference to Exhibit 10.4 of the Company's Quarterly
                            Report on Form 10-Q, No. 333-62021, filed on August 13,
                            1999).
        10.18.1          -- First Amendment to Purchase and Sale Agreement dated July
                            23, 1999, between Argent Frankford, L.P. 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 13, 1999).
</TABLE>

                                        37
<PAGE>   38

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.18.2          -- Second Amendment to Purchase and Sale Agreement dated
                            October 20, 1999, between Argent Frankford, L.P. and the
                            Company (incorporated by reference to Exhibit 10.18.2 of
                            the Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
        10.18.3          -- Third Amendment to Purchase and Sale Agreement dated
                            February 9, 2000, between Argent Frankford, L.P. and the
                            Company (incorporated by reference to Exhibit 10.18.3 of
                            the Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
        10.19            -- Employment Agreement dated November 1, 1999, between the
                            Company and Parker Equities, Inc. (incorporated by
                            reference to Exhibit 10.4 of the Company's Quarterly
                            Report on Form 10-Q of the Company, No. 333-62021, filed
                            on November 8, 1999).
        10.20            -- Professional Services Agreement dated December 1, 1999,
                            between EXE Technologies, Inc. and the Company
                            (incorporated by reference to Exhibit 10.20 of the
                            Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
        10.21            -- Master Software License Agreement dated December 1, 1999,
                            between EXE Technologies, Inc. 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 14, 2000).
        10.22            -- 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).
        10.23            -- Proposal Including Sales Agreement No. 56-5879 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company (incorporated by reference
                            to Exhibit 10.23 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.24            -- Proposal Including Sales Agreement No. 56-5898 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company(incorporated by reference
                            to Exhibit 10.24 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000) .
        10.25            -- Proposal Including Sales Agreement No. 56-5738 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company (incorporated by reference
                            to Exhibit 10.25 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.26            -- Form of Purchase and Sale Agreement between Homco, Inc.
                            and Donald J. Carter, Jr.( incorporated by reference to
                            Exhibit 10.25 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.27*           -- Employment Agreement, dated November 1, 1999, between
                            Kenneth J. Cichocki and the Company.
        10.27.1*         -- Amended and Restated Employment Agreement, dated November
                            10, 2000, between Kenneth J. Cichocki and the Company.
        10.28            -- 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).
</TABLE>

                                        38
<PAGE>   39

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.28.1*         -- Amended and Restated Employment Agreement, dated December
                            31, 2000, between Michael D. Lohner and the Company.
        10.29            -- Executive Employment, dated June 4, 1998, between the
                            Company and Barbara J. Hammond (incorporated by reference
                            to Exhibit 10.8 of the Company's Registration Statement
                            on Form S-4, No. 333-62021, filed on November 30, 1998).
        10.29.1*         -- Amendment to Executive Employment Agreement, between the
                            Company and Barbara J. Hammond, made and entered into as
                            of July 30, 1998.
        10.29.2*         -- Amendment to Executive Employment Agreement, between the
                            Company and Barbara J. Hammond, made and entered into as
                            of July 14, 2000.
        10.29.3*         -- Amendment to Executive Employment Agreement, dated
                            December 13, 2000, between Barbara J. Hammond and the
                            Company.
        10.30*           -- Agreement of Sale, dated January 3, 2001, between Lincoln
                            Property Company Commercial, Inc. and the Company.
        10.30.1*         -- First Amendment to Agreement of Sale, dated March 12,
                            2001, between Lincoln Property Company Commercial, Inc.
                            and the Company.
        10.31*           -- Unimproved Property Commercial Contract, dated November
                            17, 2000, between Dallas Woodcraft, Inc. and S & A
                            Enterprises Inc.
        10.31.1*         -- Amendment to Unimproved Property Commercial Contract,
                            dated March 20, 2001, between Dallas Woodcraft, Inc. and
                            S & A Enterprises Inc.
        10.32*           -- Lease Schedule No. 1000101377, dated May 5, 2000, between
                            the Company and Banc One Leasing Corporation.
        10.33            -- 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).
        10.34*           -- Limited Partnership Agreement, dated July 3, 2000, of
                            Laredo Candle Company, L.P., a Texas limited partnership.
        10.35            -- Purchase and Sale Agreement for 1400 Lavon Street,
                            McKinney, Texas, entered into as of May 15, 2000, between
                            Homco, Inc. and Donald J. Carter, Jr. (incorporated by
                            reference to Exhibit 10.2 of the Company's Quarterly
                            Report on Form 10-Q, No. 333-62021, filed on August 14,
                            2000).
        10.36            -- Assignment and Assumption of Purchase and Sale Agreement
                            dated as of May 12, 2000, between Donald J. Carter, Jr.
                            and 1400 Lavon, L.P. (incorporated by reference to
                            Exhibit 10.3 of the Company's Quarterly Report on Form
                            10-Q, No. 333-62021, filed on August 14, 2000).
        10.37            -- Partnership Interests Purchase Agreement dated as of July
                            3, 2000, by and between Miracle Candle Company and Spring
                            Valley Scents, Inc. (incorporated by reference to Exhibit
                            10.4 of the Company's Quarterly Report on Form 10-Q, No.
                            333-62021, filed on August 14, 2000).
        10.38            -- 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).
</TABLE>

                                        39
<PAGE>   40

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.39            -- 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).
        21.1*            -- Subsidiaries of the Company.
</TABLE>

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

* Filed herewith.

  (b) Reports on Form 8-K; Not applicable.

                                        40
<PAGE>   41

                                   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/ DONALD J. CARTER, JR.
                                              ----------------------------------
                                                    Donald J. Carter, Jr.
                                                  Chairman of the Board and
                                                   Chief Executive Officer

Date: April 4, 2001

     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.

<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE                        DATE
                      ---------                                      -----                        ----
<C>                                                    <S>                                  <C>
              /s/ DONALD J. CARTER, JR.                Chairman of the Board and Chief        April 4, 2001
-----------------------------------------------------    Executive Officer (principal
                Donald J. Carter, Jr.                    executive officer)

               /s/ BARBARA J. HAMMOND                  Director and Vice Chairman             April 4, 2001
-----------------------------------------------------
                 Barbara J. Hammond

           /s/ CHRISTINA L. CARTER URSCHEL             Director and President                 April 4, 2001
-----------------------------------------------------
             Christina L. Carter Urschel

               /s/ KENNETH J. CICHOCKI                 Vice President of Finance and          April 4, 2001
-----------------------------------------------------    Chief Financial Officer
                 Kenneth J. Cichocki                     (principal financial and
                                                         accounting officer)

                 /s/ THOMAS O. HICKS                   Director                               April 4, 2001
-----------------------------------------------------
                   Thomas O. Hicks

                  /s/ JACK D. FURST                    Director                               April 4, 2001
-----------------------------------------------------
                    Jack D. Furst

                /s/ JOSEPH COLONNETTA                  Director                               April 4, 2001
-----------------------------------------------------
                  Joseph Colonnetta

                /s/ SHELDON I. STEIN                   Director                               April 4, 2001
-----------------------------------------------------
                  Sheldon I. Stein

              /s/ GRETCHEN M. WILLIAMS                 Director                               April 4, 2001
-----------------------------------------------------
                Gretchen M. Williams

              /s/ ROBERT H. DEDMAN, JR.                Director                               April 4, 2001
-----------------------------------------------------
                Robert H. Dedman, Jr.
</TABLE>

                                        41
<PAGE>   42

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Report of Independent Accountants...........................   F-2
Consolidated Balance Sheets as of December 31, 1999 and
  2000......................................................   F-3
Consolidated Statements of Operations and Comprehensive
  Income for the years ended December 31, 1998, 1999 and
  2000......................................................   F-4
Consolidated Statements of Shareholders' Equity (Deficit)
  for the years ended December 31, 1998, 1999 and 2000......   F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1999 and 2000..........................   F-6
Notes to Consolidated Financial Statements..................   F-7
Schedule II Valuation and Qualifying Accounts...............  F-28
</TABLE>

                                       F-1
<PAGE>   43

                       REPORT OF INDEPENDENT ACCOUNTANTS

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' equity (deficit) and cash flows present fairly, in all material
respects, the consolidated financial position of Home Interiors & Gifts, Inc.
and Subsidiaries as of December 31, 1999 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, 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 the opinion expressed
above.

                                             /s/ PricewaterhouseCoopers LLP

Dallas, Texas
April 4, 2001

                                       F-2
<PAGE>   44

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1999 AND 2000
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                1999        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
                                      ASSETS

Current assets:
  Cash and cash equivalents.................................  $  32,406   $  41,720
  Accounts receivable, net..................................     13,885       9,608
  Inventories, net..........................................     42,716      27,493
  Deferred income tax benefit...............................      3,922       4,353
  Other current assets......................................      4,736       2,262
                                                              ---------   ---------
          Total current assets..............................     97,665      85,436
Restricted cash.............................................     14,590         900
Property, plant and equipment, net..........................     30,473      60,600
Investments.................................................      1,668          48
Debt issuance costs, net....................................     15,881      13,385
Other assets................................................      1,264       5,029
                                                              ---------   ---------
          Total assets......................................  $ 161,541   $ 165,398
                                                              =========   =========

                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable..........................................  $  20,986      17,693
  Accrued seminars and incentive awards.....................     14,146      15,108
  Royalties payable.........................................      9,771       4,527
  Hostess prepayments.......................................      8,687         790
  Income taxes payable......................................      2,858       1,260
  Current maturities of long-term debt and capital lease
     obligations............................................     27,308      58,503
  Other current liabilities.................................     11,318      14,162
                                                              ---------   ---------
          Total current liabilities.........................     95,074     112,043
Long-term debt and capital lease obligations, net of current
  maturities................................................    428,238     406,830
Other liabilities...........................................      6,443       8,636
                                                              ---------   ---------
          Total liabilities.................................    529,755     527,509
                                                              ---------   ---------
Minority interest...........................................      2,972          --
Commitments and contingencies (see Note 16)
Shareholders' equity (deficit):
  Preferred stock, 10,000 shares authorized.................         --          --
  Common stock, par value $0.10 per share, 75,000,000 shares
     authorized, 15,240,218 shares issued and outstanding...      1,524       1,524
  Additional paid-in capital................................    179,975     179,624
  Accumulated deficit.......................................   (552,726)   (542,939)
  Accumulated other comprehensive income (loss).............         41        (320)
                                                              ---------   ---------
          Total shareholders' deficit.......................   (371,186)   (362,111)
                                                              ---------   ---------
          Total liabilities and shareholders' deficit.......  $ 161,541   $ 165,398
                                                              =========   =========
</TABLE>

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

                                       F-3
<PAGE>   45

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net sales...................................................  $490,223   $503,344   $460,440
Cost of goods sold..........................................   242,343    240,390    223,514
                                                              --------   --------   --------
Gross profit................................................   247,880    262,954    236,926
Selling, general and administrative:
  Selling...................................................    81,124     89,721     81,668
  Freight, warehouse and distribution.......................    44,718     49,860     46,333
  General and administrative................................    20,641     27,270     48,047
  Gains on the sale of assets...............................    (6,375)   (10,650)    (2,738)
  Stock option expense (credit).............................       563        912       (351)
  Homco restructuring.......................................        --         --      1,027
  Redundant warehouse and distribution......................        --         --      6,089
  Recapitalization expenses.................................     6,198         --         --
                                                              --------   --------   --------
          Total selling, general and administrative.........   146,869    157,113    180,075
                                                              --------   --------   --------
Operating income............................................   101,011    105,841     56,851
Other income (expense):
  Interest income...........................................     5,563      2,978      2,208
  Interest expense..........................................   (27,532)   (44,081)   (45,496)
  Other income (expense), net...............................     1,020       (183)     2,116
                                                              --------   --------   --------
          Other income (expense), net.......................   (20,949)   (41,286)   (41,172)
                                                              --------   --------   --------
Income before income taxes..................................    80,062     64,555     15,679
Income taxes................................................    31,807     22,967      5,892
                                                              --------   --------   --------
Net income..................................................    48,255     41,588      9,787
Other comprehensive income (loss), before tax:
  Cumulative translation adjustment.........................      (139)       268       (361)
  Unrealized losses on investments..........................    (1,074)        --         --
                                                              --------   --------   --------
          Other comprehensive income (loss), before tax.....    (1,213)       268       (361)
  Income tax benefit related to items of other comprehensive
     income.................................................       376         --         --
                                                              --------   --------   --------
          Other comprehensive income (loss), net of tax.....      (837)       268       (361)
                                                              --------   --------   --------
Comprehensive income........................................  $ 47,418   $ 41,856   $  9,426
                                                              ========   ========   ========
</TABLE>

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

                                       F-4
<PAGE>   46

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                    (IN THOUSANDS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                              ADDITIONAL
                                        COMMON      COMMON     PAID-IN     ACCUMULATED   TREASURY
                                        SHARES       STOCK     CAPITAL       DEFICIT      STOCK     OTHER     TOTAL
                                      -----------   -------   ----------   -----------   --------   -----   ---------
<S>                                   <C>           <C>       <C>          <C>           <C>        <C>     <C>
Balance, December 31, 1997..........   58,942,500    5,894        1,120       256,121     (73,814)    610     189,931
  Net income........................                                           48,255                          48,255
  Recapitalization adjustments (see
    Note 3):
    Issuance of common stock to
      Hicks Muse....................   10,111,436    1,011      181,546                                       182,557
    Purchase and retirement of
      common stock..................  (45,836,584)  (4,584)      (1,120)     (821,853)                       (827,557)
    Retirement of treasury stock....   (7,985,700)    (798)                   (73,016)     73,814                  --
    Transaction fees and expenses...                             (3,215)                                       (3,215)
  Issuance of common stock..........        2,770       --           50                                            50
  Cumulative translation
    adjustment......................                                                                 (139)       (139)
  Unrealized losses on
    investments.....................                                                                 (698)       (698)
  Stock option expense..............                                563                                           563
  Dividends, $0.075 per share.......                                           (3,821)                         (3,821)
                                      -----------   -------    --------     ---------    --------   -----   ---------
Balance, December 31, 1998..........   15,234,422    1,523      178,944      (594,314)         --    (227)   (414,074)
  Net income........................                                           41,588                          41,588
  Issuance of common stock..........        5,796        1          119                                           120
  Cumulative translation
    adjustment......................                                                                  268         268
  Stock option expense..............                                912                                           912
                                      -----------   -------    --------     ---------    --------   -----   ---------
Balance, December 31, 1999..........   15,240,218    1,524      179,975      (552,726)         --      41    (371,186)
  Net income........................                                            9,787                           9,787
  Cumulative translation
    adjustment......................                                                                 (361)       (361)
  Stock option credit...............                               (351)                                         (351)
                                      -----------   -------    --------     ---------    --------   -----   ---------
Balance, December 31, 2000..........   15,240,218   $1,524     $179,624     $(542,939)   $     --   $(320)  $(362,111)
                                      ===========   =======    ========     =========    ========   =====   =========
</TABLE>

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

                                       F-5
<PAGE>   47

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1998        1999       2000
                                                              ---------   --------   --------
<S>                                                           <C>         <C>        <C>
Cash flows from operating activities:
Net income..................................................  $  48,255   $ 41,588   $  9,787
                                                              ---------   --------   --------
Adjustments to reconcile net income to net cash provided by
  operating activities:
  Depreciation and amortization.............................      3,170      4,032      8,837
  Amortization of debt issuance costs and other.............      1,986      3,251      2,942
  Provision for doubtful accounts...........................        664      1,662      2,801
  Provision for losses on inventories.......................         --      1,342      5,256
  Gains on the sale of assets...............................     (6,375)   (10,650)    (2,738)
  Stock option expense (credit).............................        563        912       (351)
  Realized gains on investments.............................       (203)        --       (345)
  Equity in earnings of an affiliate........................       (159)        (1)       (35)
  Deferred tax expense (benefit)............................        364      1,591     (2,102)
  Minority interest.........................................         --        163         92
  Changes in assets and liabilities:
    Accounts receivable.....................................      1,023     (8,867)     1,465
    Inventories.............................................       (479)   (13,048)     9,965
    Other current assets....................................       (600)    (2,946)     2,474
    Other assets............................................        470        179        (60)
    Accounts payable........................................      4,418      6,948     (3,293)
    Income taxes payable....................................        994     (1,243)    (1,598)
    Other accrued liabilities...............................      5,056      3,160     (5,096)
                                                              ---------   --------   --------
        Total adjustments...................................     10,892    (13,515)    18,214
                                                              ---------   --------   --------
        Net cash provided by operating activities...........     59,147     28,073     28,001
                                                              ---------   --------   --------
Cash flows from investing activities:
  Purchases of investments and other assets.................    (87,482)        --         --
  Proceeds from the sale of investments.....................    155,163         --      2,000
  Deposit on new warehouse and distribution facility........         --       (750)        --
  Purchases of property, plant and equipment................     (8,443)   (12,703)   (34,135)
  Purchase of minority ownership of Laredo Candle...........         --         --     (7,800)
  Payments received on notes receivable.....................      2,045      6,464        211
  Proceeds from the sale of property, plant and equipment...      7,800         --      5,409
  Decrease in restricted cash...............................         --         --     13,690
  Other.....................................................         --        304         --
                                                              ---------   --------   --------
        Net cash (used in) provided by investing
        activities..........................................     69,083     (6,685)   (20,625)
                                                              ---------   --------   --------
Cash flows from financing activities:
  Dividends paid............................................     (9,554)        --         --
  Capital contribution from the minority owner of Laredo
    Candle..................................................        508      2,301        642
  Proceeds from borrowings under Revolving Loan.............         --         --     50,000
  Payments under Revolving Loan.............................         --         --    (20,000)
  Payments under capital lease obligations..................         --         --       (719)
  Proceeds from issuance of common stock....................    182,607        120         --
  Purchase of treasury stock................................   (827,557)        --         --
  Proceeds from issuance of the Notes.......................    200,000         --         --
  Proceeds from borrowings under the Senior Credit
    Facility................................................    300,000         --         --
  Payments under the Senior Credit Facility.................    (13,000)   (32,695)   (27,178)
  Debt issuance costs.......................................    (21,118)        --       (446)
  Recapitalization fees and expenses........................     (3,215)        --         --
                                                              ---------   --------   --------
        Net cash (used in) provided by financing
        activities..........................................   (191,329)   (30,274)     2,299
                                                              ---------   --------   --------
Effect of cumulative translation adjustment.................       (139)       268       (361)
                                                              ---------   --------   --------
Net increase (decrease) in cash and cash equivalents........    (63,238)    (8,618)     9,314
Cash and cash equivalents at beginning of year..............    104,262     41,024     32,406
                                                              ---------   --------   --------
Cash and cash equivalents at end of year....................  $  41,024   $ 32,406   $ 41,720
                                                              =========   ========   ========
Supplemental disclosures:
  Cash payments during the period for:
    Income taxes paid.......................................  $  29,935   $ 24,210   $  9,666
    Interest paid...........................................     22,354     40,692     42,322
  Non-cash investing and financing activities:
    Execution of capital leases for the purchase of
     furniture and equipment................................         --      1,248      7,684
</TABLE>

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

                                       F-6
<PAGE>   48

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BACKGROUND

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

     The Company has been located in Dallas, Texas since its inception in 1957.
Approximately 36% of the dollar volume of products purchased by the Company in
2000 were purchased from, and manufactured by, the Company's subsidiaries. The
Company's subsidiaries sell substantially all of their products to the Company.
The Company expanded its operations internationally in 1995.

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

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

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

     - Laredo Candle Company, L.P. ("Laredo Candle") manufactures candles using
       custom-designed equipment. Laredo Candle is a Texas limited partnership
       formed following the Company's purchase of the remaining 40% ownership
       interest in Laredo Candle Company L.L.P. from the minority interest
       holder in July, 2000.

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

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

2. SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation and Use of Estimates

     The consolidated financial statements include the accounts of the Company.
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 requires 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 maintains cash and cash equivalents at financial institutions in excess
of federally insured limits.

     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

                                       F-7
<PAGE>   49
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separately valued and adjusted to market quarterly. Any resulting gain or loss
is included in other income (expense).

  Inventories

     Inventories are stated at the lower of cost or current market price. Cost
is determined using the first-in, first-out method.

  Property, Plant and Equipment

     Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the declining balance and
straight-line methods over estimated useful lives. Major expenditures for
property, plant and equipment and those which substantially increase useful
lives are capitalized. Direct costs of developing software, including
programming and enhancements, are capitalized and amortized over the estimated
useful lives once the software is placed in service. Software training 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.

  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.

  Sales 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 the
Displayers. Prior to the adoption of SAB 101, revenue was recognized when
products were shipped. Provisions for discounts, returns, and other adjustments
are provided for in the same period the related sales are recorded.

     The adoption of SAB 101 had no impact on the Company's operating results
for the year ended December 31, 2000 as the Company has historically ceased
shipping product to Displayers during the latter part of December. See Note 19
for a summary of the impact of SAB 101 on previously reported quarterly results
of operations for the year ended December 31, 2000.

  Shipping and Handling

     The associated costs incurred with shipping and handling are separately
disclosed as part of operating expenses in the consolidated statement of
operations and comprehensive income.

  Hostess Prepayments

     As a sales incentive, hostesses earn certificates redeemable for
merchandise. The amount of certificates awarded to hostesses varies depending,
among other things, upon the sales of the show, the number of

                                       F-8
<PAGE>   50
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

customers attending the show and whether any promotional program is in effect.
The Company issues these certificates to its Displayers in exchange for cash and
establishes a liability for the amount of certificates issued. These
certificates are later redeemed by Displayers as payment for merchandise. The
Company reduces the liability for these hostess certificates to the extent that
purchased certificates are not expected to be redeemed based on historical
redemption rates and management's estimates and assumptions. This program was
discontinued in March 2000. The remaining liability represents management's
estimate of certificates to be redeemed through their December 31, 2001
expiration date.

  Foreign Currency Translation

     The balance sheet accounts of the Company's foreign operations are
translated into U.S. dollars at the year-end exchange rate. Revenues and
expenses are translated at the weighted average exchange rate for each period.
Translation gains and losses are included in shareholders' deficit.

  New Accounting Pronouncement

     In June 1999, the Financial Accounting Standards Board (the "FASB") voted
to delay the effective date for implementation of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new standard is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this new standard in the
first quarter of fiscal 2001 and management anticipates that, due to the limited
use of derivative instruments, the new standard will not have a significant
impact on its financial statements.

  Reclassifications

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

  Marketable Securities

     In November 2000, the Company sold marketable securities classified as
available for sale. At that time, these securities had a book value of $1.7
million. Cash in the amount of $2.0 million was received in exchange for the
stock resulting in a realized gain of $0.3 million.

  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 notes receivable and 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 $200.0
million as of December 31, 1999 and 2000. The Notes had a fair value of
approximately $170.0 million as of December 31, 1999 and $71.0 million as of
December 31, 2000 based upon quoted market prices. The interest rate swaps had a
combined negative carrying value of $916,000 and a combined fair value of
$260,000 as of December 31, 1999. The interest rate swap had a negative carrying
value and a negative fair market value of $38,000 as of December 31, 2000. The
negative fair value of the swaps reflect the estimated amount that the Company
would have to pay to terminate the swaps.

                                       F-9
<PAGE>   51
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. THE RECAPITALIZATION

     The Company completed a recapitalization (the "Recapitalization") on June
4, 1998 through the following simultaneous transactions:

     - contribution of $182.6 million by Hicks, Muse, Tate & Furst Incorporated
       ("Hicks Muse") in exchange for 10,111,436 shares of the common stock, or
       approximately 66% of all outstanding shares upon completion of the
       Recapitalization;

     - issuance of $200.0 million of senior subordinated notes (the "Notes");

     - borrowing of $300.0 million under a $340.0 million senior credit facility
       (the "Senior Credit Facility"); and,

     - use of the above proceeds, together with available cash of $169.3
       million, to:

      -- redeem 45,836,584 shares of common stock for $827.6 million

      -- pay fees and expenses of $24.3 million associated with the
         Recapitalization consisting of:

        - $11.2 million financial advisory fee paid to Hicks Muse for its role
          in obtaining financing for the Recapitalization;

        - $11.6 million of debt issuance costs paid primarily to the bank
          syndicate group for the Senior Credit Facility and the initial
          purchasers of the Notes; and,

        - $1.5 million of legal and accounting fees

     The Company allocated the Hicks Muse financial advisory fee and the legal
and accounting fees on a proportionate basis to the debt and equity financing
for the Recapitalization. Accordingly, the Company allocated $9.5 million to
debt issuance costs and $3.2 million to additional paid-in capital. The total
debt issuance costs of $21.1 million are being amortized using the effective
interest method over the term of the related indebtedness.

     In addition to the $24.3 million of fees and expenses related to the
Recapitalization, the Company paid additional financial advisory and legal fees
of approximately $6.2 million in connection with the Recapitalization. The
Company paid its financial advisor approximately $5.7 million to assist with the
development of strategic alternatives, identify potential buyers, evaluate
proposals and assist in the negotiation of the Hicks Muse offer. These financial
advisory and legal fees were expensed as incurred and are reflected as
Recapitalization expenses in the accompanying statement of operations and
comprehensive income.

     As a result of the Recapitalization, the issued and outstanding shares of
common stock decreased to 15,231,652 shares as of June 4, 1998, all treasury
stock was retired and Hicks Muse acquired a controlling interest in the Company.

     Hicks Muse 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 "Shareholders Agreement") upon the consummation of the Recapitalization.
The Shareholders Agreement provides that the Company's Board of Directors (the
"Board") shall consist of six Directors designated by Hicks Muse, three
Directors designated by the Carter Shareholders, and two independent Directors
mutually designated. As of December 31, 2000, Hicks Muse is still entitled to
designate one additional Director.

     The Shareholders Agreement provides certain registration rights to Hicks
Muse and the Carter Shareholders. Hicks Muse and the Carter Shareholders may
require the Company to register or include their

                                       F-10
<PAGE>   52
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shares in any future registration of securities. The Carter Shareholders also
have the right to be included, on a proportionate basis, in any proposed sale of
common stock by Hicks Muse if (i) such sale individually represents more than
20% of the shares then held by Hicks Muse or (ii) in the aggregate, such sale
would result in Hicks Muse having sold more than 50% of the shares held by Hicks
Muse immediately subsequent to the Recapitalization.

4. ACQUISITION OF LAREDO CANDLE COMPANY

     In July 2000, the Company purchased the remaining 40% minority interest in
Laredo Candle for cash of $8.7 million. Of the total purchase price, $900,000 is
held in escrow and is subject to offset if certain performance standards are not
satisfied by Laredo Candle during the twelve months ending June 30, 2001. The
Company accounted for the acquisition using the purchase method of accounting.
Goodwill of $4.2 million, representing the excess of cost over the fair value of
net assets acquired, is being amortized over 15 years.

5. ACCOUNTS RECEIVABLE

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

<TABLE>
<CAPTION>
                                                               1999      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Trade receivables...........................................  $14,166   $11,374
Current portion of notes receivable.........................      189        --
Other.......................................................      843       201
                                                              -------   -------
                                                               15,198    11,575
Allowance for doubtful accounts.............................   (1,313)   (1,967)
                                                              -------   -------
                                                              $13,885   $ 9,608
                                                              =======   =======
</TABLE>

6. INVENTORIES

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

<TABLE>
<CAPTION>
                                                               1999      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Raw materials...............................................  $ 7,678   $ 5,697
Work in process.............................................    2,598     1,563
Finished goods..............................................   33,782    25,089
                                                              -------   -------
                                                              $44,058   $32,349
Allowance for raw materials.................................     (593)   (2,002)
Allowance for finished goods................................     (749)   (2,854)
                                                              -------   -------
                                                              $42,716   $27,493
                                                              =======   =======
</TABLE>

                                       F-11
<PAGE>   53
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                       ESTIMATED
                                                      USEFUL LIFE     1999       2000
                                                      -----------   --------   --------
<S>                                                   <C>           <C>        <C>
Land................................................                $  4,290   $  4,104
Buildings and improvements..........................  5-40 years      15,427     35,761
Computer hardware and software......................  5 years          8,024     12,555
Equipment, furniture and fixtures...................  3-10 years      35,650     39,366
                                                                    --------   --------
                                                                      63,391     91,786
Accumulated depreciation and amortization...........                 (34,798)   (35,111)
                                                                    --------   --------
                                                                      28,593     56,675
Equipment, software and hardware implementations in
  process...........................................                     510      2,731
Distribution automation in process..................                   1,370      1,194
                                                                    --------   --------
                                                                    $ 30,473   $ 60,600
                                                                    ========   ========
</TABLE>

     Depreciation expense was $3.0 million, $4.0 million, and $7.9 million for
1998, 1999, and 2000, respectively. Equipment, furniture and fixtures include
assets held under capital lease obligations, with a cost of $8.8 million and
accumulated amortization of $0.7 million as of December 31, 2000. Assets held
under capital lease obligations as of December 31, 1999, were $1.2 million and
no accumulated amortization.

8. INCOME TAXES

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

<TABLE>
<CAPTION>
                                                           1998      1999      2000
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Current:
  Federal...............................................  $29,095   $19,143   $ 7,032
  State.................................................    2,348     2,233       962
                                                          -------   -------   -------
                                                           31,443    21,376     7,994
Deferred, net...........................................      364     1,591    (2,102)
                                                          -------   -------   -------
                                                          $31,807   $22,967   $ 5,892
                                                          =======   =======   =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                            1998      1999      2000
                                                           -------   -------   ------
<S>                                                        <C>       <C>       <C>
Federal statutory rate applied to earnings before income
  taxes..................................................  $28,022   $22,594   $5,337
State income taxes, net of federal benefit...............    1,526     1,783      612
Nondeductible Recapitalization expenses..................    2,169        --       --
Other....................................................       90    (1,410)     (57)
                                                           -------   -------   ------
                                                           $31,807   $22,967   $5,892
                                                           =======   =======   ======
</TABLE>

                                       F-12
<PAGE>   54
                 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):

<TABLE>
<CAPTION>
                                                               1999      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Inventories.................................................  $ 1,012   $ 2,021
Allowance for doubtful accounts.............................      525       703
Debt issuance costs and stock options.......................      958     1,035
Investments.................................................      263       198
Accrued employee benefits and Displayer incentives..........    1,962     2,922
Other.......................................................      423     2,758
                                                              -------   -------
  Gross deferred tax assets.................................    5,143     9,637
Deferred gain on sale of facilities.........................   (4,030)   (5,318)
Property, plant and equipment...............................     (516)     (465)
Investments.................................................     (200)      (18)
Other.......................................................       --    (1,337)
                                                              -------   -------
  Net deferred tax asset....................................      397     2,499
Less current deferred tax asset.............................    3,922     4,353
                                                              -------   -------
  Noncurrent deferred income tax liability..................  $ 3,525   $ 1,854
                                                              =======   =======
</TABLE>

9. CORPORATE HEADQUARTERS FACILITY

     On January 3, 2000, the Company entered into a ten year lease with Granite
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. Additionally, on December 30,
1999, the Company entered into a $1.2 million capital lease obligation for
certain furniture and fixtures to be used in the new corporate headquarters. In
December 2000, the Company moved the corporate headquarters from these
facilities to the new warehouse and distribution facility. The Company subleased
approximately 40,000 square feet of the Company's former leased headquarters to
a subtenant. The Company has hired consultants to assist in subleasing the
remaining unused space to its current subtenant or to another subtenant or to
complete a buyout of the remaining lease obligation by December 31, 2001.

     The Company's rent payments per square foot are fixed for the first five
years and escalate to a fixed amount per square foot for the remaining five
years of the lease term. Approximately $2.0 million of tenant improvements borne
by the landlord are being deferred and amortized over the term of the lease.
These deferred lease incentives reduce annual rent expense by approximately
$200,000 and are included in other liabilities. The Company did not incur any
rent expense under the lease for the new corporate headquarters in 1999.

     In December 2000, the Company moved the corporate headquarters from the
rented facility into Frankford Distribution Center, which is owned by the
Company, as part of the corporate reorganization plan discussed in Note 14.

     In February 2001, the Company and a subtenant signed an agreement to
sublease approximately 55% of the corporate headquarters leased space commencing
on February 2001 through January 2, 2010. The rental rate begins at $67,000 per
month and increases over the life of the lease to $80,000 per month. The Company
has also agreed to provide the subtenant with an allowance for tenant
improvements of $150,000. Included in December 31, 2000 general and
administrative expenses in the consolidated statements of operations and
comprehensive income is $6.4 million primarily related to an accrual for the net
present value of estimated

                                       F-13
<PAGE>   55
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

future abandoned lease commitments, as adjusted for future sublease rental
income, and deferred lease incentives, of $3.8 million, and accelerated
amortization on related leasehold improvements of $2.6 million.

10. OTHER CURRENT LIABILITIES

     Other current liabilities consisted of the following as of December 31,
1999 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                               1999      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Interest payable............................................  $ 2,289   $ 2,300
Accrued compensation........................................    2,803     2,726
Employee benefit plan contributions.........................    1,190     1,030
Sales taxes payable.........................................    2,644     2,354
Other taxes payable.........................................      633     1,427
Other current liabilities...................................    1,759     4,325
                                                              -------   -------
                                                              $11,318   $14,162
                                                              =======   =======
</TABLE>

11. LONG TERM DEBT AND CAPITAL LEASE OBLIGATION

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

<TABLE>
<CAPTION>
                                                                1999       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Notes, interest at 10.125% with semi-annual interest
  payments due on June 1 and December 1.....................  $200,000   $200,000
Tranche A Loan, interest at LIBOR plus an applicable margin
  (7.94% and 8.76% as of December 31, 1999 and 2000)........   158,241     65,844
Tranche A Loan, interest at LIBOR plus an applicable margin
  (8.21% as of December 31, 2000)...........................        --     65,843
Tranche B Loan, interest at LIBOR plus an applicable margin
  (8.33% and 9.14% as of December 31, 1999 and 2000)........    96,064     47,720
Tranche B Loan, interest at LIBOR plus an applicable margin
  (9.33% as of December 31, 2000)...........................        --     47,719
Revolver, interest at Swing Line (9.25% as of December 31,
  2000).....................................................        --     10,000
Revolver, interest at Base Rate (9.75% as of December 31,
  2000).....................................................        --     20,000
Capitalized lease obligation, collateralized by certain
  equipment furniture and fixtures, effective interest at
  6.28%.....................................................     1,241      8,207
                                                              --------   --------
                                                               455,546    465,333
Less current maturities.....................................   (27,308)   (58,503)
                                                              --------   --------
                                                              $428,238   $406,830
                                                              ========   ========
</TABLE>

     In connection with the Recapitalization, the Company issued $200.0 million
of Notes and entered into a $340.0 million Senior Credit Facility, which
includes $40.0 million of revolving loans (the "Revolving Loans"). Prior to the
Recapitalization, the Company had no indebtedness. 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
Company may use the Revolving Loans for letters of credit of up to $15.0
million. Letters of credit of $2.2 million and $1.5 million were outstanding as
of December 31, 1999 and 2000, respectively.

     Borrowings under the Senior Credit Facility require quarterly principal and
interest payments. The Tranche A Loan and Revolving Loans mature on June 30,
2004. The Tranche B Loan matures on June 30,

                                       F-14
<PAGE>   56
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 .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 is 2.0% for the Tranche A Loan and the Revolving Loans
and 2.5% for the Tranche B Loan. The applicable Base Rate Basis margin is 0.75%
for the Tranche A Loan and the Revolving Loans, and 1.25% for the Tranche B
Loan. The interest rates on all borrowings outstanding under the Senior Credit
Facility as of December 31, 1999 and 2000 were based on LIBOR. The
weighted-average interest rate on the Tranche A and Tranche B borrowings
outstanding at December 31, 1999 and 2000 was 8.09% and 8.80%, respectively. The
applicable margin with respect to the loans will be eligible for certain
performance pricing step-downs.

     As of December 31, 2000, $30 million was outstanding under the Revolving
Loans. The Company borrowed $10 million of the revolver under a Swing Line
advance and the remaining $20 million was drawn under a Base Rate advance. The
weighted-average interest rate on the Revolving Loans outstanding at December
31, 2000 was 10.08%. 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, 1999 and 2000. Commitment fees of approximately $200,000 and $173,000 are
included in interest expense in 1999 and 2000, 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. In
addition, prior to June 1, 2001, the Company may, subject to certain
requirements, redeem up to 35% of the aggregate principal amount of the Notes
outstanding at a redemption price equal to 110.125% plus accrued and unpaid
interest.

     The terms of the Notes and Senior Credit Facility include significant
operating and financial restrictions, such as limits on the Company's ability to
incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. In addition, under the
Senior Credit Facility, the Company is required to comply with specified
financial ratios and tests, including minimum interest coverage and maximum
leverage ratios. Subject to the financial ratios and tests, the Company will be
required to make certain mandatory prepayments of the term loans on an annual
basis. The Company prepaid $7.7 million on the term loans as of March 31, 1999.
No prepayments were made in 2000.

     Effective March 30, 2001, the Company entered into an amendment to the
Senior Credit Facility which, among other things: (i) reduced the Revolving
Loans available to the Company from $40 million to $30 million; (ii) increased
pricing by 75 basis points above previous levels; (iii) provided for an
amendment fee of 25 basis points immediately payable to the Lenders who executed
the amendment prior to March 31, 2001; (iv) provided for a fee of $3.0 million
payable to the Lenders, with the payment of such fee deferred until September
30, 2001, and which such fee will be forgiven in the event that certain existing
equity holders or their affiliates contribute $40.0 million in equity to the
Borrower prior to September 30, 2001; (v) reset the leverage and interest
coverage ratios applicable through the fiscal quarter ended December 31, 2001;
and (vi) added additional financial covenants with respect to minimum liquidity
and EBITDA. Further limitations
                                       F-15
<PAGE>   57
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related to capital lease obligations, liens, acquisitions, payment of management
fees to affiliates, letters of credit, loans and advances to suppliers, and
asset sales were also added to the Senior Credit Facility. Additionally, the
amendment to the Senior Credit waived compliance with the minimum interest
coverage and maximum leverage ratios of the Senior Credit Facility for the
quarter ended December 31, 2000. Based on its current projections, management
believes that the Company will be able to meet the revised covenants set forth
in the Senior Credit Facility, as amended, throughout 2001. However, because the
Company's leverage and interest coverage ratios have been reset only through the
fiscal year ended December 31, 2001, the Company anticipates that it will be
required to restructure or refinance its existing indebtedness and/or seek
additional sources of equity or debt capital during 2001 to enable it to
continue to satisfy its obligations under the Senior Credit Facility beyond
2001. There can be no assurance that the Company will be able to successfully
restructure or refinance its existing indebtedness and/or obtain additional
equity or debt financing on terms that are acceptable to it.

     As a result of the new financial covenant to measure liquidity, the Company
has classified $25.0 million of the balance outstanding under the Revolving
Loans as a current liability at December 31, 2000. This represents the amount
that could potentially be required to be repaid pursuant to this covenant in
2001. Any amounts repaid pursuant to this covenant will be available for
borrowing on the following business day so long as no default or event of
default on the Senior Credit Facility has occurred or is continuing.

     The Company's near and long-term operating strategies focus on
strengthening the Displayer base and addressing operational inefficiencies. The
Company has retained financial advisors who are reviewing the financial
alternatives available to the Company, including without limitation a possible
debt restructuring. The Company believes that cash on hand, net cash flow from
operations and borrowings under the Revolving Loans will be sufficient to fund
its cash requirements over the next twelve months, which will consist primarily
of payment of principal and interest on outstanding indebtedness, working
capital requirements and capital expenditures. The Company's future operating
performance and ability to service or refinance its current indebtedness will be
subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.

  Capital Leases

     In December 1999, the Company entered into capital leases with Bank One
Leasing for certain equipment associated with the automated order fulfillment
system located at 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 approximately 6.1% per annum. Total
estimated cost of the equipment is approximately $6.2 million. The Company also
leases certain office furniture and equipment under capital lease obligations.

                                       F-16
<PAGE>   58
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments for the Company's assets held under capital lease
obligations as of December 31, 2000 are as follows (in thousands):

           Years ending December 31:

<TABLE>
<S>                                                          <C>
2001.......................................................  $ 1,801
2002.......................................................    1,801
2003.......................................................    1,592
2004.......................................................    1,366
2005.......................................................    1,356
Thereafter.................................................    1,935
                                                             -------
Total minimum lease obligations............................  $ 9,851
Less: amounts representing interest........................   (1,644)
                                                             -------
Present value of minimum lease obligations.................  $ 8,207
Less current maturities....................................   (1,324)
                                                             -------
Long-term capital lease obligations at December 31, 2000...  $ 6,883
                                                             =======
</TABLE>

     The following table represents a summary of the current maturities of
long-term debt and capital leases as of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                             TOTAL
                                                            --------
<S>                                                         <C>
2001......................................................  $ 58,503
2002......................................................    38,589
2003......................................................    43,469
2004......................................................    50,786
2005......................................................    47,825
Thereafter................................................   226,161
                                                            --------
                                                            $465,333
                                                            ========
</TABLE>

  Interest Rate Swap Agreements

     In May 2000, the Company terminated the swap portion of a $75.0 million
interest rate swap that expires in December 2001 and received approximately $1.0
million, which resulted in a deferred gain of approximately $722,000 on the
transaction. The gain has been recorded as a current liability and will be
amortized over the remaining term of the swap as an adjustment to interest
expense. The option portion of this instrument is still outstanding and had a
fair market value of $38,000 at December 31, 2000 and is included in current
liabilities.

     In addition, during the first six months of 2000, three other interest rate
swap agreements expired and the bank that was a party to such agreements did not
exercise its option to renew the agreements. There were no significant gains or
losses recorded on the expiration of these three agreements.

                                       F-17
<PAGE>   59
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. OTHER LIABILITIES

     Other long-term liabilities consisted of the following as of December 31,
1999 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                               1999     2000
                                                              ------   ------
<S>                                                           <C>      <C>
Deferred income tax liability...............................  $3,525   $1,854
Interest rate swap derivatives..............................     916       --
Deferred lease incentives...................................   2,002       --
Abandoned lease commitments net.............................      --    4,434
Other long-term liabilities.................................      --    2,348
                                                              ------   ------
                                                              $6,443   $8,636
                                                              ======   ======
</TABLE>

13. BENEFIT PLANS

  Employee Benefit Plans

     In 1993, the Company established an Employee Stock Ownership Plan (the
"ESOP") for all full-time employees who had at least one year of service and
were age 18 or older. Historically, the Company made annual contributions to the
ESOP at the discretion of the Board.

     In connection with the Recapitalization, the ESOP was converted into a
401(k) plan and the shares of common stock previously held by the ESOP were
redeemed for cash. The 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%. Company matching contributions totaled $1 million and
$752,000 in 1999 and 2000, respectively. Additionally, the Board may make
discretionary contributions to the 401(k) plan at any time. The Board approved
discretionary contributions of $1.2 million and $1 million to the 401(k) for
1999 and 2000.

  Stock-Based Compensation Plans

     In connection with the Recapitalization, the Company adopted stock option
plans for key employees (the "Key Employee Stock Option Plan") and for
Displayers and other independent contractors (the "Independent Contractor Stock
Option Plan"). A trust (the "Stock Option Trust") holds and distributes stock
options granted under the Independent Contractor Stock Option Plan.

     Options under both plans are issued at an exercise price equal to the
estimated fair market value of common stock on the date of grant. The option
exercise period is specified when the option is granted, not to exceed 10 years.

     Options granted under both plans vest ratably over five years and have a 10
year term; however, if an initial public offering occurs, vesting is accelerated
for options issued under the Independent Contractor Stock Option Plan. All
options issued in 1998 under both plans have an exercise price of $18.05, the
price per share paid in connection with the Recapitalization. There were no
expired or exercisable options under either plan as of December 31, 1998. All
options issued in 1999 under both plans have an exercise price of $21.33.
Options issued in 2000 for the Key Employee Stock Option Plan and the
Independent Contractor Stock Option Plan were issued with an exercise price of
$18.05 and $21.26, respectively.

  Key Employee Stock Option Plan

     Options for a total of 1,353,924 shares of common stock are available for
grant under the Key Employee Stock Option Plan. As common stock is not publicly
traded, the fair value of options granted to key employees was estimated on the
date of grant using the Minimum Value method of option pricing and the
assumptions

                                       F-18
<PAGE>   60
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

set forth below in order to determine compensation expense for disclosure
purposes only in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company accounts for options issued under the
Key Employee Stock Option Plan in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25").

  Independent Contractor Stock Option Plan

     Options for a total of 338,481 shares are available for grant to the Stock
Option Trust for the benefit of certain Displayers and other independent
contractors under the Independent Contractor Stock Option Plan. The fair value
of each stock option grant is estimated on the date of the grant using the
Black-Scholes method of option pricing based on the assumptions set forth below
in order to determine compensation expense for the period. As common stock is
not publicly traded, a volatility factor for a peer group of public companies is
utilized in the Black-Scholes model. The Company accounts for options issued
under the Independent Contractor Stock Option Plan in accordance with SFAS 123.
Compensation expense (credit) totaled $563,000, $912,000, and ($351,000) for
1998, 1999 and 2000.

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

<TABLE>
<CAPTION>
                                                                  WEIGHTED   INDEPENDENT   WEIGHTED
                                                   KEY EMPLOYEE   AVERAGE    CONTRACTOR    AVERAGE
                                                   STOCK OPTION   EXERCISE      STOCK      EXERCISE
                                                       PLAN        PRICE     OPTION PLAN    PRICE
                                                   ------------   --------   -----------   --------
<S>                                                <C>            <C>        <C>           <C>
Options outstanding as of December 31, 1997......          --          --            --         --
  Granted........................................     984,432      $18.05       275,338     $18.05
  Exercised......................................          --          --            --         --
  Forfeited......................................          --          --        (3,047)    $18.05
                                                    ---------                ----------
Options outstanding as of December 31, 1998......     984,432      $18.05       272,291     $18.05
  Granted........................................      42,192      $21.33        22,230     $21.33
  Exercised......................................      (1,108)     $18.05            --         --
  Forfeited......................................     (14,404)     $18.05        (7,202)    $18.05
                                                    ---------                ----------
Options outstanding as of December 31, 1999......   1,011,112      $18.19       287,319     $18.17
  Granted........................................      76,391      $18.05        30,554     $21.26
  Exercised......................................          --          --            --         --
  Forfeited......................................    (103,556)     $18.34        (4,771)    $18.63
  Expired........................................          --          --        (1,705)    $18.14
                                                    ---------                ----------
Options outstanding as of December 31, 2000......     983,947      $18.16       311,397     $18.47
                                                    =========                ==========
Options exercisable as of December 31, 2000......     356,459      $18.08       105,109     $18.17
Weighted average remaining contractual life......   6.9 years                 6.8 years
Valuation assumptions:
  Expected term..................................   6.0 years                 6.0 years
  Expected dividend yield........................        0.00%                     0.00%
  Expected volatility............................          --                     43.87%
  Risk-free interest rate........................        6.41%                     5.77%
</TABLE>

     The weighted average fair value of options granted in 1998, 1999, and 2000
under the Key Employee Stock Option Plan and Independent Stock Option Plan was
$5.04, $5.97 and $4.66, and $7.92, $9.92 and $9.27, respectively.

                                       F-19
<PAGE>   61
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Compensation Charge

     SFAS 123 establishes a fair value basis of accounting for stock-based
compensation plans. The effects of applying SFAS 123 as shown below are not
indicative of future amounts. Had the compensation cost for the Company's Key
Employee Stock Option Plan been determined consistent with SFAS 123, the
Company's compensation cost and net income for 1998, 1999, and 2000 would
approximate (in thousands):

<TABLE>
<CAPTION>
                                                            KEY EMPLOYEE STOCK OPTION PLAN
                                                           --------------------------------
                                                             1998        1999        2000
                                                           ---------   ---------   --------
<S>                                                        <C>         <C>         <C>
SFAS 123 Compensation Cost:
  As reported............................................        --          --         --
  Pro forma..............................................   $   517     $   998     $  815
Net Income:
  As reported............................................   $48,255     $41,588     $9,787
  Pro forma..............................................   $47,919     $40,939     $9,257
</TABLE>

14. RESTRUCTURING, REDUNDANCY AND REORGANIZATION

  Homco Restructuring

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

     On May 15, 2000, the Company sold Homco's manufacturing and warehouse
facility to Donald J. Carter, Jr., the Company's Chairman of the Board and Chief
Executive Officer, for approximately $3.7 million. The Company used the proceeds
from the sale, together with approximately $1.7 million in proceeds from the
sale of another property, to purchase an undivided interest in the Company's new
warehouse and distribution facility. This exchange qualified as a Section 1031
like-kind exchange under the Internal Revenue Code.

  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 has 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 have 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 manual operations was moved into the consolidated distribution
facility. The Company has extended the lease term on the other manual
distribution facility for a period of five years, which was the minimum term
permitted by the landlord. Annual rentals on this facility are approximately
$250,000. The Company intends to sublease that facility once the automated order
fulfillment system and consolidated distribution facility are fully operational.
The inability to sublease the manual distribution facility for an amount equal
to or in excess of the remaining rents may result in a non-recurring charge.

                                       F-20
<PAGE>   62
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Redundant warehouse and distribution costs resulting from the issues
discussed above were approximately $6.1 million for the year ended December 31,
2000. 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.

  Reorganization Cost

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

     Included in general and administrative expenses in the December 31, 2000
consolidated statements of operations and comprehensive income are the following
amounts associated with the Company's reorganization plan:

<TABLE>
<S>                                                           <C>
Staff reductions, excess facilities cost and other..........  $1,723
Lease abandonment costs and accelerated amortization of
  leasehold improvements....................................   6,474
                                                              ------
                                                              $8,197
                                                              ======
</TABLE>

15. RELATED PARTY TRANSACTIONS

     A majority of the Company's inventory purchases are from suppliers whose
primary customer is the Company.

     A shareholder and former Director of the Company is a partner of a law firm
that renders various legal services for the Company. The Company paid the firm
approximately $798,000, $385,000 and $236,000 for legal services during 1998,
1999 and 2000. Approximately $398,000 of the fees paid in 1998 were incurred in
connection with the Recapitalization and accordingly are reflected in
Recapitalization expenses in the accompanying statements of operations. Amounts
due to the law firm totaled $25,000, and $27,000 as of December 31, 1999, and
2000.

     Another shareholder and former Director of the Company owns a company which
supplies inventory items to the Company and whose primary customer is the
Company. The Company paid the supplier approximately $37.0 million, $30.9
million, and $13.2 million during 1998, 1999 and 2000. Amounts due to this
supplier totaled approximately $4.2 million and $1.1 million as of December 31,
1999 and 2000.

     The Company owned 21% of the common stock of Charles W. Weaver
Manufacturing Company, a supplier whose primary customer is the Company. The
investment was sold on November 30, 2000 for $2.0 million resulting in a gain of
$0.3 million. The Company paid the supplier approximately $11.4 million, $10.7
million and $12.4 million during 1998, 1999 and 2000. There were no amounts due
this supplier as of December 31, 2000.

     The Company leased improved real estate from its former chief executive
officer for $52,000 per year plus expenses during the three-month period ended
March 31, 1998. In April 1998, the Company exchanged such real estate, which was
valued at approximately $1.9 million, for two airplane hangers and cash of
approximately $340,000. The real estate was recorded by the Company at an amount
equal to the sum of the net book value of the two airplane hangars exchanged of
$858,000 and the cash paid.

                                       F-21
<PAGE>   63
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 1998, 1999, and 2000 the Company paid a related party approximately
$24,000, $19,000 and $18,900 for rental of a condominium.

     The Company engages the services of a freight company controlled by former
Directors of the Company to handle a small portion of its freight. The Company
paid this freight company $87,000, $108,000 and $110,000 during 1998, 1999 and
2000 for its services. The amounts due to this freight company was $13,000 as of
December 31, 1999. There were no amounts due this supplier as of December 31,
2000.

     In conjunction with the Recapitalization, the Company entered into an
agreement requiring payment of a quarterly management fee to Hicks Muse. 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 totaled $574,000,
$1.2 million and $1.1 million during 1998, 1999, and 2000, respectively. In
addition, if the Board requests Hicks Muse to perform additional financial
advisory services in the future, Hicks Muse will receive a financial advisory
fee. As a result of the amendment to the Senior Credit Facility dated March 30,
2001, these fees for monitoring and oversight may be accrued but not paid until
a future date to be determined. The management agreement with Hicks Muse
terminates on June 4, 2008 or earlier under certain circumstances.

     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, can be
voluntarily terminated only by the employee. In 1998, 1999, and 2000 the Company
paid the former chief executive officer approximately $127,000, $201,000 and
$200,000 pursuant to the terms and conditions of his executive employment
agreement.

     In December 1998, the Company's former chief executive officer provided a
bridge loan of $2.8 million to the minority owner of Laredo Candle at the prime
rate plus 1.0% per annum. The loan was repaid in 1999. The Company also
purchased inventory from the minority owner of Laredo Candle. The Company paid
the minority owner $34.0 million and $12.7 million in 1999 and 2000. As of
December 31, 1999, $9,000 was due to the minority owner; no amounts were due as
of December 31, 2000.

     During 2000, Board fees were paid to certain outside Directors which
totaled $33,000.

16. COMMITMENTS AND CONTINGENCIES

     The Company is engaged in various legal proceedings incidental to its
normal business activities. Because most of the claims are covered by insurance,
management believes that the amounts, if any, which ultimately may be due in
connection with such lawsuits and claims would not have a material effect upon
the Company.

17. SEGMENT REPORTING

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

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

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

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

     The Company evaluates the performance of its segments and allocates
resources to them based on earnings before interest, taxes, depreciation and
amortization, recapitalization expenses, reorganization costs, redundant
warehouse and distribution expenses, Homco restructuring, non-cash (expenses)
credit for stock

                                       F-22
<PAGE>   64
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options and gains on sale of assets ("EBITDA"). The accounting principles of the
segments are the same as those described in Note 2. Segment data includes
intersegment sales. Eliminations consist primarily of intersegment sales between
Manufacturing and HI, as well as the elimination of the investment in each
subsidiary for consolidated purposes. The table below presents information about
reportable segments used by the chief operation decision-maker of the Company as
of and for the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
                                      HI      MANUFACTURING   INTERNATIONAL   ELIMINATIONS   CONSOLIDATED
                                   --------   -------------   -------------   ------------   ------------
<S>                                <C>        <C>             <C>             <C>            <C>
1998
Net sales........................  $486,434      $86,661         $ 6,406        $(89,278)      $490,223
EBITDA...........................    84,392       20,380            (296)             91        104,567
Total assets.....................   115,310       26,906            (608)         (9,160)       132,448
Capital expenditures.............     4,872        3,521              50              --          8,443
1999
Net sales........................  $499,515      $88,083         $ 9,098        $(93,352)      $503,344
EBITDA...........................    83,426       17,993            (338)           (946)       100,135
Total assets.....................   145,222       42,577             825         (27,083)       161,541
Capital expenditures.............     5,449        7,101             245             (92)        12,703
2000
Net sales........................  $452,792      $87,596         $15,148        $(95,096)      $460,440
EBITDA...........................    56,461       17,670             695             433         75,259
Total assets.....................   144,815       62,324             700         (42,441)       165,398
Capital expenditures.............    28,501        5,512             122              --         34,135
</TABLE>

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

<TABLE>
<CAPTION>
                                                          1998       1999      2000
                                                        --------   --------   -------
<S>                                                     <C>        <C>        <C>
EBITDA................................................  $104,567   $100,135   $75,259
Depreciation and amortization.........................    (3,170)    (4,032)   (8,837)
Gains on the sale of assets...........................     6,375     10,650     2,738
Stock option (expenses) credit........................      (563)      (912)      351
Homco Restructuring...................................        --         --    (1,027)
Redundant warehouse & distribution....................        --         --    (6,089)
Reorganization costs..................................        --         --    (5,544)
Recapitalization expenses.............................    (6,198)        --        --
Interest income.......................................     5,563      2,978     2,208
Interest expense......................................   (27,532)   (44,081)  (45,496)
Other income (expense), net...........................     1,020       (183)    2,116
                                                        --------   --------   -------
Income before income taxes............................  $ 80,062   $ 64,555   $15,679
                                                        ========   ========   =======
</TABLE>

                                       F-23
<PAGE>   65
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. GUARANTOR FINANCIAL DATA

     DWC, GIA, Homco, SVS, Laredo Candle and Homco PR (collectively, the
"Guarantors") unconditionally, on a joint and several basis, guarantee the
Notes. During 1999, Laredo Candle was not a guarantor, Laredo Candle became a
guarantor in connection with the purchase of the 40% ownership of Laredo from
the minority owner in July 3, 2000. The Company's other subsidiary, Home
Interiors de Mexico (the "Non-Guarantors") has not guaranteed the Notes.
Guarantor and Non-Guarantor financial statements on an individual basis are not
significant and have been omitted. Accordingly, the following presents financial
information of the Guarantors and Non-Guarantors on a consolidating basis (in
thousands):

                     CONSOLIDATING STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net sales.........................  $499,515    $84,590        $12,591         $(93,352)      $503,344
Cost of good sold.................   259,266     63,950          8,891          (91,717)       240,390
                                    --------    -------        -------         --------       --------
  Gross profit....................   240,249     20,640          3,700           (1,635)       262,954
                                    --------    -------        -------         --------       --------
Total selling, general and
  administrative..................   149,124      4,771          3,964             (746)       157,113
                                    --------    -------        -------         --------       --------
  Operating income (loss).........    91,125     15,869           (264)            (889)       105,841
Other income (expense), net.......   (41,821)     1,107            (29)            (543)       (41,286)
                                    --------    -------        -------         --------       --------
  Income (loss) before income
     taxes........................    49,304     16,976           (293)          (1,432)        64,555
Income taxes......................    16,313      6,654             --               --         22,967
                                    --------    -------        -------         --------       --------
  Net income (loss)...............  $ 32,991    $10,322        $  (293)        $ (1,432)      $ 41,588
                                    ========    =======        =======         ========       ========
</TABLE>

                     CONSOLIDATING STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
Net sales.........................  $452,792    $88,793        $13,951         $(95,096)      $460,440
Cost of good sold.................   241,475     68,119          7,148          (93,228)       223,514
                                    --------    -------        -------         --------       --------
  Gross profit....................   211,317     20,674          6,803           (1,868)       236,926
                                    --------    -------        -------         --------       --------
Total selling, general and
  administrative..................   173,427      2,633          6,399           (2,384)       180,075
                                    --------    -------        -------         --------       --------
  Operating income................    37,890     18,041            404              516         56,851
Other income (expense), net.......   (42,337)     1,512            (66)            (281)       (41,172)
                                    --------    -------        -------         --------       --------
  Income (loss) before income
     taxes........................    (4,447)    19,553            338              235         15,679
Income taxes......................      (564)     6,456             --               --          5,892
                                    --------    -------        -------         --------       --------
  Net income (loss)...............  $ (3,883)   $13,097        $   338         $    235       $  9,787
                                    ========    =======        =======         ========       ========
</TABLE>

                                       F-24
<PAGE>   66
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                          CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                      HI       GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   --------------   ------------   ------------
<S>                                <C>         <C>          <C>              <C>            <C>
                                                 ASSETS

Current assets:
  Cash and cash equivalents......  $  31,687    $   150        $   151         $    418      $  32,406
  Accounts receivable, net.......     13,372        182            331               --         13,885
  Inventories, net...............     33,778      8,797          2,479           (2,338)        42,716
  Other current assets...........      7,678        824            156               --          8,658
  Intercompany...................    (11,850)    14,867         (1,204)          (1,813)            --
                                   ---------    -------        -------         --------      ---------
          Total current assets...     74,665     24,820          1,913           (3,733)        97,665
Property, plant and equipment,
  net............................     15,525      7,543          7,497              (92)        30,473
Restricted cash..................     14,590         --             --               --         14,590
Investment in subsidiaries.......     22,038         --             --          (22,038)            --
Debt issuance costs and other
  assets.........................     19,003      1,031             --           (1,221)        18,813
                                   ---------    -------        -------         --------      ---------
          Total assets...........  $ 145,821    $33,394        $ 9,410         $(27,084)     $ 161,541
                                   =========    =======        =======         ========      =========

                             LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable...............  $  19,528    $ 1,148        $ 1,797         $ (1,487)     $  20,986
  Current maturities of long-term
     debt and capital lease
     obligations.................     27,308         --             --               --         27,308
  Other current liabilities......     43,236      3,187            357               --         46,780
                                   ---------    -------        -------         --------      ---------
          Total current
            liabilities..........     90,072      4,335          2,154           (1,487)        95,074
Long-term debt and capital lease
  obligations, net of current
  maturities.....................    428,238         --             --               --        428,238
Other liabilities................      7,265        399             --           (1,221)         6,443
                                   ---------    -------        -------         --------      ---------
          Total liabilities......    525,575      4,734          2,154           (2,708)       529,755
Minority interest................         --         --          2,809              163          2,972
Commitments and contingencies
  (Note 16)
Shareholders' equity (deficit):
  Common stock...................      1,524      1,011              8           (1,019)         1,524
  Additional paid-in capital.....    179,976     10,292          5,458          (15,751)       179,975
  Retained earnings (accumulated
     deficit)....................   (561,254)    17,357         (1,060)          (7,769)      (552,726)
  Other..........................         --         --             41               --             41
                                   ---------    -------        -------         --------      ---------
          Total shareholders'
            equity (deficit).....   (379,754)    28,660          4,447          (24,539)      (371,186)
                                   ---------    -------        -------         --------      ---------
          Total liabilities and
            shareholders' equity
            (deficit)............  $ 145,821    $33,394        $ 9,410         $(27,084)     $ 161,541
                                   =========    =======        =======         ========      =========
</TABLE>

                                       F-25
<PAGE>   67
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                          CONSOLIDATING BALANCE SHEET
                            AS OF DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                       HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                    --------   ----------   --------------   ------------   ------------
<S>                                 <C>        <C>          <C>              <C>            <C>
                                                 ASSETS

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

                             LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

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

                                       F-26
<PAGE>   68
                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                      CONSOLIDATING CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                        {FOR THE YEAR ENDED DECEMBER 31, 1999
                                         --------------------------------------------------------------------
                                            HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                         --------   ----------   --------------   ------------   ------------
<S>                                      <C>        <C>          <C>              <C>            <C>
Net cash provided by operating
  activities...........................  $ 41,281    $ 1,684        $  (138)        $(14,754)      $ 28,073
Net cash used in investing
  activities...........................   (17,284)    (1,974)        (2,436)          15,009         (6,685)
Net cash used in financing
  activities...........................   (32,738)        --          2,301              163        (30,274)
</TABLE>

<TABLE>
<CAPTION>
                                                         {FOR THE YEAR ENDED DECEMBER 31, 2000
                                          -------------------------------------------------------------------
                                            HI      GUARANTORS   NON GUARANTORS   ELIMINATIONS   CONSOLIDATED
                                          -------   ----------   --------------   ------------   ------------
<S>                                       <C>       <C>          <C>              <C>            <C>
Net cash provided by operating
  activities............................  $17,478    $ 10,563        $ 378           $(418)        $ 28,001
Net cash used in investing activities...   (9,999)    (10,504)        (122)             --          (20,625)
Net cash provided by financing
  activities............................    1,657         642           --              --            2,299
</TABLE>

19. QUARTERLY RESULTS REVISED FOR SAB 101 (UNAUDITED)

     SAB 101 was not in effect until the year 2000. The following table presents
quarterly results (in thousands) during 1999.

<TABLE>
<CAPTION>
                                      MARCH 31,   JUNE 30,   SEPTEMBER 30,   DECEMBER 31,
                                        1999        1999         1999            1999        TOTAL
                                      ---------   --------   -------------   ------------   --------
<S>                                   <C>         <C>        <C>             <C>            <C>
Net sales...........................  $116,748    $126,234     $112,075        $148,287     $503,344
Gross profit........................    60,036      65,955       56,867          80,096      262,954
Operating income....................    20,489      26,147       18,080          41,125      105,841
Net income (loss)...................     5,942       9,018        7,048          19,580       41,588
</TABLE>

     The following table summarizes (in thousands) the effect of SAB 101 on the
quarters ended:
<TABLE>
<CAPTION>
                              MARCH 31, 2000         JUNE 20, 2000        SEPTEMBER 20, 2000     DECEMBER 31, 2000       TOTAL
                           --------------------   --------------------   --------------------   --------------------   ----------
                                        REVISED                REVISED                REVISED                REVISED
                           PREVIOUSLY   FOR SAB   PREVIOUSLY   FOR SAB   PREVIOUSLY   FOR SAB   PREVIOUSLY   FOR SAB   PREVIOUSLY
                            REPORTED      101      REPORTED      101      REPORTED      101      REPORTED      101      REPORTED
                           ----------   -------   ----------   -------   ----------   -------   ----------   -------   ----------
<S>                        <C>          <C>       <C>          <C>       <C>          <C>       <C>          <C>       <C>
Net sales................   121,121     112,090    104,932     107,008     96,970     94,975     137,417     146,367    460,440
Gross profit.............    60,477      55,957     55,936      57,231     53,298     51,927      67,215      71,811    236,926
Operating income.........    15,950      12,578     19,359      20,391     16,315     15,195       5,227       8,687     56,851
Net income (loss)........     3,005         897      6,326       6,971      2,591      1,891      (2,135)         28      9,787

<CAPTION>
                            TOTAL
                           -------
                           REVISED
                           FOR SAB
                             101
                           -------
<S>                        <C>
Net sales................  460,440
Gross profit.............  236,926
Operating income.........   56,851
Net income (loss)........    9,787
</TABLE>

                                       F-27
<PAGE>   69

                 HOME INTERIORS & GIFTS, INC. AND SUBSIDIARIES

                 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
           COLUMN A                COLUMN B           COLUMN C ADDITIONS            COLUMN D        COLUMN E
           --------              ------------   -------------------------------   -------------   -------------
                                  BALANCE AT    CHARGED TO
                                 BEGINNING OF    COSTS AND       CHARGED TO                        BALANCE AT
                                    PERIOD      EXPENSES(1)   OTHER ACCOUNTS(2)   DEDUCTIONS(3)   END OF PERIOD
                                 ------------   -----------   -----------------   -------------   -------------
<S>                              <C>            <C>           <C>                 <C>             <C>
Allowance for Doubtful
  Accounts:
  Year ended December 31, 1998        239            664             289               (844)            348
  Year ended December 31, 1999        348          1,662             108               (805)          1,313
  Year ended December 31, 2000      1,313          2,801              93             (2,240)          1,967
</TABLE>

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

(1) Represents provision for losses on accounts receivable.

(2) Represents collection of accounts previously written off.

(3) Represents write-off of uncollectible accounts receivable.

<TABLE>
<CAPTION>
           COLUMN A                COLUMN B           COLUMN C ADDITIONS            COLUMN D        COLUMN E
           --------              ------------   -------------------------------   -------------   -------------
                                  BALANCE AT    CHARGED TO
                                 BEGINNING OF    COSTS AND       CHARGED TO                        BALANCE AT
                                    PERIOD      EXPENSES(1)    OTHER ACCOUNTS     DEDUCTIONS(1)   END OF PERIOD
                                 ------------   -----------   -----------------   -------------   -------------
<S>                              <C>            <C>           <C>                 <C>             <C>
Allowance for Inventory Losses:
  Year ended December 31, 1998      1,561             --              --             (1,561)             --
  Year ended December 31, 1999         --          1,342              --                 --           1,342
  Year ended December 31, 2000      1,342          5,256              --             (1,742)          4,856
</TABLE>

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

(1) Represents net increase (decrease) for allowance for inventory losses..

                                       F-28
<PAGE>   70

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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, filed on November 30, 1998).
         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, filed on November
                            30, 1998).
         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, filed on November
                            30, 1998).
         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, filed on November 30, 1998).
         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, filed on November 30, 1998).
         4.2             -- Purchase Agreement, dated as of May 28, 1998, among the
                            Company, as issuer, the Guarantors named therein and
                            Bear, Stearns & Co., Inc., Chase Securities, Inc., Morgan
                            Stanley Dean Witter and NationsBanc Montgomery Securities
                            LLC, as initial purchasers (incorporated by reference to
                            Exhibit 4.2 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
         4.3             -- Exchange and Registration Rights Agreement, dated as of
                            June 4, 1998, among the Company, the Guarantors named
                            therein and Bear, Stearns & Co., Inc., Chase Securities,
                            Inc., Morgan Stanley Dean Witter and NationsBanc
                            Montgomery Securities LLC. (incorporated by reference to
                            Exhibit 4.3 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
         4.4             -- 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).
        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, filed on November 30, 1998).
        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).
</TABLE>
<PAGE>   71

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        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.
        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, filed on November 30, 1998).
        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.
        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, filed on November 30, 1998).
        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.
        10.4             -- Consulting Agreement, dated June 4, 1998, between Company
                            and Ronald L. Carter (incorporated by reference to
                            Exhibit 10.4 of the Company's Registration Statement on
                            Form S-4, No. 333-62021, filed on November 30, 1998).
</TABLE>
<PAGE>   72

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.5             -- 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).
        10.6             -- 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, filed on November
                            30, 1998).
        10.7             -- Executive Employment Agreement, dated June 4, 1998,
                            between the Company and Donald J. Carter Jr.
                            (incorporated by reference to Exhibit 10.7 of the
                            Company's Registration Statement on Form S-4, No.
                            333-62021, filed on November 30, 1998).
        10.8             -- Executive Employment Agreement, dated June 4, 1998,
                            between the Company and Barbara J. Hammond (incorporated
                            by reference to Exhibit 10.8 of the Company's
                            Registration Statement on Form S-4, No. 333-62021, filed
                            on November 30, 1998).
        10.9             -- 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, filed on November 30, 1998).
        10.10            -- 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, filed on November 30, 1998).
        10.11            -- 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, filed on November 30, 1998).
        10.12            -- 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, filed on November 30, 1998).
        10.13            -- 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, filed
                            on November 30, 1998).
        10.14            -- 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, filed on November
                            30, 1998).
        10.15            -- Agreement of Partnership of Laredo Candle Company, dated
                            as of December 14, 1998, between the Company and Miracle
                            Candle Company (incorporated by reference to Exhibit
                            10.15 of the Company's Annual Report on Form 10-K, No.
                            333-62021, filed March 16, 1999).
        10.15.1          -- First Amendment to Agreement of Partnership of Laredo
                            Candle Company, dated as of February 1, 1999, between the
                            Company and Miracle Candle Company (incorporated by
                            reference to Exhibit 10.15.1 of the Company's Annual
                            Report on Form 10-K, No. 333-62021, filed March 16,
                            1999).
</TABLE>
<PAGE>   73

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.16            -- 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).
        10.16.1*         -- First Amendment to Consulting Services Agreement dated
                            September 2000, between the Company and Tompkins
                            Associates Incorporated.
        10.17            -- Real Estate Purchase Contract dated July 19, 1999,
                            between the Company and Parker Equities, Inc.
                            (incorporated by reference to Exhibit 10.2 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on August 13, 1999).
        10.17.1          -- First Amendment to Real Estate Purchase Contract dated
                            July 19, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.3 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on August 13, 1999).
        10.17.2          -- Second Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.1 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.17.3          -- Third Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.2 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.17.4          -- Fourth Amendment to Real Estate Purchase Contract dated
                            August 18, 1999, between the Company and Parker Equities,
                            Inc. (incorporated by reference to Exhibit 10.3 of the
                            Company's Quarterly Report on Form 10-Q, No. 333-62021,
                            filed on November 8, 1999).
        10.18            -- Purchase and Sale Agreement dated July 19, 1999, between
                            Argent Frankford, L.P. and the Company (incorporated by
                            reference to Exhibit 10.4 of the Company's Quarterly
                            Report on Form 10-Q, No. 333-62021, filed on August 13,
                            1999).
        10.18.1          -- First Amendment to Purchase and Sale Agreement dated July
                            23, 1999, between Argent Frankford, L.P. 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 13, 1999).
        10.18.2          -- Second Amendment to Purchase and Sale Agreement dated
                            October 20, 1999, between Argent Frankford, L.P. and the
                            Company (incorporated by reference to Exhibit 10.18.2 of
                            the Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
        10.18.3          -- Third Amendment to Purchase and Sale Agreement dated
                            February 9, 2000, between Argent Frankford, L.P. and the
                            Company (incorporated by reference to Exhibit 10.18.3 of
                            the Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
        10.19            -- Employment Agreement dated November 1, 1999, between the
                            Company and Parker Equities, Inc. (incorporated by
                            reference to Exhibit 10.4 of the Company's Quarterly
                            Report on Form 10-Q of the Company, No. 333-62021, filed
                            on November 8, 1999).
        10.20            -- Professional Services Agreement dated December 1, 1999,
                            between EXE Technologies, Inc. and the Company
                            (incorporated by reference to Exhibit 10.20 of the
                            Company's Annual Report on Form 10-K, No. 333-62021,
                            filed March 14, 2000).
</TABLE>
<PAGE>   74

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.21            -- Master Software License Agreement dated December 1, 1999,
                            between EXE Technologies, Inc. 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 14, 2000).
        10.22            -- 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).
        10.23            -- Proposal Including Sales Agreement No. 56-5879 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company (incorporated by reference
                            to Exhibit 10.23 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.24            -- Proposal Including Sales Agreement No. 56-5898 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company(incorporated by reference
                            to Exhibit 10.24 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000) .
        10.25            -- Proposal Including Sales Agreement No. 56-5738 Rev. B
                            dated December 14, 1999, between Mannesmann Dematic
                            Rapistan Corp. and the Company (incorporated by reference
                            to Exhibit 10.25 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.26            -- Form of Purchase and Sale Agreement between Homco, Inc.
                            and Donald J. Carter, Jr.( incorporated by reference to
                            Exhibit 10.25 of the Company's Annual Report on Form
                            10-K, No. 333-62021, filed March 14, 2000).
        10.27*           -- Employment Agreement, dated November 1, 1999, between
                            Kenneth J. Cichocki and the Company.
        10.27.1*         -- Amended and Restated Employment Agreement, dated November
                            10, 2000, between Kenneth J. Cichocki and the Company.
        10.28            -- 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).
        10.28.1*         -- Amended and Restated Employment Agreement, dated December
                            31, 2000, between Michael D. Lohner and the Company.
        10.29            -- Executive Employment, dated June 4, 1998, between the
                            Company and Barbara J. Hammond (incorporated by reference
                            to Exhibit 10.8 of the Company's Registration Statement
                            on Form S-4, No. 333-62021, filed on November 30, 1998).
        10.29.1*         -- Amendment to Executive Employment Agreement, between the
                            Company and Barbara J. Hammond, made and entered into as
                            of July 30, 1998.
        10.29.2*         -- Amendment to Executive Employment Agreement, between the
                            Company and Barbara J. Hammond, made and entered into as
                            of July 14, 2000.
        10.29.3*         -- Amendment to Executive Employment Agreement, dated
                            December 13, 2000, between Barbara J. Hammond and the
                            Company.
        10.30*           -- Agreement of Sale, dated January 3, 2001, between Lincoln
                            Property Company Commercial, Inc. and the Company.
        10.30.1*         -- First Amendment to Agreement of Sale, dated March 12,
                            2001, between Lincoln Property Company Commercial, Inc.
                            and the Company.
</TABLE>
<PAGE>   75

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.31*           -- Unimproved Property Commercial Contract, dated November
                            17, 2000, between Dallas Woodcraft, Inc. and S & A
                            Enterprises Inc.
        10.31.1*         -- Amendment to Unimproved Property Commercial Contract,
                            dated March 20, 2001, between Dallas Woodcraft, Inc. and
                            S & A Enterprises Inc.
        10.32*           -- Lease Schedule No. 1000101377, dated May 5, 2000, between
                            the Company and Banc One Leasing Corporation.
        10.33            -- 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).
        10.34*           -- Limited Partnership Agreement, dated July 3, 2000, of
                            Laredo Candle Company, L.P., a Texas limited partnership.
        10.35            -- Purchase and Sale Agreement for 1400 Lavon Street,
                            McKinney, Texas, entered into as of May 15, 2000, between
                            Homco, Inc. and Donald J. Carter, Jr. (incorporated by
                            reference to Exhibit 10.2 of the Company's Quarterly
                            Report on Form 10-Q, No. 333-62021, filed on August 14,
                            2000).
        10.36            -- Assignment and Assumption of Purchase and Sale Agreement
                            dated as of May 12, 2000, between Donald J. Carter, Jr.
                            and 1400 Lavon, L.P. (incorporated by reference to
                            Exhibit 10.3 of the Company's Quarterly Report on Form
                            10-Q, No. 333-62021, filed on August 14, 2000).
        10.37            -- Partnership Interests Purchase Agreement dated as of July
                            3, 2000, by and between Miracle Candle Company and Spring
                            Valley Scents, Inc. (incorporated by reference to Exhibit
                            10.4 of the Company's Quarterly Report on Form 10-Q, No.
                            333-62021, filed on August 14, 2000).
        10.38            -- 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).
        10.39            -- 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).
        21.1*            -- Subsidiaries of the Company.
</TABLE>

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

* Filed herewith.