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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549




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FORM 10-K



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(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 30, 2006
|o | 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 1-11908



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LENOX GROUP INC.(Exact name of registrant as specified in its charter)

|                                                                   |  |                                       
|------------------------------------------------------------------ |  | --------------------------------------
|Delaware                                                           |  | 13-3684956                            
|(State or other
  jurisdiction of
  incorporation or organization) |  | (I.R.S. Employer
  Identification No.)
|                                                                   |  |                                       
|One
  Village Place                                                |  | 55344                                 
|6436
  City West Parkway                                           |  | (Zip Code)                            
|Eden
  Prairie, MN                                                 |  |                                       
|(Address of principal executive offices)                           |  |                                       

(952) 944-5600
(Registrants telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

|                                         |  |                                            
|---------------------------------------- |  | -------------------------------------------
|Title of each class                      |  | Name of each exchange
  on which registered
|                                         |  |                                            
|                                         |  |                                            
|Common Stock, par value
  $.01 per share |  | New York Stock Exchange                    

Securities registered pursuant to Section 12(g) of the Act: None



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act. Yes o No x

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 o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act (Check one):

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|Large accelerated filer o | Accelerated filer x | Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as
of June 30, 2006 (the last trading day of the registrants most recently completed second fiscal quarter) was $97,052,089
(based on the closing price of the registrants Common Stock as reported on the New York Stock Exchange on June 30,
2006).

Number of Shares of Common Stock, par value $.01 per share, outstanding as of March 2, 2007: 14,073,672.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K (the 2007 Proxy Statement) are incorporated by reference in
Part III.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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|---------- | -------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|           |                                                                                                                      |  | Page
|           |                                                                                                                      |  |     
|           |                                                                                                                      |  |      | 
|Part I     |                                                                                                                      |  |      | 
|           |                                                                                                                      |  |      | 
|Item 1.    | Business                                                                                                             |  | 1    | 
|Item 1A.   | Risk
  Factors                                                                                                       |  | 7    | 
|Item 1B.   | Unresolved
  Staff Comments                                                                                          |  | 9    | 
|Item 2.    | Properties                                                                                                           |  | 10   | 
|Item 3.    | Legal
  Proceedings                                                                                                  |  | 11   | 
|Item 4.    | Submission
  of Matters to a Vote of Security Holders                                                                |  | 11   | 
|           |                                                                                                                      |  |      | 
|Part II    |                                                                                                                      |  |      | 
|           |                                                                                                                      |  |      | 
|Item 5.    | Market
  for the Registrants Common Equity, Related Stockholder Matters and Issuer
  Purchases of Equity Securities |  | 12   | 
|Item 6.    | Selected
  Financial Data                                                                                            |  | 14   | 
|Item 7.    | Managements
  Discussion and Analysis of Financial Condition and Results of Operations                              |  | 15   | 
|Item 7A.   | Quantitative
  and Qualitative Disclosures about Market Risk                                                         |  | 31   | 
|Item 8.    | Financial
  Statements and Supplementary Data                                                                        |  | 31   | 
|Item 9.    | Changes
  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |  | 31   | 
|Item 9A.   | Controls
  and Procedures                                                                                            |  | 31   | 
|Item 9B.   | Other
  Information                                                                                                  |  | 32   | 
|           |                                                                                                                      |  |      | 
|Part III   |                                                                                                                      |  |      | 
|           |                                                                                                                      |  |      | 
|Item 10.   | Directors,
  Executive Officers and Corporate Governance                                                             |  | 33   | 
|Item 11.   | Executive
  Compensation                                                                                             |  | 35   | 
|Item 12.   | Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters                   |  | 35   | 
|Item 13.   | Certain
  Relationships and Related Transactions, and Director Independence                                          |  | 35   | 
|Item 14.   | Principal
  Accountant Fees and Services                                                                             |  | 35   | 
|           |                                                                                                                      |  |      | 
|Part IV    |                                                                                                                      |  |      | 
|           |                                                                                                                      |  |      | 
|Item 15.   | Exhibits
  and Financial Statement Schedules                                                                         |  | 36   | 
|           |                                                                                                                      |  |      | 
|Signatures |                                                                                                                      |  | 41   | 

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Table of Contents

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|PART I
|      
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|ITEM 1. | BUSINESS

General

Lenox Group Inc. (the Company), including its two main operating subsidiaries, D 56,
Inc. (Department 56) and Lenox, Incorporated (Lenox), is a leading designer, distributor, wholesaler and
retailer of fine quality tableware, collectible and other giftware products marketed under the Department 56, Lenox,
Gorham and Dansk brand names. These products are sold through gift and specialty retailers, department stores, and
general merchandise chains, as well as through the Companys own retail stores and consumer-direct channels of distribution,
including Internet, catalog and mail order.

The Company was incorporated in Delaware in 1992 to hold the equity of a Minnesota corporation
formed in 1984 under the name Department 56, Inc., which Minnesota corporation has since changed its name to D
56, Inc. and continues as one of the Companys principal operating subsidiaries. On November 14, 2005, the legal name
of the Company was changed to Lenox Group Inc. The Companys principal executive offices are located at One
Village Place, 6436 City West Parkway, Eden Prairie, MN, 55344. The Companys telephone number is (952) 944-5600.

The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act), available free of charge through a direct link to the Securities and Exchange
Commission (the SEC) on the Companys corporate website www.lenoxgroupinc.com, as soon as is reasonably
practicable after such material is electronically filed with or furnished to the SEC.

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Exchange Act. See
Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations 
Forward-Looking Statements and Factors Affecting Future Earnings herein.

Major Acquisition

On September 1, 2005, the Company completed the acquisition of all of the capital stock of Lenox
from Brown-Forman Corporation (Brown-Forman) for $204.0 million, which included transaction costs of $7.6 million. The
acquisition was effected pursuant to a Stock Purchase Agreement, dated July 21, 2005. The acquisition of Lenox added strong,
market-leading brands and complementary product lines and distribution channels to the Companys portfolio. The Company
funded the payment of the purchase price and related transaction costs of the acquisition through a $275 million senior secured
credit facility consisting of a $175 million revolving credit facility and a $100 million term loan.

Recent Developments

On January 5, 2007, the Company announced that Susan E. Engel, the Companys Chief Executive
Officer, Chairwoman of the Board and a director, had stepped down from these positions, effective immediately. Concurrent with
this announcement, Stewart Kasen, Lead Director, was elected as Chairman of the Board. The Company also announced that Marc L.
Pfefferle, a partner at Carl Marks Advisory Group, LLC (CMAG), was elected as interim Chief Executive Officer.

Mr. Pfefferle and his team from CMAG, along with Company personnel, are assessing the Companys
current business model. A significant component of this assessment includes analyzing the impact of last years strategic
plan to: a) expand channels of distribution, and b) expand product offerings to include year-round gift products. The goal of this
assessment is to validate the current strategic direction or recommend new initiatives to improve financial
performance.

On February 9, 2007, the Company entered into waivers and amendments to the revolving credit
facility and the term loan credit facility in connection with the Companys noncompliance with the financial covenants under
the credit agreements for the period ended December 30, 2006. Pursuant to the waivers and amendments, the lenders granted the
Company a limited waiver of noncompliance through and including April 30, 2007, and temporarily amended the agreements to adjust
the leverage ratio and interest coverage ratio levels for the first quarter of 2007. In addition, the amendment to the term loan
facility increased the applicable margin for loans by 0.25% per annum. As consideration for the amendments, the Company paid
amendment fees of $0.2 million.

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In order to avoid defaulting under its existing credit facilities, on or before April 30, 2007, the
Company will either have to negotiate amendments to the revolving and term credit facilities or obtain new credit agreements with
other lenders. The Company is currently in discussions with the agent under its existing credit facilities as well as with other
potential lenders regarding a modified or new lending arrangement. While the Company is optimistic it will be able to amend its
existing facilities or enter into new facilities, it cannot provide assurance that it will occur.

Products

The Company is a market leader in quality tabletop, giftware and collectibles. It markets its
products primarily under the Department 56®, Lenox®, Dansk® and Gorham® brands.
Together, these brands represent over 450 years of tabletop and giftware experience.

Our tabletop business consists of a portfolio of consumer brands that have a rich heritage in the
domestic market. The Company sells dinnerware, crystal stemware and giftware, stainless steel flatware, and silver-plated and
metal giftware under the Lenox and Gorham brands. Dansk is the Companys contemporary tabletop,
housewares and giftware brand. The Company sells premium casual dinnerware and fine china dinnerware, giftware and collectibles
under the Lenox trademark, and sterling silver flatware and sterling silver giftware under the Gorham trademark. The
Company believes that it is the largest domestic marketer of fine tabletop products.

The Department 56 brand is best known for its use in connection with the Village
Series of collectible, handcrafted, lighted ceramic and porcelain houses, buildings and related accessories that depict
nostalgic scenes. The Company introduces new pieces, limited edition pieces, figurines and other accessories each year to
complement and provide continuity to the collections.

The Company offers a wide range of other decorative giftware and home accessory items under the
Department 56 brand, including the Companys Snowbabies line of figurines and holiday and seasonal decorative
items. Giftware product lines are developed around either a seasonal or unique design theme. The Company continues to build its
general giftware business by developing new product lines and signing license agreements with nationally recognized
artists.

In May 2006, the Company acquired certain assets and assumed certain liabilities of Willitts Design
International, Inc. (Willitts), a California-based designer and wholesaler of collectible and home décor products. The
acquisition of the Willitts product lines, which include Thomas Blackshears Ebony Visions and Possible Dreams, added a broad
range of diversity and contemporary expression to the Companys collectible portfolio.

The Company introduces new products and refines its
product offerings on a regular basis at national and regional trade shows
dedicated to the tabletop and giftware industries.

Operating Segments

In connection with the Companys acquisition of Lenox, the Company redefined its operating
segments to include three reportable segments  Wholesale, Retail and Direct. Although the product produced and sold for each
segment is similar, the type of customer for the product and the method used to distribute the product are different. The
segmentation of these operations also reflects how the Company currently reviews the results of these operations. Financial data
for the last three fiscal years by segment is set forth in detail in Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this Annual Report on Form 10-K and in Note 16 to the Consolidated Financial
Statements.

The Wholesale Segment

The Company sells it products through a wide range of wholesale channels including department
stores, large specialty retailers, mass merchants, national chains and clubs, small independent specialty accounts and other
wholesale accounts.

As of December 30, 2006, the Companys Wholesale segment had order backlog of approximately
$18.4 million compared to $17.8 million as of December 31, 2005. Of the $18.4 million in order backlog as of December 30, 2006,
the Company expects to ship approximately $15.4 million in fiscal 2007.

Approximately 25% of the Wholesale segments sales in fiscal 2006 (17% of consolidated sales)
were to one customer: Federated Department Stores, Inc.

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The Retail Segment

In 2006, the Company opened three new concept stores under the name, All the Hoopla. The
stores are located in Detroit, MI and Orlando and Palm Beach, FL. These stores feature all of the Companys brands in a
single location and focus on providing customers with entertaining, decorating and everyday gift-giving solutions.

As of February 1, 2007, the Companys Retail segment
operated 35 retail stores, including five stores operated under the Department
56 trade name, 27 stores operated under the Lenox trade name and three
stores operated under the All the Hoopla trade name.

This segment experiences no significant unfilled orders and is not dependent on a single customer or
group of customers.

The Direct Segment

The Company markets and sells its products directly to consumers through the following methods of
direct marketing: (i) traditional direct-to-consumer methods (media advertising, direct mail and telemarketing); (ii) catalogs and
(iii) the Companys various Internet sites, including those located at department56.com, lenox.com and dansk.com.

As of December 30, 2006, the Companys Direct segment had order backlog of approximately $1.5
million compared to $1.1 million as of December 31, 2005. Of the $1.1 million in order backlog as of December 30, 2006, the
Company expects substantially all to ship in fiscal 2007.

This segment is not dependent on a single customer or group of customers.

Cessation of Time to Celebrate Business

In October 2005, the Company committed to a plan to cease operations of its Time to Celebrate
direct selling business. This business marketed giftware and home decor products to consumers through a network of independent
sales consultants who sold these products through the home show sales method.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company recorded Time to Celebrates results in continuing
operations until the run-off of operations was completed in the fourth quarter of 2005. The Time to Celebrate results have
been reclassified into discontinued operations for all periods presented.

Manufacturing & Sourcing

The Company owns and operates one manufacturing facility in the United States. The Company
manufactures its Lenox branded, fine china dinnerware at its plant located in Kinston, NC. The Company also leases a
manufacturing facility in Pomona, NJ, where it produces sterling silver flatware under the Gorham brand name.

Clay and feldspar are the principal raw materials used to manufacture china products. Gold and
platinum are significant raw materials used to decorate china products. Sand, potash and lead are used in the manufacture of
crystal products. Fine silver is the principal raw material used to manufacture sterling flatware products and steel is the
principal raw material used to manufacture stainless steel flatware. The Company anticipates that these raw materials will be in
adequate supply. However, the acquisition price of gold, platinum, fine silver and steel is influenced significantly by worldwide
economic events and commodity trading.

The Company also sources product from external manufacturers. Of the total value of product sourced
in 2006, 93% was imported from abroad, primarily from manufacturing sources located in the Pacific Rim area, including the
Peoples Republic of China (China), Indonesia, Thailand and the Philippines. The Company also imports a portion of its
products from sources in India and Europe.

Distribution

The imported products sold by the Company to its wholesale customers, direct response customers and
through its Company-owned retail stores are generally shipped by ocean freight from abroad and then by rail or truck to the
Companys distribution centers located in Hagerstown, MD, Langhorne, PA and Rogers, MN. Certain overseas shipments to some
wholesale customers are sent directly to those customers. The products manufactured in the Companys owned and leased
facilities are sent via commercial trucking lines to the Hagerstown, MD warehouse or directly to its wholesale customers.
Shipments from the Company to its wholesale and direct response customers are handled primarily by parcel post or commercial
trucking lines.

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On February 26, 2007, the Company announced its intention to close the distribution center located
in Rogers, MN in October 2007. The Company intends to transfer the distribution activities at its facility in Rogers to its
distribution center located in Hagerstown, MD.

The Companys systems maintain order processing from the time a product enters the
Companys system through shipping and ultimate payment collection from its various customers. The Company uses handheld
optical scanners and bar coded labels in accepting orders at its wholesale showrooms. In addition, systems for the
Company-operated retail stores monitor and transmit to the Company on a daily basis the POS (point of sales) data for those retail
stores.

Seasonality

The Companys business is highly seasonal. The Company records its highest wholesale sales
during the third and fourth quarters of each year as wholesale customers stock merchandise in anticipation of the holiday season.
In addition, the Company records its highest Retail and Direct segment sales in the fourth quarter during the peak holiday
shopping season. However, the Company can experience fluctuations in quarterly sales and related net income compared with the
prior year due to the timing of receipt of product from suppliers and subsequent shipment of product from the Company to
customers, as well as the timing of orders placed by customers. Due to the seasonality of segment sales as indicated above, the
Company has historically operated at a loss during the first nine months of the fiscal year. The Company is not managed to
maximize quarter-to-quarter results, but rather to achieve annual objectives designed to achieve long-term growth consistent with
the Companys business strategy.

Competition

The Company competes generally for the discretionary income of consumers with other producers of
tabletop, collectibles, specialty giftware and home decorative accessory products. These areas are affected by, among other
things, changing consumer tastes and interests, changing consumer shopping habits, consolidation of channels of distribution and
the shift in supply to Asian sources of manufacture.

The tabletop/giftware industry is highly competitive, with a large number of both large and small
participants. The Companys competitors distribute their products through their company-owned retail stores, independent gift
retailers, department stores, mass market and specialty chain stores, televised home shopping networks, Internet commerce and mail
order houses, and through the home show sales method or other direct response marketing methods.

The Company believes that the principal elements of
competition in the tabletop/specialty giftware industry are design, product
assortment, brand loyalty, quality, display and price. The Company believes
that its competitive position is enhanced by a variety of factors, including
the design, uniqueness, quality and enduring themes of the Companys products,
its in-house design expertise, its reputation among retailers and consumers,
its sourcing and marketing capabilities, and the pricing of its products.

Financial Information Relating to Geographical Areas

Approximately 2% of the Companys total revenue is derived from customers outside the United
States. All long-lived assets are located within the United States.

Trademarks and other Proprietary Rights

The Company owns 234 U.S. trademark registrations and has pending two U.S. trademark applications
for registration. These registrations cover the Companys brand names, logos and important product names. In addition, the
Company owns trademark registrations in select foreign countries where the Companys products are manufactured, marketed
and/or sold.

The Company regards its trademarks and other proprietary rights as valuable assets. The
registrations for the Companys trademarks are currently scheduled to be cancelled at various times over the next ten years,
but can be maintained and renewed provided that the trademarks are still in use for the goods and services covered by such
registrations. The Company has historically renewed its registered trademarks and expects to continue to do so, as business needs
dictate.

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Employees

As of February 10, 2007, the Company had 1,543 full-time employees and 781 part-time and seasonal
employees in the United States, four employees in Canada, 16 in China and three in Vietnam.

Local Union No. 638 of the Teamsters Union represents 37 of the Companys employees who work at
its warehouse facility located in Rogers, MN. Local Union No. 236A of the Glass, Molders, Pottery, Plastics and Allied Workers
International Union represents 22 of the Companys employees who work at its sterling silver manufacturing facility located
in Pomona, NJ. The agreements with Local Union No. 638 and Local Union No. 236A expire on December 31, 2007 and October 5, 2009,
respectively.

The Company believes that its labor relations are good
and it has not experienced a work stoppage.

Environmental Matters

The Company is subject to various federal, state and
local laws and regulations governing the use, discharge and disposal of
hazardous materials.

As a result of the acquisition of Lenox, the Company
is responsible for the cleanup and/or monitoring of two environmental sites
located in New Jersey pursuant to an Administrative Consent Order and
Memorandum of Understanding with the New Jersey Department of Environmental
Protection (NJDEP). The Company is also responsible for monitoring solid
waste management units at its Pomona, NJ manufacturing facility pursuant to a
Hazardous & Solid Waste Amendment (HSWA) permit with the U.S.
Environmental Protection Agency. The Company accrues for losses associated with
environmental cleanup obligations when such losses are probable and can be
reasonably estimated.

At one of the NJDEP sites there are other potentially
responsible parties who bear part of the cost of the cleanup, in which case the
Companys accrual is based on the Companys estimated share of the total costs.
A portion of the cleanup costs with respect to the two NJDEP sites is paid by
insurance. The estimated recovery of cleanup costs is recorded as an asset when
receipt is deemed probable.

As of December 30, 2006, the Company estimated, based
on engineering studies, total remediation and ongoing monitoring costs to be $3.7
million, including the effects of inflation. Accordingly, the Company recorded
a liability of approximately $2.6 million in other noncurrent liabilities,
which represents the net present value of the estimated future costs discounted
at 5.25%. In accordance with Statements of Position (SOP) 96-1, Environmental
Remediation Liabilities, the Company measures this liability on a discounted
basis as it believes the amount and timing of cash payments for the liability
are reliably determinable. The estimated insurance recovery assets as of
December 30, 2006 were $1.2 million and are included in other assets.

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Executive Officers of the Registrant

Marc
L. Pfefferle, 50, has been interim Chief Executive Officer of
the Company since January 5, 2007. He has been a partner in the firm of Carl
Marks Advisory Group LLC (CMAG) since November 1997. Mr. Pfefferle has 25
years of management consulting, interim executive and restructuring officer
experience and is a certified Turnaround Professional and Certified Fellow in
Production and Inventory management.

Joel
D. Anderson, 42, has been President - Consumer Direct for the
Company since December 14, 2005. From June 2 until December 14, 2005, he was
Executive Vice President-Consumer Direct for the Company. He was Vice President
- New Ventures for ToysRUs, Inc. beginning in 2001. From 1999 to 2001, Mr.
Anderson was employed by Toysrus.com, LLC, serving as that companys Vice
President, General Manager from 2000 to 2001 and as Vice President 
Merchandising from 1999 to 2000.

Louis
A. Fantin, 56, has been Senior Vice President, General
Counsel and Secretary for the Company since September 2005. He was Senior Vice
President, Secretary and Lenox Counsel for Lenox, Incorporated from May 1, 1995
to September 2005. Prior to that, Mr. Fantin held a succession of positions at
Lenox, including Vice President, Secretary and Lenox Counsel from October 1,
1994 until April 30, 1995, Vice President, First Assistant General Counsel and
Assistant Secretary from May 1, 1990 to September 30, 1994; First Assistant
General Counsel and Assistant Secretary from May 1, 1989 to April 30, 1990 and
Assistant General Counsel from August 31, 1981 to April 30, 1989.

Branka
Hannon, 49, has been Senior Vice President - Human Resources
for the Company since September 2005. Ms. Hannon held the same position at
Lenox, Incorporated from February 1, 2004 until September 2005. From June 1,
2002 to January 31, 2004, she was Vice President - Organizational Development
at Lenox, and from November 2, 2000 until May 31, 2002, Ms. Hannon was Director
- Human Resources for the Lenox Collections Division of Lenox.

Lesa
Chittenden Lim, 48, was appointed President of Lenox
Brands, one of the Companys principal business units, on March 7, 2006. From
1998 to that date, Ms. Chittenden Lim worked as an independent consultant
specializing in strategy development, mergers and acquisitions and marketing
and sales effectiveness. She was retained by the Company as a consultant from
September 2005 through March 2006 to assist with the integration of Lenox,
Incorporated and D 56, Inc., the Companys two main operating subsidiaries.

Stephen
J. Ruelle, 43, has been President of Department 56 since July
28, 2006. From 2003 to 2006, Mr. Ruelle served as Chief Executive Officer of
Making Memories, Inc., a company based in Centerville, Utah that designs and
supplies scrapbooks and scrapbooking materials. From 2002 to 2003, Mr. Ruelle
was a registered representative/manager for Virchow Krause Capital, an
affiliate of Virchow Krause & Company, where he coordinated mergers and
acquisitions and provided strategic consulting services.

Timothy
J. Schugel, 48, has been Chief Financial Officer and Chief
Operating Officer for the Company since September 28, 2005. He was Executive
Vice President and Chief Financial Officer for the Company from April 1, 2002
until September 28, 2005. He was Senior Vice President - Sourcing Management
and Production Control from January 29, 2001 until April 1, 2002. Mr. Schugel
was Vice President of the Company from April 10, 1995 until January 29, 2001.

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|ITEM 1A. | RISK
  FACTORS

Our business faces many risks. Any of the risks
discussed below, or elsewhere in this Annual Report on Form 10-K or in our
other SEC filings, could have a material impact on our business, financial
condition or results of operations. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial might also
impair our business operations.

Our ability to secure and manage debt
financing may significantly impact on our ability to operate.

As of December 30, 2006, we had $96.3 million of debt
outstanding under our term and revolver credit facilities. We are currently
operating under limited waivers of specified events of default within these
credit facilities, and these limited waivers expire on April 30, 2007. On or
before this date, we will either have to negotiate amendments to these credit
facilities, or in the alternative, obtain new credit agreements with other
lenders. Due to our existing levels of indebtedness and the seasonal nature of
our business, which requires us to use our revolving credit facility to finance
operations during the year, our ability to operate is dependent upon our
ability to secure adequate financing in a timely fashion. The Company is
currently in discussions with the agent under its existing credit facilities as
well as with other potential lenders regarding a modified or new lending
arrangement. While the Company is optimistic it will be able to amend its
existing facilities or enter into new facilities, it cannot provide assurance
that it will occur, which raises substantial doubt about our ability to
continue as a going concern.

In addition, if we are unable to generate sufficient
cash flows to pay off the outstanding debt under our term and revolver credit
facilities or any new credit agreement that we may enter into after April 30,
2007, our financial results and financial condition would be significantly
impaired.

Our sales could be negatively impacted if
our major customers substantially reduce orders for our products.

With the exception of two major accounts, Federated
Department Stores, Inc. and Bed Bath & Beyond, our customer base is
relatively dispersed. Our sales to these two customers accounted for
approximately 20% of our net sales for fiscal year 2006. If Federated
Department, Inc. Stores and/or Bed Bath & Beyond were to cease or significantly
reduce their business with us, our business and results of operations would be
negatively impacted.

Our reliance on foreign manufacturing is
subject to inherent risk, which may affect our ability to procure goods and/or
procure them in a timely fashion.

Foreign manufacturing and procurement of imports is
subject to the following inherent risks: labor availability and increases in labor
costs, increases in the cost of raw materials, economic and political
instability; cost and capacity fluctuations and delays in transportation,
dockage and material handling; restrictive actions by governments;
nationalizations; the laws and policies of the United States affecting
importation of goods (including duties, quota and taxes); international
political, military and terrorist developments; and foreign trade and tax laws.
Moreover, we cannot predict what relevant political, legal or regulatory
changes may occur, or the type or amount of any financial impact on us that
such changes may have in the future.

Our products are subject to customs duties and
regulations pertaining to the importation of goods. In the ordinary course of
business, we may be involved in disputes with the U.S. Bureau of Customs and
Border Protection (U.S. Customs) regarding the amount of duty to be paid, the
value of merchandise to be reported or other Customs regulations, which may
result in the payment of additional duties and/or penalties, or in the refund
of duties to us. Since the terrorist attacks of September 11, 2001, U.S.
Customs has enacted various security protocols affecting the importation of
goods. Such protocols could adversely affect the speed or cost involved in our
receipt of inventory from our overseas vendors.

The inability to make timely shipments of merchandise
to our trade customers due to delays caused by foreign sourcing could
significantly lower sales and damage our relationship with trade customers resulting
in harm to our financial results.

7

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Our reliance on manufacturing from sources
within China, in particular, is subject to inherent risk, which may affect our
ability to procure goods and/or procure them in a timely fashion.

In fiscal year 2006, approximately 76% of our imports
were manufactured in China, and we anticipate that such percentage will hold
constant or increase for the foreseeable future.

China has joined the World Trade Organization and been
accorded permanent Normal Trade Relations status by the U.S. government.
However, various commercial and legal practices in China, including the
handling of intellectual property and certain labor practices, are under review
by the U.S. government. China has been designated a Country of Particular
Concern (CPC) pursuant to the International Religious Freedom Act of 1998
(IRFA). The IRFA enumerates several specific retaliatory actions that may be
taken by the U.S. government, none of which we believe would have a material
impact on our business. The IRFA, however, also accords the President broad
discretion in fashioning other or additional actions and, due to the breadth of
the Presidential powers under the IRFA, we are unable to predict what, if any,
action the President could take in the future.

Accordingly, the ability to continue to conduct
business with vendors located in China is subject to political uncertainties,
the financial impact of which we are unable to estimate. To the extent China
may have its exports or transaction of business with U.S. persons subject to
political retaliation, the cost of Chinese imports could increase significantly
and/or the ability to import goods from China may be materially impaired. In
such an event, there could be an adverse effect on us until alternative arrangements
for the manufacture of our products were obtained on economic, production and
operational terms at least as favorable as those currently in effect.

We are subject to risks associated with
changes in foreign currency exchange rates.

Fluctuations in currency exchange rates present risks
inherent in our method of inventory procurement. Our costs could be adversely
affected if the currencies of other countries in which we source product
appreciate significantly relative to the U.S. dollar. This could result, for
example, from a decision by China to revalue the Renminbi (RNB) relative to
the U.S. dollar or to allow the RNB to float instead of being pegged to the
U.S. dollar at a fixed rate.

If interest rates on our variable rate debt
were to increase, our financial results would be negatively affected.

A principal market risk affecting us is the exposure
to changes in the interest rates on our variable rate debt. As our credit
facilities bear interest at variable rates, our results of operations and cash
flows will be exposed to changes in interest rates. Based on debt outstanding
at December 30, 2006, a 1% increase or decrease in current market interest
rates would have an impact of approximately $1.0 million on an annual basis.

We may encounter litigation that has a
material impact on our business.

We are involved on an ongoing basis in litigation
arising in the ordinary course of business. Trends in litigation may include
claims brought by consumers, shareholders, vendors, accounts and/or injured persons
in cases relating to antitrust, employment and labor, environmental, negligence
and regulatory matters. Litigation trends and the outcome of litigation cannot
be predicted with certainty and adverse litigation trends and outcomes could
adversely affect our financial results.

8

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Our inability to adapt successfully to
changing consumer preferences may damage our business.

Our success is dependent upon consumer demand for our products. Our ability to anticipate consumer preferences and
create tabletop, gift and collectible products which appeal to consumers who shop in our market channels is critical to achieving
financial results. As a related factor, our ability to identify, hire and retain quality designers and sculptors and other
artistic talent is critical to our product development efforts and our ability to innovate successfully. Our failure to
successfully anticipate, identify and react to consumers current preferences in our market channels, and to identify, hire
and retain artistic talent, could significantly lower sales of our products and harm our financial results.

If we are unable to complete our operational improvements, including improving our inventory management and
forecasting systems to make our supply chain more efficient, improving the effectiveness and efficiency of our US manufacturing
operations, and integrating our legacy Department 56 and Lenox information, operating and distribution systems, our business
results may be adversely impacted.

In response to market changes, including department store consolidation and a decrease in the sales of
collectibles and fine tableware over the past few years, we are restructuring our operations to achieve revenue and cost
synergies, including a consolidation of our distribution facilities and a reduction-in-force and cost reduction initiative at our
North Carolina bone china factory. If we are not successful in doing so, however, the reduced sales resulting from these external
market trends may have an adverse impact on our financial results.

In addition, we have implemented plans to improve our inventory management and provide more accurate forecasting
to enhance the efficiency of our supply chain. The highly seasonal nature of our business, with a majority of our sales occurring
in the third and fourth quarters in anticipation of the holiday season, requires us accurately to forecast demand for products in
order to avoid losing potential sales of popular products or producing excess inventory of products that are less popular with
consumers. Excess inventory poses particular risks to our brand when sold through liquidation channels. If we do not successfully
implement and operate our new inventory management and forecasting systems, we may adversely affect our financial
results.

Following our acquisition of Lenox, we have been working to integrate the information systems, operating systems,
fulfillment processes and distribution resources of Department 56 and Lenox. If we are unable successfully to integrate systems
and functional resources, we will not be able operate in the most effective and cost efficient manner
which may have an adverse impact on our financial results.

If we are unable to manage employee turnover through our integration of Department 56 and Lenox
 and the completion of our operational improvement process, our business could be adversely impacted.

We value and are dependent on key employees throughout the Company for our business success. In
addition, an important element of our strategy is to utilize the expertise of key employees to integrate
successfully the legacy Department 56 and Lenox operations and complete our operational improvement process.
As a result of the Companys past performance and current restructuring efforts, employee turnover
has occurred and is expected to continue. If employee turnover is not managed effectively, the implementation of business
improvements, employee morale and results of our operations could be adversely impacted.

|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS

None.

9

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|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Significant properties owned or leased by the Company are as follows:

Owned Facilities

Office Facilities

The Companys Executive Office (66,400-sq. ft.) including a creative center and a primary
corporate showroom located in Eden Prairie, MN.

Manufacturing Facilities

A china dinnerware manufacturing facility (218,000 sq.
ft.) servicing the Wholesale, Retail and Direct segments (which includes a
retail store), located in Kinston, NC (the Kinston Facility).

Leased Facilities

Office Facilities

An office facility (126,000-sq. ft.) servicing the
Wholesale, Retail and Direct segments and corporate function located in
Bristol, PA (the Bristol Facility).

An office facility (7,500-sq. ft.) servicing the
Wholesale, Retail and Direct segments located in Petaluma, CA (the Petaluma
Facility).

Mixed Use Facilities

A manufacturing/office/retail facility (120,200-sq.
ft.) servicing the Wholesale, Retail and Direct segments located in Pomona, NJ
(the Pomona Facility).

An office/warehousing/distribution/retail facility
(168,893-sq. ft.) servicing the Direct and Retail segments located in
Langhorne, PA (the Langhorne Facility).

A retail/warehousing facility (125,370-sq. ft.)
servicing the Wholesale and Retail segments located in South Brunswick, NJ (the
Cranbury Facility).

Warehouse and/or Distribution Facilities

A warehousing and distribution facility (500,000-sq.
ft.) servicing the Wholesale and Retail segments located in Hagerstown, MD.

A warehousing and distribution facility (333,700-sq.
ft.) servicing the Wholesale, Retail and Direct segments located in Rogers,
MN.

A warehousing facility (45,000-sq. ft.) servicing the
Direct segment located in Bristol Township, PA.

10

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Table of Contents

Retail Stores

As of February 1, 2007, the Companys Retail segment
operated 35 retail stores located in 19 states, including five stores operated
under the Department
56 trade name, 27 stores operated under the Lenox trade name (including
locations in the manufacturing and mixed use facilities above) and three stores
operated under the All the Hoopla trade name. The retail
stores range from 3,100 to 15,000 sq. ft., excluding the retail space in the
Cranbury and Langhorne Facilities, which are approximately 48,000 sq. ft and
30,600 sq. ft., respectively.

Showrooms

The Company also operates nine showrooms located in
Atlanta, GA, Billerica, MA, Chicago, IL, Columbus, OH, Dallas, TX, Los Angeles,
CA and New York, NY.

The terms of the above-referenced leases expire at
various dates. The Company believes that the facilities are in good condition
and are adequate for the business.

|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

In August 2004, plaintiffs purporting to represent a
class of consumers who purchased tableware sold in the United States filed suit
against Federated Department Stores, the May Department Stores Company,
Waterford Wedgwood U.S.A. and Lenox, Incorporated (Lenox) in United States
District Court for the Northern District of California. In November 2004,
plaintiffs filed a consolidated amended complaint alleging that for the period
beginning at least as early as May 1 2001, through the filing of the amended
complaint on November 12, 2004, defendants violated Section 1 of the Sherman
Act by conspiring to fix prices and to boycott sales to Bed, Bath & Beyond
(hereinafter the Action). Plaintiffs seek to recover an undisclosed amount of
damages, trebled in accordance with antitrust laws, as well as costs,
attorneys fees and injunctive relief.

On February 22, 2007, without admitting any violation
of any statute or law or any liability or wrongdoing whatsoever, Lenox entered
into a settlement agreement with the plaintiff class representatives. Pursuant
to the terms of the settlement agreement, Lenox has agreed to pay $500,000, in
return for which Lenox and its affiliates will be completely released from any
and all claims, demands and actions concerning the Action and any claims that
could have been alleged in the Action. This settlement agreement is subject to
approval of the court and a final judgment dismissing the Action with prejudice
as to Lenox. Plaintiffs and Lenox have agreed to use their best efforts
promptly to seek court approval of the settlement agreement and dismissal of
the Action with prejudice.

In addition to the above Action, the Company is
involved in various legal proceedings, claims, and governmental audits in the
ordinary course of its business. The Company believes it has meritorious
defenses to all proceedings, claims, and audits. Management believes the
impact, if any, of these legal proceedings would not be material to the results
of operations, financial position or cash flows of the Company.

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

No matters were submitted to a vote of the Companys
security holders during the last quarter of the year ended December 30, 2006.

11

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|        |                                                                                                             
|------- | ------------------------------------------------------------------------------------------------------------
|PART II
|       
|       
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

The Companys common stock trades on the New York Stock Exchange (NYSE) under the
symbol LNX. The table below sets forth the high and low sales prices for each quarter during the last two fiscal
years, as reported by the NYSE.

|               |  |      |       |     |   |       | 
|-------------- |  | ---- | ----- | --- | - | ----- | 
|               |  | High |       | Low |  
|               |  |      |       |     |  
|               |  |      |       |     |   |       | 
|Fiscal
  2006  |  |      |       |     |   |       | 
|First quarter  |  | $    | 13.80 |     | $ | 12.38 | 
|Second quarter |  |      | 14.37 |     |   | 7.04  | 
|Third quarter  |  |      | 7.37  |     |   | 5.38  | 
|Fourth quarter |  |      | 7.79  |     |   | 5.44  | 
|               |  |      |       |     |   |       | 
|Fiscal
  2005  |  |      |       |     |   |       | 
|First quarter  |  | $    | 17.46 |     | $ | 15.83 | 
|Second quarter |  |      | 17.79 |     |   | 9.93  | 
|Third quarter  |  |      | 14.78 |     |   | 10.28 | 
|Fourth quarter |  |      | 13.46 |     |   | 10.44 | 

The Company has not declared
or paid dividends on its common stock. As a holding company, the ability of the
Company to pay cash dividends will depend upon the receipt of dividends or
other payments from its subsidiaries. See Item 7.  Managements Discussion
and Analysis of Financial Condition and Results of Operations  Liquidity and
Capital Resources below with respect to restrictions under the Companys
credit facilities pertaining to its ability to pay dividends.

As of March 2, 2007, the
number of holders of record of the Companys common stock was 781.

STOCK PERFORMANCE GRAPH

The following graph compares
the cumulative total return on $100 invested on December 31, 2001, in each of
our Common Stock, Standard & Poors SmallCap 600 Index and a peer group
index.

The peer group index is
composed of the following issuers: Blyth Inc., Enesco Group, Inc., Lenox Group
Inc., Lifetime Brands, Inc., Libbey, Inc. and Russ Berrie & Co. These
companies were selected based on their respective product offerings (i.e.,
tabletop, giftware and/or collectible products), the channels of distribution
in which their respective products are sold and financial criteria.

The stock of Lifetime
Brands, Inc. is traded on the NASDAQ exchange. The stock of Enesco Group Inc.
was traded on the New York Stock Exchange through June 9, 2006. Thereafter, its
stock became listed on the other OTC exchange. The stock of the other
companies comprising the peer group is traded on the New York Stock Exchange.

In calculating the peer
group index, each of the issuers is weighted to recognize its stock market
capitalization. The returns of the Standard & Poor SmallCap 600 Index and
the peer group index are calculated assuming reinvestment of dividends. The
Company has not paid any dividends. The graph specifies data values for the
preceding trading day nearest to each of the Companys fiscal year-ends during
such period.

The stock price performance
shown on the graph below is not necessarily indicative of future price
performance. Data points below provided by Research Data Group, Inc., a licensee
of Standard & Poors.

12

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Lenox Group Inc., The S & P
Smallcap 600 Index And A Peer Group

(LINE GRAPH)

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends.
Index calculated on month-end basis.

|                   |  |                         |  |          |  |        |  |        |  |          |  |          | 
|------------------ |  | ----------------------- |  | -------- |  | ------ |  | ------ |  | -------- |  | -------- | 
|                   |  | Cumulative Total Return | 
|                   |  |                         | 
|                   |  | 12/31/01                |  | 12/28/02 |  | 1/3/04 |  | 1/1/05 |  | 12/31/05 |  | 12/30/06 | 
|                   |  |                         |  |          |  |        |  |        |  |          |  |          | 
|Lenox Group Inc.   |  | 100.00                  |  | 149.42   |  | 160.47 |  | 193.60 |  | 153.95   |  | 74.42    | 
|S & P SmallCap 600 |  | 100.00                  |  | 85.37    |  | 118.48 |  | 145.32 |  | 156.48   |  | 180.14   | 
|Peer Group         |  | 100.00                  |  | 105.87   |  | 125.48 |  | 105.72 |  | 69.33    |  | 71.31    | 

13

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|                                                                                                                                                                    |                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|ITEM 6.                                                                                                                                                             | SELECTED FINANCIAL DATA
|                                                                                                                                                                    |                        
|FIVE-YEAR SUMMARY (In thousands, except per share amounts)
YEARS ENDED DECEMBER 30, 2006, DECEMBER 31, 2005, JANUARY 1, 2005, JANUARY 3, 2004 AND DECEMBER 28, 2002
|                                                                                                                                                                   

The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial
Statements and related Notes thereto, included elsewhere herein. Fiscal year 2006, 2005, 2004, 2003 and 2002 results reflect the
reclassification of Geppeddos and Time to Celebrates financial results as discontinued operations.

|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ---------------------- | - | ------------------ | - | ------------------ | ------- | -------------------- | - | ------- | - | - | ------- | -
|                                                                                                                 |  | December 30,
  20061 |         | December 31,
  20051,2 |   | January 1,
  20051 |   | January 3,
  20041 |         | December 28,
  20021 |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |  
|STATEMENTS OF OPERATIONS                                                                                         |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Net sales                                                                                                        |  | $                    | 502,506 |                        | $ | 331,728            |   | $                  | 162,908 |                      | $ | 174,957 |   | $ | 190,357 |  
|Cost of sales                                                                                                    |  |                      | 257,932 |                        |   | 172,845            |   |                    | 73,958  |                      |   | 78,862  |   |   | 81,975  |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |  
|Gross profit                                                                                                     |  |                      | 244,574 |                        |   | 158,883            |   |                    | 88,950  |                      |   | 96,095  |   |   | 108,382 |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Operating expenses:                                                                                              |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Selling, general and administrative                                                                              |  |                      | 234,676 |                        |   | 126,394            |   |                    | 53,834  |                      |   | 54,902  |   |   | 62,350  |  
|Pension curtailment and settlement
gains3                                                                        |  |                      | (14,783 | )                      |   |                   |   |                    |        |                      |   |        |   |   |        |  
|Goodwill impairment4                                                                                             |  |                      | 55,269  |                        |   |                   |   |                    |        |                      |   |        |   |   |        |  
|Trademark impairment5                                                                                            |  |                      | 3,743   |                        |   |                   |   |                    |        |                      |   |        |   |   |        |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Operating (loss) income from continuing operations                                                               |  |                      | (34,331 | )                      |   | 32,489             |   |                    | 35,116  |                      |   | 41,193  |   |   | 46,032  |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Other expense (income):                                                                                          |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Interest expense                                                                                                 |  |                      | 16,697  |                        |   | 5,735              |   |                    | 493     |                      |   | 1,901   |   |   | 3,425   |  
|Litigation settlement6                                                                                           |  |                      |        |                        |   |                   |   |                    | (6,871  | )                    |   |        |   |   | (5,388  | )
|Other, net                                                                                                       |  |                      | 35      |                        |   | (744               | ) |                    | (414    | )                    |   | (906    | ) |   | (349    | )
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|(Loss) income from continuing operations before income
taxes                                                     |  |                      | (51,063 | )                      |   | 27,498             |   |                    | 41,908  |                      |   | 40,198  |   |   | 48,344  |  
|(Benefit) provision for income taxes                                                                             |  |                      | (1,795  | )                      |   | 10,146             |   |                    | 15,088  |                      |   | 14,529  |   |   | 13,581  |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|(Loss) income from continuing operations before cumulative effect of
  change in accounting principle            |  |                      | (49,268 | )                      |   | 17,352             |   |                    | 26,820  |                      |   | 25,669  |   |   | 34,763  |  
|Loss from discontinued operations, net of tax7                                                                   |  |                      |        |                        |   | (2,182             | ) |                    | (3,036  | )                    |   | (9,261  | ) |   | (2,922  | )
|Cumulative effect of change in accounting
principle8                                                             |  |                      |        |                        |   |                   |   |                    |        |                      |   |        |   |   | (93,654 | )
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Net (loss) income                                                                                                |  | $                    | (49,268 | )                      | $ | 15,170             |   | $                  | 23,784  |                      | $ | 16,408  |   | $ | (61,813 | )
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|(Loss) income per share from continuing operations before cumulative
  effect of change in accounting principle: |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Basic                                                                                                            |  | $                    | (3.58   | )                      | $ | 1.27               |   | $                  | 2.01    |                      | $ | 1.96    |   | $ | 2.67    |  
|Diluted                                                                                                          |  | $                    | (3.58   | )                      | $ | 1.26               |   | $                  | 1.98    |                      | $ | 1.94    |   | $ | 2.65    |  
|                                                                                                                 |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|BALANCE SHEET DATA                                                                                               |  |                      |         |                        |   |                    |   |                    |         |                      |   |         |   |   |         |  
|Working capital                                                                                                  |  | $                    | 30,260  |                        | $ | 79,326             |   | $                  | 82,294  |                      | $ | 49,424  |   | $ | 60,864  |  
|Total assets                                                                                                     |  |                      | 373,797 |                        |   | 469,928            |   |                    | 167,388 |                      |   | 142,304 |   |   | 157,184 |  
|Total debt (current and noncurrent)                                                                              |  |                      | 96,566  |                        |   | 110,718            |   |                    |        |                      |   |        |   |   | 54,000  |  
|Total stockholders equity9                                                                                      |  |                      | 141,679 |                        |   | 161,749            |   |                    | 143,757 |                      |   | 114,296 |   |   | 88,607  |  

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The year ended January 3,
  2004 is a 53-week fiscal year whereas all other fiscal years presented are
  52-week periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2 | Effective September 1, 2005, the Company completed the acquisition of Lenox from
Brown-Forman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|3 | In the fourth quarter of 2006, the Company announced the freezing
of its defined benefit pension plans. As a result of this decision, the Company recognized a pension curtailment of $13.2 million.
Also, in the fourth quarter of 2006, the Company recorded a plan settlement gain of $1.6 million as a result of significant
lump-sum cash payments made to employees from one of its defined benefit pension plans.                                                                                                                                                                                                                                                                                                                                                                                                    
|4 | In the second quarter of 2006, the Company recognized a goodwill impairment charge of $37.1
million in its Department 56 wholesale reporting unit related to the continuing decline of product shipments into the gift and
specialty channel. This goodwill impairment principally related to the goodwill originally recorded in 1992 as the result of the
acquisition of Department 56 by Forstmann Little & Co. In the fourth quarter of 2006, the Company recognized a goodwill
impairment charge of $18.2 million as a result of lower projected sales and profits from the Companys Lenox wholesale
reporting unit as compared to that which was originally projected at the date of the Acquisition. This goodwill impairment related
to the goodwill originally recorded in 2005 as part of the acquisition of Lenox.
|5 | During 2006, the Company recognized a trademark impairment charge of $3.7 million related
to lower than projected sales of Dansk and Gorham product from that estimated at the time of the original purchase price
allocation. These trademark costs were originally recorded in 2005 as part of the acquisition of Lenox.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|6 | During 2002, the Company received net proceeds (before income taxes) of $11.0 million in
settlement of the Companys litigation against a third party related to the implementation of its information systems. This
recovery resulted in other income of $5.4 million and a $5.6 million reduction in net depreciable assets. During 2004, the Company
received net proceeds (before income taxes) of $6.9 million in settlement of the Companys litigation against a third party
related to the implementation of its information systems. This recovery was recorded in other income.                                                                                                                                                                                                                                     

14

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7 | In December 2005, the Company ceased operations of its Time to Celebrate business.
Additionally, during the first quarter of 2004, the Company ceased operations of its Geppeddo seasonal kiosk business. In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reclassified the
results of these ceased operations into discontinued operations for all periods presented.
|8 | During 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets.
Upon adoption of SFAS No. 142, the Company performed impairment testing and concluded that the goodwill related to the leveraged
buy-out of the Company in 1992 was impaired. As a result, the Company recognized a $93.7 million charge to write-down its
goodwill.                                                                         
|9 | The Company has not declared or paid dividends on its common stock. As a holding company,
the ability of the Company to pay cash dividends will depend upon the receipt of dividends or other payments from its
subsidiaries.                                                                                                                                                                                                     

|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

On January 5, 2007, the Company announced that Susan E. Engel, the Companys Chief Executive
Officer, Chairwoman of the Board and a director, had stepped down from these positions, effective immediately. Concurrent with
this announcement, Stewart Kasen, Lead Director, was elected as Chairman of the Board. The Company also announced that Marc L.
Pfefferle, a partner at Carl Marks Advisory Group, LLC (CMAG), was elected as interim Chief Executive Officer.

Mr. Pfefferle and his team
from CMAG, along with Company personnel, are assessing the Companys current
business model. A significant component of this assessment includes analyzing
the impact of last years strategic plan to: a) expand channels of
distribution, and b) expand product offerings to include year-round gift
products. The goal of this assessment is to validate the current strategic
direction or recommend new initiatives to improve financial performance.

On February 9, 2007, the
Company entered into waivers and amendments to the revolving credit facility
and the term loan credit facility in connection with the Companys
noncompliance with the financial covenants under the credit agreements for the
period ended December 30, 2006. Pursuant to the waivers and amendments, the
lenders granted the Company a limited waiver of noncompliance through and
including April 30, 2007, and temporarily amended the agreements to adjust the
leverage ratio and interest coverage ratio levels for the first quarter of
2007. In addition, the amendment to the term loan facility increased the
applicable margin for loans by 0.25% per annum. As consideration for the amendments,
the Company paid amendment fees of $0.2 million.

In order to avoid defaulting
under its existing credit facilities, on or before April 30, 2007, the Company
will either have to negotiate amendments to the revolving and term credit
facilities or obtain new credit agreements with other lenders. The Company is
currently in discussions with the agent under its existing credit facilities as
well as with other potential lenders regarding a modified or new lending
arrangement. While the Company is optimistic it will be able to amend its
existing facilities or enter into new facilities, it cannot provide assurance
that it will occur.

SUMMARY OF 2006 RESULTS OF OPERATIONS

On September 1, 2005, the
Company completed the acquisition (the Acquisition) of all of the capital
stock of Lenox, Incorporated (Lenox) from Brown Forman Corporation
(Brown-Forman). The acquisition of Lenox, which sells products under the Lenox,
Dansk, and Gorham brand names, added strong, market-leading brands and
complementary product lines and distribution channels to the Companys
portfolio. The results of operations for 2006 explained below include 12
months of Lenox operations while the results of operations for 2005 only
include the four months from the acquisition date on September 1, 2005 to the
Companys fiscal year end of December 31, 2005.

On May 1, 2006, the Company
completed the acquisition of certain assets and the assumption of certain
liabilities of Willitts Design International, Inc. (the Willitts
Acquisition). The results of operations for 2006 explained below include eight
months of Willitts operations while the results of operations for 2005 do not
contain any Willitts results.

15

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Loss from continuing operations was $49.3 million in 2006 compared to income from continuing
operations of $17.4 million in 2005. Loss from continuing operations in 2006 included certain events as decribed below:

| |  | In the second quarter of 2006, the Company
recognized a goodwill impairment charge of $35.7 million, net of tax, in its Department 56 wholesale reporting unit related to the
continuing decline of product shipments into the gift and specialty channel. This goodwill principally related to the goodwill
originally recorded in 1992 as the result of the acquisition of Department 56 by Forstmann Little & Co. In the fourth quarter
of 2006, the Company recognized a goodwill impairment charge of $18.2 million, net of tax, as a result of lower projected sales
and profits from the Companys Lenox wholesale reporting unit as compared to that which was originally projected at the date
of the Acquisition. This goodwill impairment related to the goodwill originally recorded as part of the Acquisition on September
1, 2005. The Company also recognized a trademark impairment charge of $2.3 million, net of tax, related to lower than projected
sales of Dansk and Gorham product from that estimated at the time of the original purchase price allocation. These trademark costs
were also originally recorded as part of the Acquisition.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In the fourth quarter of 2006, the Company also
announced the freezing of its defined benefit pension plans. No future benefits will accrue under the pension plans,
but pension benefits earned through December 31, 2006, will be available to legacy Lenox employees when they retire under the
terms of the plan. As a result of this decision, the Company recognized a pension curtailment gain of $8.2 million, net of tax.
Also, in the fourth quarter of 2006, the Company recorded a plan settlement gain of $1.0 million, net of tax, as a result of
significant lump-sum cash payments made to employees from one of its defined benefit pension plans.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In the fourth quarter of 2006, the Company sold
its Pomona facility for net proceeds of $6.6 million and recognized a gain of $0.7 million, net of tax.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In the fourth quarter of 2006, the Company
reversed a $1.5 million deferred tax asset valuation allowance that the Company believed was no longer needed because the capital
gains generated from the assets sold in 2006 will be used to offset previously recorded capital losses. Finally, in 2006, the
Company restructured its legal entities, which lowered its effective tax rate. As a result, the Company revalued its net deferred
tax assets, which resulted in an additional $0.6 million of tax expense.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Excluding the impact of the goodwill and trademark impairment charges, the pension curtailment and settlement
gains, the gain on the sale of the Pomona facility, the reversal of the deferred tax valuation allowance and the
additional tax expense from the revaluation of deferred tax assets from the 2006 results, loss from continuing operations was $3.9
million in 2006 compared to income from continuing operations of $17.4 million in 2005 as shown in the table below. The loss from
continuing operations of $3.9 million in 2006 was due primarily to the Acquisition. The financing costs incurred to finance the
Acquisition were higher than the income from operations from the Lenox business. While the Company made progress in reducing costs
in 2006, the Lenox results from operations were lower than originally projected at the time of the acquisition due to sourcing and
delivery problems that delayed the shipment of product, lower sales to the Companys largest customer due to the
customers consolidation of acquired entities, the continued decline of fine china and the trend to casual product, higher
manufacturing variances, and higher levels of excess inventory.

The change from income of $17.4 million from continuing operations in 2005 to a loss
from continuing operations of $3.9 million in 2006, representing a decline of $21.3 million, (see the table below for
reconciliation of non-GAAP financial measure) was principally due to the seasonality of the acquired Lenox business and the timing
of the Acquisition, higher interest expense related to the Acquisition, and the continued contraction of the legacy Department 56
business.

The Company benefited from
the timing of the Acquisition in 2005. Historically, due to the seasonality of
the business, Lenox has been unprofitable for the first eight months of its
fiscal year and profitable for the last four months of its fiscal year. The
2005 results from operations only included the last four months of the Lenox
business (i.e., as it was acquired on September 1, 2005) which were the
profitable months of its fiscal year. The 2006 results from operations included
the full 12 months of operations which contained the first eight months of
its fiscal year which are unprofitable. The negative impact of this difference
on results of operations was approximately $6.0 million, net of tax. In addition,
the Company incurred 12 months of interest expense related to the financing
of the Acquisition compared to only four months in 2005. The negative impact of
this difference on results of operations was approximately $7.0 million, net of
tax.

Finally, the legacy
Department 56 business continued to contract in 2006. Net sales were down 8%,
or $9.8 million, compared to 2005, principally due to a decline in net
shipments of Village product to the Companys wholesale gift and specialty
channel. This decline in Village product sales to the Companys wholesale gift
and specialty channel is a continuation of a steady decline the Company has
been experiencing for more than five years. In addition, the Companys gross
margin rate on the sale of Department 56 product decreased due to a shift from
higher margin Village product to lower margin giftware product. The negative
impact of the reduced sales and gross margin percentages on results of
operations was approximately $8.0 million, net of tax.

16

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Reconciliation of Non-GAAP Financial Measure (In millions)

|                                                                    |  |                                      |       |                                     |   |      | 
|------------------------------------------------------------------- |  | ------------------------------------ | ----- | ----------------------------------- | - | ---- | 
|                                                                    |  | Year 
  Ended 
  December 30,
  2006 |       | Year 
  Ended
  December 31,
  2005 |  
|                                                                    |  |                                      |       |                                     |  
|(Loss) income from continuing operations, net of tax (GAAP
measure) |  | $                                    | (49.3 | )                                   | $ | 17.4 | 
|                                                                    |  |                                      |       |                                     |   |      | 
|Goodwill impairment charges, net of tax                             |  |                                      | 53.9  |                                     |   |      | 
|Trademark impairment charges, net of tax                            |  |                                      | 2.3   |                                     |   |      | 
|Pension curtailment and settlement gains, net of tax                |  |                                      | (9.2  | )                                   |   |      | 
|Gain on sale of Pomona manufacturing facility, net of tax           |  |                                      | (0.7  | )                                   |   |      | 
|Reversal of deferred tax asset valuation allowance                  |  |                                      | (1.5  | )                                   |   |      | 
|Revaluation of net deferred tax assets                              |  |                                      | 0.6   |                                     |   |      | 
|                                                                    |  |                                      |       |                                     |   |      | 
|                                                                    |  |                                      |       |                                     |   |      | 
|(Loss) income from continuing operations 
(non-GAAP measure)       |  | $                                    | (3.9  | )                                   | $ | 17.4 | 
|                                                                    |  |                                      |       |                                     |   |      | 

Management believes the
non-GAAP measure above provides useful information to investors regarding the
Companys results from continuing operations because it provides a meaningful
comparison, on a consistent basis year-over-year, and understanding of the
Companys operating performance for the past two annual periods exclusive of
certain events which occurred in 2006. This non-GAAP measure should not be
considered an alternative to income from continuing operations, which is
determined in accordance with GAAP.

17

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Table of Contents

COMPARISON OF RESULTS OF CONTINUING OPERATIONS FOR 2006, 2005 AND 2004

|                                                 
|-------------------------------------------------
|(Amounts
  in millions, except per share amounts)
|                                                 

In connection with the Companys acquisition of Lenox from Brown-Forman, the Company redefined
its operating segments in accordance with SFAS No. 131 to include three reportable segments  Wholesale, Retail and Direct.
Net sales, gross profit, and specifically identified selling costs are measured for each segment. Expenses not allocated to
specific operating segments are reflected in the Corporate category and represent general and administrative costs. Other
components of the statement of operations which are classified below income (loss) from operations (i.e. interest expense,
provision for income taxes, etc.) are not allocated by segment and are discussed separately. In addition, the Company does not
account for or report assets, capital expenditures, or certain depreciation and amortization by segment. Certain previous year
amounts have been reclassified to conform to current year presentations. These reclassifications had no impact on consolidated net
income or retained earnings as previously reported.

|                                                               |  |      |       |      |   |       |   |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                               |  | 2006 |       | 2005 |   | 2004  |  
|                                                               |  |      |       |      |   |       |  
|WHOLESALE:                                                     |  |      |       |      |   |       |   |   |       |  
|Net sales                                                      |  | $    | 330.4 |      | $ | 217.0 |   | $ | 153.1 |  
|Gross profit                                                   |  |      | 135.9 |      |   | 90.8  |   |   | 81.7  |  
|Gross profit as a % of net sales                               |  |      | 41    | %    |   | 42    | % |   | 53    | %
|Selling expenses                                               |  |      | 42.3  |      |   | 26.5  |   |   | 16.2  |  
|Selling expenses as a % of net sales                           |  |      | 13    | %    |   | 12    | % |   | 11    | %
|Goodwill impairment                                            |  |      | 55.3  |      |   |      |   |   |      |  
|Income from operations                                         |  |      | 38.3  |      |   | 64.3  |   |   | 65.5  |  
|                                                               |  |      |       |      |   |       |   |   |       |  
|RETAIL:                                                        |  |      |       |      |   |       |   |   |       |  
|Net sales                                                      |  | $    | 72.4  |      | $ | 72.8  |   | $ | 9.8   |  
|Gross profit                                                   |  |      | 40.4  |      |   | 41.7  |   |   | 7.2   |  
|Gross profit as a % of net sales                               |  |      | 56    | %    |   | 57    | % |   | 74    | %
|Selling
  expenses                                             |  |      | 32.7  |      |   | 22.4  |   |   | 6.5   |  
|Selling expenses as a % of net sales                           |  |      | 45    | %    |   | 31    | % |   | 67    | %
|Income from operations                                         |  |      | 7.7   |      |   | 19.3  |   |   | 0.7   |  
|                                                               |  |      |       |      |   |       |   |   |       |  
|DIRECT:                                                        |  |      |       |      |   |       |   |   |       |  
|Net sales                                                      |  | $    | 98.0  |      | $ | 41.1  |   |   |      |  
|Gross profit                                                   |  |      | 66.5  |      |   | 25.6  |   |   |      |  
|Gross profit as a % of net sales                               |  |      | 68    | %    |   | 62    | % |   |      |  
|Selling expenses                                               |  |      | 46.9  |      |   | 17.0  |   |   |      |  
|Selling expenses as a % of net sales                           |  |      | 48    | %    |   | 41    | % |   |      |  
|Income from operations                                         |  |      | 19.6  |      |   | 8.6   |   |   |      |  
|                                                               |  |      |       |      |   |       |   |   |       |  
|CORPORATE:                                                     |  |      |       |      |   |       |   |   |       |  
|Unallocated net sales                                          |  | $    | 1.8   |      | $ | 0.8   |   |   |      |  
|Unallocated general and administrative
  expenses              |  |      | 112.7 |      |   | 60.5  |   | $ | 31.1  |  
|Unallocated pension curtailment and
  settlement gains         |  |      | (14.8 | )    |   |      |   |   |      |  
|Unallocated trademark impairment                               |  |      | 3.7   |      |   |      |   |   |      |  
|Loss from operations                                           |  |      | (99.9 | )    |   | (59.7 | ) |   | (31.1 | )
|                                                               |  |      |       |      |   |       |   |   |       |  
|CONSOLIDATED                                                   |  |      |       |      |   |       |   |   |       |  
|Net sales                                                      |  | $    | 502.5 |      | $ | 331.7 |   | $ | 162.9 |  
|Operating (loss) income from continuing
  operations           |  |      | (34.3 | )    |   | 32.5  |   |   | 35.1  |  
|                                                              
|Other expense (income):                                        |  |      |       |      |   |       |   |   |       |  
|Interest expense                                               |  |      | 16.7  |      |   | 5.7   |   |   | 0.5   |  
|Litigation settlement                                          |  |      |      |      |   |      |   |   | (6.9  | )
|Other, net                                                     |  |      |      |      |   | (0.7  | ) |   | (0.4  | )
|                                                               |  |      |       |      |   |       |   |   |       |  
|(Loss) income from continuing operations
  before income taxes |  |      | (51.1 | )    |   | 27.5  |   |   | 41.9  |  
|(Benefit) provision for income taxes                           |  |      | (1.8  | )    |   | 10.1  |   |   | 15.1  |  
|(Loss) income from continuing operations                       |  | $    | (49.3 | )    | $ | 17.4  |   | $ | 26.8  |  

18

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COMPARISON OF RESULTS OF CONTINUING OPERATIONS 2006 TO 2005

Wholesale

Net sales were up 52% to $330.4 million from $217.0 million in 2005 reflecting the timing impact of
the Acquisition. In 2006, the Company had 12 months of Lenox activity compared to only four months of activity in 2005 (i.e.
due to the Acquisition being consummated on September 1, 2005). Partially offsetting the increase in Lenox product sales was the
decrease in legacy Department 56 product sales. Net sales of Department 56 product decreased 8% or $9.8 million principally due to
the continued contraction experienced in the gift and specialty channel since 1999. Excluding the incremental sales recorded as a
result of the Willitts acquisition, net sales of Department 56 product decreased 14%, or $18.1 million.

The gross profit percentage was 41% compared to 42% in 2005. The gross profit percentage in 2005 for
the Lenox wholesale business was negatively impacted by an $8.7 million purchase accounting fair market value adjustment related
to the write-up of inventory to its estimated selling price less cost of disposal under the purchase method of accounting on the
opening balance sheet date. Excluding this purchase accounting adjustment, the gross profit percentage was 41% compared to 46% in
2005. The decrease in gross profit percentage was principally due to the Acquisition as the Lenox wholesale business typically
generates lower gross profit percentages because it primarily sells to national customers who command higher discounts. In
addition, the Lenox wholesale business generated lower gross profit percentages in 2006 compared to 2005 due to an increase in the
amount of excess inventory and the liquidation of such excess inventory.

Selling expenses increased $15.8 million, or 60%, from $26.5 million in 2005 to $42.3 million in
2006. The increase in selling expenses was principally due to the timing of the Acquisition and the additional selling expenses
recorded as a result of the Willitts acquisition. Selling expenses as a percentage of net sales were 13% in 2006 compared to 12%
in 2005.

During 2006, the Company recognized $55.3 million in goodwill impairment charges. In the second
quarter of 2006, the Company recognized a goodwill impairment charge of $37.1 million in its Department 56 wholesale reporting
unit principally related to the continuing decline of product shipments into the gift and specialty channel. This goodwill
principally related to the goodwill originally recorded in 1992 as the result of the acquisition of Department 56 by Forstmann
Little & Co. In the fourth quarter of 2006, the Company recognized a goodwill impairment charge of $18.2 million as a result
of lower projected sales and profits from the Companys Lenox wholesale reporting unit as compared to that which was
originally projected at the date of the Acquisition. This goodwill impairment related to the goodwill originally recorded as part
of the Acquisition on September 1, 2005.

Income from operations decreased $26.0 million, or 40%, from $64.3 million in 2005 to $38.3 million
in 2006. The decrease was principally due to the $55.3 million in goodwill impairment charges, partially offset by the increase in
net sales and income from operations due to the timing of the Acquisition as explained above.

Retail

Net sales were $72.4 million in 2006 compared to $72.8 million in the prior year. Net sales from
go forward stores increased from 2005 to 2006 as a result of reflecting 12 months of sales in 2006 compared to
four months of sales in 2005 (i.e. due to the timing of the Acquisition). This increase in net sales was offset by a reduction in
net sales in 2006 related to the closing of 28 retail stores in January of 2006 (i.e. these non-go forward stores had
four months of net sales in 2005 compared to only one month of net sales in 2006). Same-store sales decreased 4.0% from 2005 to
2006. Same-store sales represent a comparison of the sales (during the corresponding weeks of the two fiscal years compared) of
the stores included in our same-store sales base. A store first enters our same-store sales base after completing 12 fiscal months
of operations. In 2006, there were 33 stores included in our same-store sales base and one of these stores was included for less
than a year.

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The gross profit percentage
was 56% in 2006 compared to 57% in 2005. Subsequent to the Acquisition date of
September 1, 2005, the Lenox retail business was liquidating excess product
acquired as part of the Acquisition. The impact of liquidating this excess
product normally would have resulted in lower gross margins for the Lenox
retail business. However, this impact was offset by the requirement to value
Lenox inventory at its estimated selling price less cost of disposal under
purchase accounting on the opening balance sheet date. The impact of this purchase accounting
adjustment was $4.5 million in 2006 and $5.8 million in 2005. Excluding the
impact of this adjustment, the gross margin percentage was 50% in 2006 compared
to 49% in 2005.

Selling expenses were $32.7
million, or 45% of net sales, in 2006 compared to $22.4 million, or 31% of net
sales, in 2005. The increase in selling expenses, both in absolute dollars and
as a percentage of net sales, was principally due to the timing of the
Acquisition. The four months of 2005 that were included in 2005 results
typically have the lowest selling expense as a percentage of sales due to the
seasonally high volume of sales during that time period. In addition, the
Company recognized a gain in 2005 related to the buyout of a lease at one of
its stores that was being relocated which reduced selling expense as a
percentage of sales.

Income from operations
decreased $11.6 million from $19.3 million in 2005 to $7.7 million in 2006. The
decrease was principally due to higher selling expenses as a result of the
timing of the Acquisition as explained above.

Direct

Net sales increased by $56.9
million, or 138%, from $41.1 million in 2005 to $98.0 million in 2006. The
increase in net sales was due to the timing of the Acquisition.

The gross profit percentage
was 68% compared to 62% in 2005. The gross profit percentage for the Lenox
direct business was negatively impacted by a purchase accounting fair market
value adjustment related to the write-up of inventory to its estimated selling
price less cost of disposal under the purchase method of accounting on the
opening balance sheet date. The impact of this purchase accounting adjustment
was $1.2 million in 2006 and $2.8 million in 2005. Excluding the impact of this
adjustment, the gross margin percentage was 69% in both 2006 and 2005.

Selling expenses were $46.9,
or 48% of net sales, in 2006 compared to $17.0 million, or 41% of net sales, in
2005. The increase in selling expenses, both in absolute dollars and as a
percentage of net sales, was principally due to the timing of the Acquisition.
The four months of 2005 that were included in 2005 results typically have the
lowest selling expense as a percentage of sales due to the seasonally high
volume of sales during that time period.

Income from operations
increased from $8.6 million in 2005 to $19.6 million in 2006. The increase was
principally due to the timing of the Acquisition as explained above.

Corporate

Net sales in the corporate
segment represent licensing income from the licensing of Lenox brands. Net sales
increased from $0.8 million in 2005 to $1.8 million in 2006. The increase in
net sales was due to the timing of the Acquisition.

General and administrative
expenses increased by $52.2 million from $60.5 million in 2005 to $112.7
million in 2006. The increase in general and administrative expenses was due to
the timing of the Acquisition. The increase was partially offset by a gain of
$1.1 million recognized in the fourth quarter of 2006 related to the sale of
the Companys Pomona facility.

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On October 31, 2006, the
Company announced the freeze of the Companys defined benefit pension plans as
of December 31, 2006. As a result of the freeze, employees will not accrue
additional benefits under the defined benefit pension plans after December 31,
2006. In addition, the Companys pension obligation is significantly reduced
because benefits payable to employees will not incorporate future compensation
increases. As a result of this change, the Company recorded a pension
curtailment gain of $13.2 million. In the fourth quarter of 2006, the Company
recorded a plan settlement as a result of significant lump-sum cash payments
made to employees from one of its defined benefit pension plans. As a result of
this settlement, the Company recorded a settlement gain of $1.6 million.

In the fourth quarter of
2006, the Company recognized a trademark impairment charge of $3.7 million
related to lower than projected sales of Dansk and Gorham product than what was
estimated at the time of the original purchase price allocation. These trademark costs were
originally recorded as part of the Acquisition.

Loss from operations
increased by $40.2 million from ($59.7) million in 2005 to ($99.9) million in
2006. The increase was principally due to increased general and administrative
expenses resulting from the timing of the Acquisition, partially offset by the
pension curtailment and settlement gains and the gain on the sale of the Pomona facility recognized in 2006 as explained above.

Interest expense

Interest expense increased
by $11.0 million from $5.7 million in 2005 to $16.7 million in 2006. The
increase was principally due to the timing of the Acquisition. The Company
incurred 12 months of interest expense related to the financing of the
Acquisition in 2006 compared to only four months in 2005.

Provision for income taxes

The income tax provision
rate was a 4% benefit in 2006 compared to a 37% provision in 2005. The change
in the rate in 2006 was principally due to the goodwill impairment charges
which were primarily non-tax deductible, the reversal of a $1.5 million
deferred tax asset valuation allowance that the Company believed was no longer
needed because the capital gains generated from the assets sold in 2006 will be
used to offset previously recorded capital losses, the reversal of $1.0 million
in tax accruals that were no longer needed as a result of the expiration of the
applicable statute of limitations and the completion of tax audits, and a $0.6
million tax charge related to the revaluation of the Companys net deferred tax
assets as a result of a lower effective tax rate due to a legal entity
restructuring that was needed to integrate the Lenox business and the
Department 56 business.

COMPARISON OF RESULTS OF CONTINUING OPERATIONS 2005 TO 2004

Wholesale

Net sales were up 42% to
$217.0 million in 2005 from $153.1 million in 2004 reflecting the impact of the
Acquisition. Excluding the impact of the Acquisition, net sales were down 18%
to $124.9 million. This decrease was principally due to a reduction in product
shipments as a result of the continued contraction experienced in the gift and
specialty channel since 1999.

The gross profit percentage
was 42% in 2005 compared to 53% in the prior year reflecting the impact of the
Acquisition. The gross profit percentage for the Lenox wholesale business for
the year was negatively impacted by an $8.7 million purchase accounting fair
market value adjustment related to the write-up of inventory to its estimated
selling price less cost of disposal under the purchase method of accounting on
the opening balance sheet date. Excluding the impact of this adjustment, the
Companys gross profit percentage was 46% in 2005 compared to 53% in 2004. This
decrease was primarily due to the Companys more aggressive pricing of many of
its new items and its decision not to pass on cost increases on some of its
existing items.

Selling expenses were $26.5 million, or 12% of sales, in 2005, compared to $16.2 million, or 11% of
sales, in the prior year reflecting the impact of the Acquisition. Excluding the impact of the Acquisition, selling expenses were
$16.9 million, or 13% of sales, in 2005, compared to $16.2 million, or 11% of sales in the prior year. The increase in selling
expense as a percentage of sales was due to certain fixed selling expenses that did not decrease proportionally with the sales
decrease.

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Income from operations decreased $1.2 million to $64.3 million in 2005 from $65.5 million in 2004
reflecting the impact of the Acquisition. Excluding the impact of the Acquisition, operating income from continuing operations
decreased $22.1 to $43.4 million in 2005 from $65.5 million in 2004. The decrease in operating income was principally due to the
sales decrease in the gift and specialty channel and the decline in the gross profit percentage as explained above.

Retail

Net sales were $72.8 million in 2005 compared to $9.8 million in the prior year reflecting the
impact of the Acquisition. Excluding the impact of the Acquisition, net sales were up 12% to $11.0 million. The increase was
principally due to a same-store sales increase of 6% and the opening of a new retail store in June 2004 (which operated during the
entire year in 2005 but only a portion of 2004). Same-store sales represent a comparison of the sales (during the corresponding
weeks of the two fiscal years compared) of the stores included in our same-store sales base. A store first enters our same-store
sales base after completing 12 fiscal months of operations. In 2005, there were six stores included in our same-store sales base
and one of these stores was included for less than a year.

The gross profit percentage was 57% in 2005 compared to 74% in the prior year reflecting the impact
of the Acquisition. Subsequent to the Acquisition date of September 1, 2005, the Lenox retail business was liquidating excess
product acquired as part of the Acquisition. The impact of liquidating this excess product normally would have resulted in lower
gross margins for the Lenox retail business. However, this impact was offset by the requirement to value Lenox inventory at its
estimated selling price less cost of disposal under purchase accounting on the opening balance sheet date. The impact of this
purchase accounting adjustment was approximately $5.8 million in 2005. Excluding the impact of the Acquisition, the gross margin
percentage was 70% in 2005 compared to 74% in the prior year. The decrease in the gross profit percentage was principally due to
higher markdowns and the Companys more aggressive pricing of many of its new items as discussed under the Wholesale segment
above.

Selling expenses were $22.4 million, or 31% of sales, in 2005, compared to $6.5 million, or 67% of
sales, in the prior year reflecting the impact of the Acquisition. Excluding the impact of the Acquisition, selling expenses were
$6.5 million, or 59% of sales, in 2005, compared to $6.5 million, or 66% of sales during 2004. The decrease in selling expense as
a percentage of sales was primarily due the relocation of one of the Companys retail stores and the resulting gain in
connection with the buyout of the previous lease.

Income from operations increased $18.6 million to $19.3 million in 2005 from $0.7 million in 2004
reflecting the impact of the Acquisition. Excluding the impact of the Acquisition, operating income from continuing operations
increased $0.4 million to $1.1 million in 2005 from $0.7 million in 2004. The increase in operating income was due to the increase
in net sales described above.

Direct

The Direct business was acquired as part of the Acquisition. Net sales from the Direct business were
$41.1 million for the four months ended December 31, 2005. The gross profit percentage was 62%. The gross profit percentage for
the Lenox direct business for the year was negatively impacted by a $2.8 million purchase accounting fair market value adjustment
related to the write-up of inventory to its estimated selling price less cost of disposal under the purchase method of accounting
on the opening balance sheet date. Selling expenses were $17.0 million, or 41% of sales.

Corporate

Net sales in the corporate segment represent licensing income from the licensing of Lenox brands. Net sales were
$0.8 million in 2005.

General and administrative expense was $60.5 million in 2005 compared to $31.1 million in 2004
reflecting the impact of the Acquisition. Excluding the Acquisition, unallocated general and administrative expense was $31.4
million compared to $31.1 million in 2004.

22

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Table of Contents

Interest Expense

Interest expense increased $5.2 million between 2005 and 2004 reflecting the additional financing
required to complete the Acquisition.

Litigation Settlement

During 2004, the Company
received net proceeds (before income taxes) of $6.9 million in settlement of
the Companys litigation against a third party related to the implementation of
its information systems. This recovery was recorded in other income in 2004.

Provision for Income Taxes

The effective income tax
rate was 37% in 2005 compared to 36% in 2004. Excluding the impact of the
Acquisition on the effective tax rate, the effective income tax rate was 34% in
2005, reflecting a $0.3 million adjustment for the reversal of prior year tax
accruals that were no longer necessary.

Discontinued Operations

The Company completed the
closing of its Time to Celebrate business during the fourth quarter of 2005 and
its Geppeddo seasonal kiosk business during the first quarter of 2004. Results
for these businesses, which generated losses of $2.2 million and $3.0 million
in 2005 and 2004, respectively, have been reclassified as discontinued
operations for all periods presented.

SEASONALITY

The
Companys business is highly seasonal. It has historically recorded its highest
Wholesale segment sales during the third and fourth quarters of each year as
wholesale customers stock merchandise in anticipation of the holiday season. In
addition, the Company records its highest Retail and Direct segment sales in
the fourth quarter during the peak holiday shopping season. However, the
Company can experience fluctuations in quarterly sales and related net income
compared with the prior year due to the timing of receipt of product from
suppliers and subsequent shipment of product from the Company to customers, as
well as the timing of orders placed by customers. The Company is not managed to
maximize quarter-to-quarter results, but rather to achieve annual objectives
designed to achieve long-term growth consistent with the Companys business
strategy.

|                                                                       |  |          |       |          |   |          |   |          |       |       |   |          |   |          |       |           |   |           |   |       |      |  |   |      |  |   |       |  |   |       | 
|---------------------------------------------------------------------- |  | -------- | ----- | -------- | - | -------- | - | -------- | ----- | ----- | - | -------- | - | -------- | ----- | --------- | - | --------- | - | ----- | ---- |  | - | ---- |  | - | ----- |  | - | ----- | 
|(In millions, except per share amounts)                                |  |          |      
|                                                                      
|                                                                       |  | 2006     |       | 2005     |  
|                                                                       |  |          |       |          |  
|                                                                       |  | 1st Qtr. |       | 2nd Qtr. |   | 3rd Qtr. |   | 4th Qtr. |       | Total |   | 1st Qtr. |   | 2nd Qtr. |       | 3rd Qtr.1 |   | 4th Qtr.1 |   | Total |     
|                                                                       |  |          |       |          |   |          |   |          |       |       |   |          |   |          |       |           |   |           |   |       |     
|                                                                       |  |          |       |          |   |          |   |          |       |       |   |          |   |          |       |           |   |           |   |       |      |  |   |      |  |   |       |  |   |       | 
|Net sales2                                                             |  | $        | 90.8  |          | $ | 98.4     |   | $        | 154.3 |       | $ | 159.1    |   | $        | 502.5 |           | $ | 19.6      |   | $     | 36.4 |  | $ | 99.6 |  | $ | 176.1 |  | $ | 331.7 | 
|Gross profit2                                                          |  |          | 49.3  |          |   | 47.8     |   |          | 73.4  |       |   | 74.0     |   |          | 244.6 |           |   | 9.8       |   |       | 18.4 |  |   | 48.7 |  |   | 82.0  |  |   | 158.9 | 
|(Loss) income from continuing operations                               |  |          | (7.1  | )        |   | (41.2    | ) |          | 5.4   |       |   | (6.4     | ) |          | (49.3 | )         |   | (2.2      | ) |       | 4.5  |  |   | 11.5 |  |   | 3.6   |  |   | 17.4  | 
|Net (loss) income                                                      |  |          | (7.1  | )        |   | (41.2    | ) |          | 5.4   |       |   | (6.4     | ) |          | (49.3 | )         |   | (2.6      | ) |       | 4.1  |  |   | 11.1 |  |   | 2.6   |  |   | 15.2  | 
|(Loss) income from continuing operations
  per share assuming dilution |  |          | (0.52 | )        |   | (3.00    | ) |          | 0.39  |       |   | (.46     | ) |          | (3.58 | )         |   | (0.16     | ) |       | 0.32 |  |   | 0.84 |  |   | 0.26  |  |   | 1.26  | 
|Net (loss) income per common share assuming
  dilution                 |  |          | (0.52 | )        |   | (3.00    | ) |          | 0.39  |       |   | (.46     | ) |          | (3.58 | )         |   | (0.16     | ) |       | 0.30 |  |   | 0.81 |  |   | 0.19  |  |   | 1.10  | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Effective September 1, 2005 the Company completed the acquisition of Lenox
from Brown-Forman. Therefore, the third and fourth quarters of 2005 contain the results of operations of the acquired
entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2 | In connection with the process to finalize the purchase accounting for the
Lenox acquisition, in 2006 the Company identified certain items that were classified differently on the Statement of Operations by
Department 56 (the acquiring company) and Lenox (the acquired company). In order to have consistent classification across the
Company, the Company has reclassified certain items. See discussion provided under the caption Reclassifications
within Note 1 to the Consolidated Financial Statements in this Form 10-K. The impact of these reclassifications to Net
sales previously reported in the Companys Form 10-Qs for the first, second and third quarters of 2006 were an
increase of $0.4 million, $0.5 million and $0.2 million, respectively. The impact of these reclassifications to
Gross profit previously reported in the Companys Form 10-Qs for the first, second and third quarters of 2006 were
an increase of $0.9 million, an increase of $1.3 million and a decrease of $0.1 million, respectively. The impact
of these reclassifications to Net sales previously reported under the caption Seasonality in the Companys 2005
Form 10-K for the first, second, third and fourth quarters of 2005 were an increase of $0.0 million, $0.0 million,
$0.1 million and $0.7 million, respectively. The impact of these reclassifications to Gross profit previously reported
under the caption Seasonality in the Companys 2005 Form 10-K for the first, second, third and fourth
quarters of 2005 were an increase of $0.9 million, $0.9 million, $0.5 million and $0.6 million, respectively.
These reclassifications had no impact on (loss) income from continuing operations or consolidated net (loss) income for 2006 or
2005 and are reflected in the table above.

23

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LIQUIDITY AND CAPITAL RESOURCES

The Companys primary
sources of cash are the funds generated from operations and its revolving
credit facility, which is available for working capital and investment needs.

Consistent with customary
practice in the giftware industry, the Company offers extended payment terms to
some of its wholesale customers. This practice has created significant working
capital requirements as the Company uses cash to source inventory, but does not
receive cash from its customers until the fourth quarter and early first
quarter of the subsequent year when the extended payment terms come due.
Similarly, the Companys Retail and Direct segments create working capital
requirements during the first nine months of the year with revenue and cash
collections peaking during the holiday season in the fourth quarter and early
first quarter of the subsequent year. The Company finances these working
capital requirements with seasonal borrowings under its revolving credit
facility. Cash collected in the fourth quarter and first quarter of the
subsequent year is used to repay the seasonal borrowings.

The timing of cash payments
to suppliers of inventory, the ability to ship inventory to its customers, and
the timing of cash receipts from its customers will impact the Companys
borrowing base capacity. The Company monitors accounts receivable, inventory
levels and shipment of product on a routine basis to ensure adequate borrowing
base capacity exists to fund its current working capital needs.

Based on current forecasted
levels of operations, the Company believes its current cash and liquidity
available under its revolving credit facility will be sufficient to finance
working capital needs, capital expenditures and contractual obligations through
the end of April, 2007. As discussed below, the Company is currently operating
under limited waivers of noncompliance with certain covenants within its
revolving credit facility, and these limited waivers expire on April 30, 2007.
On or before this date, the Company will either have to negotiate amendments to
these credit facilities or, in the alternative, obtain new credit agreements
with other lenders. With the Companys existing levels of indebtedness and the
seasonal nature of its business as described above, the Companys ability to
operate is dependent upon its ability to secure adequate financing on or prior
to April 30, 2007.

Cash Flows from Operations

Net cash used
in operating activities was $15.3 million in 2006 compared to $60.4 million of
cash provided by operating activities in 2005 and $24.9 million of cash
provided by operating activities in 2004. The net cash used in operating
activities of $15.3 million in 2006 was due to the Acquisition. The financing costs incurred to finance the
Acquisition were higher than the income from operations from the Lenox
business. In addition, the Company made payments of pension and post-retirement
obligations of $14.3 million and payments of severance and restructuring
charges that were recorded on the opening balance sheet as part of the
Acquisition of $11.4 million.

The $75.7
million change in cash flow from operating activities was principally due to
the timing of the Acquisition, the closing of Lenox retail stores during 2005
which generated significant cash flow in the last four months of 2005 that was
not repeated in 2006, the payments of severance and restructuring charges
explained above, and a decrease in cash provided from operating activities from
the legacy Department 56 business.

Historically,
due to the seasonality of the business, the acquired Lenox business has
generated negative cash flow from operations during the first eight months of
its fiscal year and has generated significant positive cash flow from
operations during the last four months of its fiscal year. The 2005 cash flow
from operating activities only included the last four months of the acquired
Lenox business (as Lenox, Incorporated was acquired on September 1, 2005),
resulting in a significant contribution of cash flow from operating activities.
The 2006 cash flow from operating activities included the full 12 months of the
acquired Lenox business, which contained the first eight months of the
Companys fiscal year, during which significant cash was used in operating
activities. In addition, the Company generated positive cash flow from
operations during the last four months of 2005 due to the closing of 31 Lenox
retail stores, the closing of which was contemplated at the time of the
Acquisition.

The decrease
in cash flow from operating activities from 2005 to 2006 was also due to higher payments of severance and restructuring charges in
2006 than in 2005. On September 1, 2005, the Company accrued $13.8 million in acquisition reserves related to plant closings,
retail store closings, and general restructurings that were planned as part of the Acquisition. Of that reserve, $1.8 million
was paid in 2005 and $11.4 million was paid in 2006.

Finally, the change in cash flow from operating activities from 2005 to 2006 was also due to the
continued contraction of the Department 56 business. Cash flow from the operating activities of the Department 56 business
decreased by $9.7 million from 2005 to 2006.

24

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Table of Contents

Cash Flows from Investing Activities

Capital expenditures in 2006 were $12.4 million compared to $1.9 million and $2.2 million in 2005
and 2004, respectively. Capital expenditures in 2006 were principally related to the consolidation of the Lenox wholesale and
direct businesses into a newly renovated office facility in Bristol, PA, costs associated with the opening of the Companys
new All the Hoopla stores, and manufacturing and technology infrastructure expenditures.

During 2006, the Company received net proceeds of $9.9 million from the sale of its Langhorne, PA
facility, $6.6 million from the sale of its Pomona, NJ facility, and $26.3 million from the sale of its Hagerstown, MD facility
(all such proceeds were used to repay a portion of the indebtedness with respect to the term loan facility as described
below).

During 2006,
the Company completed the acquisition of Willitts for $2.8 million. During
2005, the Company completed the acquisition of Lenox for $204.0 million, which
included transaction costs of $7.6 million. See Note 3 to the Consolidated
Financial Statements in this Form 10-K.

During 2005,
the Company obtained cash of $11.2 million from the sale of available-for-sale
securities, which the Company used for working capital purposes and to
partially fund the Acquisition.

Cash Flows from Financing Activities

To finance the Acquisition in 2005, the Company entered into a revolving credit facility and a
term loan facility. The credit facilities were used to finance the Acquisition and to payoff existing indebtedness under the
Companys old revolving credit facility, and the revolving credit facility is being used to finance working capital needs. In
connection with the new credit facilities, the Company recorded $10.1 million in deferred financing fees, which is included in
other assets on the Consolidated Balance Sheets and is being amortized over the lives of the credit facilities. During 2006, the
Company entered into amendments to its credit facilities that required the payment of an amendment fee of $0.4 million, which was
added to the unamortized balance at the time of amendment. The unamortized balance was $7.9 million and $9.5 million at December
30, 2006 and December 31, 2005, respectively. The revolving credit facility expires on September 1, 2010 and the term loan
facility expires on September 1, 2011.

The credit facilities are
secured by a first-priority lien on substantially all of the real and personal
property of the Company. In addition, the Company has pledged the common stock
of its subsidiaries, direct and indirect, as collateral under the credit
facilities, and the Company and its material subsidiaries, direct and indirect,
have guaranteed repayment of amounts borrowed under the credit facilities.

The revolving credit
facility provides for borrowings up to $175 million, which may be in the form
of letters of credit and revolving credit loans. The revolving credit facility
allows the Company to choose between two interest rate options in connection
with its revolving credit loans. The interest rate options are the Alternate
Base Rate (as defined) or the Adjusted LIBOR Rate (as defined) plus an
applicable margin. The applicable margin ranges from 0% to 0.75% for Alternate
Base Rate loans and from 1.75% to 2.5% for Adjusted LIBOR Rate loans.

Borrowings under the
revolving credit facility are subject to certain borrowing base limitations,
and the Companys borrowing capacity fluctuates during the year based upon
accounts receivable and inventory levels. The Companys borrowing capacity
under the revolving credit facility as of December 30, 2006, was $100.2
million, of which $47.6 million was available for additional borrowings or
letters of credit at such date. The revolving credit facility provides for
commitment fees of 0.375% per annum on the daily average of the unused
commitment.

The term loan facility
provides for term loans in the aggregate principal amount of up to $100.0
million, and allows the Company to choose between two interest rate options in
connection with its loans under the facility. The interest rate options are the
Alternate Base Rate (as defined) or the Adjusted LIBOR Rate (as defined) plus an applicable margin. The
applicable margin (as amended) was 2.75% for Alternate Base Rate loans and
3.75% for Adjusted LIBOR Rate loans.

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In connection with the
credit facilities amendments in 2006, the Company obtained limited consent to
sell the manufacturing facility located in Pomona, NJ and its
distribution/office facility located in Langhorne, PA, provided that 100% of
the net cash proceeds of such sales were used to repay a portion of the
indebtedness with respect to the term loan facility. During 2006, the Company
also obtained consent to enter into a sale and leaseback transaction for its
distribution facility located in Hagerstown, MD, provided that 100% of the net
cash proceeds of such sale were used to repay of portion of the indebtedness
with respect to the term loan facility. The sale of these facilities resulted
in repayments of indebtedness under the term loan facility of $42.8 million
during 2006. The Company also made scheduled amortization payments of
indebtedness under the term loan facility of $8.3 million.

The contractual maturity of
the Companys $48,806 term loan facility as of December 30, 2006 is as follows:

|     |  |                          |        | 
|---- |  | ------------------------ | ------ | 
|Year |  | Contractual
  Maturities |       
|     |  |                          |       
|2007 |  | $                        | 5,423  | 
|2008 |  |                          | 5,423  | 
|2009 |  |                          | 5,423  | 
|2010 |  |                          | 5,423  | 
|2011 |  |                          | 27,114 | 

Under the term loan facility, the Company is also obligated to make mandatory prepayments if certain
events occur in the future such as asset sales, additional debt issuances, common and preferred stock issuances, and excess cash
flow generation.

In accordance with Accounting Research Bulletin No. 43, the Company has classified the entire
principal amount of its term debt as of December 30, 2006, as a current liability on the Consolidated Balance Sheets as its
noncompliance with the financial covenants allows the debt to be called by the term lenders.

The credit facilities (as amended) contain customary financial conditions and covenants, including
restrictions on additional indebtedness, liens, investments, capital expenditures, issuances of capital stock and dividends. The
credit facilities also require maintenance of minimum levels of interest coverage and maximum levels of leverage, in each case at
the end of each fiscal quarter. The minimum interest coverage ratio (as defined within the credit facility agreements) requires
the Company to maintain a minimum ratio of Consolidated EBITDA (as defined within the credit facility agreements, which excludes
non-cash impairment charges) to interest expense over a 12-month period ending on each fiscal quarter. The minimum ratio to be
maintained at each quarter-end over the term of the facilities is defined within the credit facility agreements (as amended) and
ranges from 2.35:1.0 to 3.75:1.0 (except for 1.25:1.0 during the first quarter of 2007 as referenced below). The maximum leverage
ratio (as defined within the credit facility agreements) requires the Company to maintain a maximum ratio of debt (as measured at
the end of each fiscal quarter) to Consolidated EBITDA over a 12-month period ending on each fiscal quarter. The maximum leverage
ratio to be maintained at each quarter-end over the term of the facilities is defined within the credit facility agreements (as
amended) and ranges from 2.0:1.0 to 5.75:1.0. As of December 30, 2006, the Companys interest coverage ratio was 2.26:1.0
(compared to the minimum allowed for the period of 2.70:1.0), the leverage ratio was 2.70:1.0 (compared to the maximum allowed for
the period of 2.35:1.0). With these ratios, the Company was not in compliance with the financial covenants under the credit
facilities.

On February 9, 2007, the Company entered into waivers and amendments to the revolving credit
facility and the term loan credit facility in connection with the Companys noncompliance with the financial covenants under
the credit agreements for the period ended December 30, 2006. Pursuant to the waivers and amendments, the lenders granted the
Company a limited waiver of noncompliance through and including April 30, 2007, and temporarily amended the agreements to adjust
the leverage ratio and interest coverage ratio levels for the first quarter of 2007. In addition, the amendment to the term loan
facility increased the applicable margin for loans by 0.25% per annum. As consideration for the amendments, the Company paid
amendment fees of $0.2 million.

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In order to avoid defaulting under its existing credit facilities, on or before April 30, 2007, the
Company will either have to negotiate amendments to the revolving and term credit facilities or obtain new credit agreements with
other lenders. The Company is currently in discussions with the agent under its existing credit facilities as well as with other
potential lenders regarding a modified or new lending arrangement. While the Company is optimistic it will be able to amend its
existing facilities or enter into new facilities, it cannot provide assurance that it will occur.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS

As of December 30, 2006, the Company is obligated to make cash payments in connection with its debt
obligations, operating leases, purchase obligations, capital leases, environmental remediation costs and royalty guarantees in the
amounts listed below. The Company has no off-balance sheet debt or other unrecorded obligations other than the items noted in the
following table:

|                             |  |      |         |      |   |        |  |      |        |      |   |            |  |       |       |  |   |        |  |   |         | 
|---------------------------- |  | ---- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ----- |  | - | ------ |  | - | ------- | 
|Payments Due (in thousands)  | 
|                             | 
|                             |  | 2007 |         | 2008 |   | 2009   |  | 2010 |        | 2011 |   | Thereafter |  | Total |      
|                             |  |      |         |      |   |        |  |      |        |      |   |            |  |       |      
|                             |  |      |         |      |   |        |  |      |        |      |   |            |  |       |       |  |   |        |  |   |         | 
|Revolving Credit Facility1,2 |  | $    | 47,510  |      |   |       |  |      |       |      |   |           |  |       |      |  |   |       |  | $ | 47,510  | 
|Long-term Debt2,3            |  |      | 49,056  |      |   |       |  |      |       |      |   |           |  |       |      |  |   |       |  |   | 49,056  | 
|Operating Leases             |  |      | 16,126  |      | $ | 13,985 |  | $    | 12,508 |      | $ | 10,248     |  | $     | 9,172 |  | $ | 52,906 |  |   | 114,945 | 
|Purchase Commitments4        |  |      | 36,724  |      |   |       |  |      |       |      |   |           |  |       |      |  |   |       |  |   | 36,724  | 
|Capital leases               |  |      | 23      |      |   | 10     |  |      |       |      |   |           |  |       |      |  |   |       |  |   | 33      | 
|Environmental costs5         |  |      | 777     |      |   | 237    |  |      | 244    |      |   | 251        |  |       | 259   |  |   | 1,918  |  |   | 3,686   | 
|Royalty Guarantees6          |  |      | 607     |      |   | 189    |  |      | 55     |      |   |           |  |       |      |  |   |       |  |   | 851     | 
|                             |  |      |         |      |   |        |  |      |        |      |   |            |  |       |       |  |   |        |  |   |         | 
|Total                        |  | $    | 150,823 |      | $ | 14,421 |  | $    | 12,807 |      | $ | 10,499     |  | $     | 9,431 |  | $ | 54,824 |  | $ | 252,805 | 
|                             |  |      |         |      |   |        |  |      |        |      |   |            |  |       |       |  |   |        |  |   |         | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The Companys borrowings under the revolving credit facility are classified as current
liabilities on the Consolidated Balance Sheets in accordance with Emerging Issues Task Force Issue No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and
a Lock-Box Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2 | In accordance with Accounting Research Bulletin No. 43, the Company has classified the
entire principal amount of its term debt as of December 30, 2006, as a current liability on the Consolidated Balance Sheets as its
noncompliance with the financial covenants under the term loan credit facility as of such date allows the debt to be called by the
term lenders. In addition to the principal payments on debt included in the summary of significant contractual obligations, the
Company will incur interest expense on outstanding variable rate debt. All amounts outstanding under the revolving and term loan
credit facilities are variable interest rate debt with weighted average interest rates as of December 30, 2006 of 7.96% and 9.14%,
respectively. See Note 8 to the Consolidated Financial Statements.
|3 | Long term debt also includes the $150 in principal amount of the conditional notes payable
to the Maryland Department of Business and Economic Development and the $100 in principal amount of the conditional notes payable
to the County Commissioners of Washington County, Maryland. In addition to these principal amounts, the Company will incur
interest expense at rates of 3% and 0%, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                      
|4 | The Company is committed to pay suppliers of product under the terms of open purchase
orders issued in the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|5 | The Company is responsible for the cleanup and/or monitoring of two environmental sites
located in New Jersey.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|6 | The Company is committed to pay licensors under the terms of license agreements entered
into in the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Total contractual obligations do not include the following:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payments made to the Companys deferred compensation
  plan  Under this plan, employees may elect to defer a portion of their
  eligible compensation into the plan. The Company, at its discretion, may also
  contribute amounts into the plan on behalf of the employees. The Company
  cannot predict when contributions to and withdrawals from the plan will
  occur. See Note 12 to the Consolidated Financial Statements.                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Pension and postretirement obligations  As of
  December 30, 2006, the Company had accrued pension and postretirement benefit
  obligations of $46.5 million. Because the specific periods in which those
  obligations will be funded are not known at this time, no amounts related to
  these obligations are reflected in the above table. The Company expects to
  contribute approximately $8.0 million to its pension plans and approximately
  $1.2 million to its postretirement plans in 2007. See Note 10 to the
  Consolidated Financial Statements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We have adopted various accounting policies to prepare the consolidated financial statements in
accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully
described in Note 1 of the Notes to Consolidated Financial Statements in this Form 10-K. In connection with the
preparation of the financial statements, we are required to make assumptions, make estimates and apply judgment that affect the
reported amounts of assets, liabilities, revenue, expenses and related disclosures. The Company bases its assumptions, estimates
and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the
consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions,
estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted
accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could
differ from our assumptions and estimates, and such differences could be material.

Management believes the
following critical accounting policies require the most difficult, subjective
or complex judgments about matters that are inherently uncertain and are
therefore particularly important to an understanding of the Companys results
of operations and financial position:

Sales Returns and Credits  An allowance is established for credits
related to possible returned or damaged product, markdowns and pricing and
shipping discrepancies. The amount of the allowance is based on historical
ratios of credits to sales, the historical average length of time between the
sale and the credit, and other factors. Changes in customers behavior versus
historical experience, changes in product damage or defect rates, or changes in
the Companys return policies are among the factors that would result in
materially different amounts for this item. Based on 2006 sales returns and
credits, a 10% increase or decrease in sales returns and credits would have had
an impact of approximately $2.0 million.

Inventory Valuation  Inventory is valued at the lower of cost or
net realizable value. The amount is determined by analyzing historical and
projected sales information, plans for discontinued products and other factors.
The Company procures product based on forecasted sales volume. If actual sales
were significantly lower than forecasted sales due to unexpected economic or
competitive conditions, it could result in materially higher surplus and
discontinued inventories. Based on 2006 inventory write-downs, a 10% increase
or decrease in inventory write-downs would have had an impact of less than $0.8
million.

Allowance for Doubtful Accounts  The Company records an allowance for
estimated uncollectible accounts receivable based on an evaluation of its
accounts receivable balance. This evaluation includes a number of factors
including the age of the receivable, the financial condition of the customer,
the current business environment and the historical collection experience for
customers and consumers of similar background and nature. Additionally, since many of the Companys
wholesale sales have dating terms which come due in November and December, the
Company does not have visibility into overdue balances for many of its
wholesale customers until the fourth quarter of its fiscal year. Due to the
seasonality of the Companys business, the extended dating terms provided to
wholesale customers and the relative size of accounts receivable balances at
year-end, it is not uncommon for the Company to experience fluctuations in the
provision for bad debt expense from quarter to quarter as the Company refines
its estimate. Unexpected changes in the aforementioned factors would result in
materially different amounts for this item. In addition, results could be materially
different if economic conditions worsened for the Companys customers. Based on
2006 bad debt write-offs, a 10% increase or decrease in bad debt write-offs
would have had an impact of approximately $0.5 million.

Valuation of Long-Lived Assets  Long-lived assets on the Companys
consolidated balance sheet consist primarily of property and equipment. The
Company periodically reviews the carrying value of these assets based, in part,
upon projections of anticipated undiscounted cash flows. Management undertakes
this review when facts and circumstances suggest that cash flows emanating from
those assets may be diminished. Any impairment charge recorded reduces
earnings. While the Company believes future estimates are reasonable, different
assumptions regarding items such as future cash flows and the volatility
inherent in markets within which the Company operates could affect evaluations
and result in impairment charges against the carrying value of those assets.

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Valuation of Goodwill, Trademarks and Other Intangible Assets  The Company evaluates
goodwill, trademarks and other intangible assets on a periodic basis. This evaluation relies on assumptions regarding estimated
future cash flows and other factors to determine the fair value of the respective assets. If these estimates or related
assumptions change, the Company may be required to recognize impairment charges.

Pension and Postretirement Benefits The Company sponsors various defined benefit
pension plans as well as postretirement plans providing retiree health care and retiree life insurance benefits. Benefits are
based on such factors as years of service and compensation level during employment. The benefits expected to be paid are expensed
over the employees expected service. To determine the expected benefits to be paid, the Company has to make assumptions
regarding interest rates, return on plan assets and expected health care trend rates. Actual experience different from these
assumptions could result in materially different benefit payments. In December 2006, the Company adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements
No. 87, 88, 106, and 132 (R) (SFAS 158). SFAS 158 requires that the Company recognize the overfunded or
underfunded status of its defined benefit pension and postretirement plans as an asset or liability in the Companys 2006
year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur.

Tax Contingencies  The Company is periodically contacted or
audited by federal and state tax authorities. These contacts or audits include
questions regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposure associated
with various filing positions, the Company records a reserve for estimated
probable exposures. The estimate of this reserve contains uncertainty because
management must use judgment to estimate the exposure associated with its
various filing positions. To the extent the Company does not have to pay taxes
for which reserves have been established or is required to pay amounts in
excess of its reserves, the Companys tax rate in a given financial period
could be materially impacted.

Stock-Based Compensation  In accordance with SFAS 123R the
estimated grant date fair value of each stock-based award is recognized in
income on an accelerated basis (for existing options) and a straight-line basis
(for new grants) over the requisite service period. The estimated fair value of
each option is calculated using the Black-Scholes option-pricing model. The
Company makes certain assumptions using the Black-Scholes option-pricing model
which includes the risk-free interest rate, expected dividend yield, expected
stock price volatility, expected life and expected forfeitures. Nonvested
restricted stock is recorded as compensation cost over the requisite service
periods based on the market value on the date of grant. Prior to January 1,
2006, the Company applied the recognition and measurement principles of APB
Opinion No. 25 to stock options and other stock-based incentive plans as
permitted pursuant to SFAS 123. In accordance with APB Opinion No. 25, cost for
stock-based compensation was recognized in income based on the excess, if any,
of the quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock. The
exercise price for stock options granted to employees equaled the fair market
value of the Companys common stock at the date of grant, thereby resulting in
no recognition of compensation expense. Nonvested restricted stock was recorded
as compensation cost over the requisite service periods based on the market
value on the date of grant.

SUBSEQUENT EVENTS

Effective January 4, 2007, the
Company entered into a consulting agreement with the Carl Marks Advisory Group
LLC (CMAG). On January 5, 2007, the Company announced that Susan Engel, the
Companys Chief Executive Officer, Chairwoman of the Board and a director, had
stepped down from all of those positions effective immediately. On January 5,
2007, the Company also announced that Stewart Kasen, the current Lead Director,
was elected as Chairman of the Board. The Company announced that Marc
Pfefferle, a partner at CMAG, was elected as interim Chief Executive Officer,
replacing Susan Engel immediately.

On January 24, 2007, the Company
entered into an amendment to the consulting agreement it signed with CMAG on
January 4, 2007. Pursuant to the amendment, CMAG will provide the Company with
an additional Managing Director to assist in the development of the 2007
business plan incorporating cost savings and profit improvement action plans
and financial analysis and modeling related to the overall business, segment
profitability and balance sheet tasks.

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On February 9, 2007, the Company entered into a waiver and amendment to the Revolving Credit
Agreement dated September 1, 2005 and the Term Loan Credit Agreement dated September 1, 2005. The waivers and amendments were
entered into in connection with the Companys noncompliance with certain financial covenants under the credit agreements for
the period ended December 30, 2006. Pursuant to the waivers and amendments, the lenders granted the Company a limited waiver of
noncompliance through and including April 30, 2007.

On February 26, 2007, the Company announced its intention to close the distribution center located
in Rogers, MN in October 2007. The Company intends to transfer the distribution activities at its facility in Rogers to its
distribution center located in Hagerstown, MD.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Consolidated Financial Statements, under the subheading, New Accounting
Standards, at page F-15, regarding the effect of certain new accounting standards on the Company.

EFFECT OF INFLATION

The Company continually attempts to minimize any effect of inflation on earnings by controlling its
operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material
impact on the Companys results of operations.

FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE EARNINGS

Certain statements made in this Annual Report on Form 10-K and the documents incorporated by
reference in this Annual Report on Form 10-K include forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All statements regarding the Companys expected future financial
position, results of operations, cash flows, financing plans, business strategy, budgets, tax rates, capital expenditures,
competitive positions, growth opportunities, plans and objectives of management, as well as statements containing words such as
anticipate, approximate, believe, plan, estimate, expect,
project, could, should, will, intend, may and other
similar expressions, are forward-looking statements. Forward-looking statements do not relate strictly to historical or current
facts.

Such forward-looking statements are inherently uncertain, and you must recognize that actual results
may differ materially from forward-looking statements as a result of a variety of factors, including, without limitation, those
discussed below and under Item 1A of this Annual Report on Form 10-K. Such forward-looking statements are based on
managements current expectations and include known and unknown risks, uncertainties and other factors, many of which the
Company is unable to predict or control, that may cause the Companys actual results or performance to differ materially from
any future results or performance expressed or implied by such forward-looking statements. These statements involve risks,
uncertainties and other factors discussed below and under Item 1A of this Annual Report on Form 10-K or described from time to
time in the Companys filings with the SEC.

Actual results may vary materially from forward-looking statements and the assumptions on which they
are based. The Company undertakes no obligation to update or publish in the future any forward-looking statements.

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|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion of the Companys exposure to market risk contains
forward-looking statements that involve risks and uncertainties. The information presented has been prepared utilizing
certain assumptions considered reasonable in light of information currently available to management. Given the unpredictability of
interest rates as well as other factors, actual results could differ materially from those projected in such forward-looking
information.

The Companys market risks relate primarily to changes in interest rates and currency exchange
rates. The Companys interest rate risk relates to its debt outstanding. The Companys credit facilities bear interest
at variable rates. As a result of this variable interest rate debt, the Companys results of operations and cash flows will
be exposed to changes in interest rates. Based on debt outstanding at December 30, 2006, a 1% increase or decrease in current
market interest rates would have an impact of approximately $1.0 million on an annual basis.

Less than 2% of the Companys wholesale sales and less than 3% of the Companys sourced
product purchases in fiscal year 2006 were denominated in a foreign currency. Based on these sales and product purchases, a 10%
increase or decrease in the foreign currency exchange rates would have an impact of less than $1.0 million. At this time, the
Company does not use derivative instruments to manage the exchange rate risk.

|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements beginning on page F-5 and quarterly data provided under the
caption Seasonality within Item 7  Managements Discussion and Analysis of Financial Condition and
Results of Operations.

|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Lenox Group Inc. management is responsible for establishing and maintaining effective disclosure controls and
procedures, as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this
report, The Company performed an evaluation, under the supervision and with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls
and procedures. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits to the Securities and Exchange Commission under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commissions
rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Controls Over Financial Reporting

No changes were made to the Companys internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.

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Managements Report on Internal Control over Financial Reporting

Managements Report on Internal Control over Financial Reporting in included on Page F-1 of
this 2006 Annual Report on Form 10-K and is incorporated herein by reference.

Report of Independent Registered Public Accounting Firm

The Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting is provided on page F-2 of this 2006 Annual Report on Form 10-K and is incorporated herein by reference.

|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION

None.

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|        
|--------
|PART III
|        
|        

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors

JAMES E. BLOOM, 64, has been our director since November 2001. Mr. Bloom is a private investor and
was a business consultant with Bloom Consulting, Inc. from July 2001 to December 2005. From January 1995 to June 2001, he was Vice
President - Sales & Marketing with Charter Systems LLC, a software developer of business communications solutions for the
telecommunications industry. Mr. Bloom has held a number of sales, marketing and managerial positions in the business technology
area with various companies, starting his career with IBM Corporation in 1967.

GLENDA B. GLOVER, 54, has been our director since May 2006. Dr. Glover is the Dean of the College of
Business of Jackson State University, a position she has held since 1994. From 1990 to 1994, Dr. Glover was the Chairperson of the
Department of Accounting and an Assistant Professor at Howard University. Prior to joining Howard University, from 1985 to 1990,
she was the Chief Financial Officer and a Senior Vice President of Metters Industries, Inc. From 1979 to 1985, Dr. Glover was
Project manager of Tax Administration and Manager of Investor Relations at Potomac Electric Power Co. in Washington, D.C. Since
1998, Dr. Glover has been a member of the Board of Directors of the Student Loan Corporation, a publicly traded subsidiary of
Citibank. She is Chairperson of the Board of Economic Analysis, Inc., a position she has held since 1998. Dr. Glover has also been
a member of the Board of Regions Bank of Mississippi since 2000, and a member of the Board of the Jackson Municipal Airport
Authority since 1998, where she recently served as Chairperson. Dr. Glover is an attorney and certified public
accountant.

CHARLES N. HAYSSEN, 56, has been our director since March 2004. Mr. Hayssen has been Chief Operating
Officer of AllOver Media, Inc., an out-of-home media company, since August 2004. Mr. Hayssen was a private investor from April
2004 to August 2004, and Chief Financial Officer of ThinkEquity Partners LLC, an equity capital markets firm, from September 2002
to April 2004. Prior to September 2002, Mr. Hayssen was a private investor from November 2001 to September 2002, and Chief
Financial Officer of Access Cash International L.L.C. from February 2000 to November 2001. Previously, Mr. Hayssen held a number
of positions over a nineteen-year career with Piper Jaffray Companies Inc., including three years as Chief Information Officer,
two years as Chief Operating Officer of Piper Capital Management and eight years as Chief Financial Officer.

STEWART M. KASEN, 67, has been our director since December 2000 and Chairman of the Board since
January 2007. Mr. Kasen has been President of S&K Famous Brands, Inc., a retailer of menswear, since April 2002. He was
President of Schwarzschild Jewelers, a retail jewelry chain, from September 2001 to April 2002. From October 1999 until September
2001, Mr. Kasen was a consultant to the retail industry and a private investor. He was Chairman, President and Chief Executive
Officer of Factory Card Outlet Corp., a specialty retailer, from May 1998 until October 1999. Mr. Kasen is a public company
director of S&K Famous Brands, Inc., Markel Corp. and Retail Holdings N.V.

REATHA CLARK KING, 68, has been our director since May 2002. Dr. King was President and Executive
Director of General Mills Foundation from November 1988 until May 2002, and served as Chairperson of the Foundations Board
of Trustees from May 2002 until June 2003. She performs consulting work in organizational governance and philanthropic programs.
Currently, Dr. King is a Senior Advisor for the Council on Foundations in Washington, D.C. Prior to joining General Mills
Foundation, Dr. King held a variety of scientific and educational positions. Dr. King is a director of Exxon Mobil Corporation.
She is a former director of the Wells Fargo & Company, H.B. Fuller Company and Minnesota Mutual Insurance Company.

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DOLORES A. KUNDA, 51, has been our director since May 2006. Ms. Kunda is President and Chief
Executive Officer of Lapiz Integrated Hispanic Marketing in Chicago, IL, a position she has held since 1999. From 1992 to 1999 she
was employed at Leo Burnett USA where she held the position of the Vice President/Director Hispanic Marketing (from 1994 to 1999)
and Vice President/Account Supervisor Hispanic (from 1992 to 1994). Ms. Kunda was a Vice President/Account Director for Leo
Burnett Mexico SA de CV, Mexico, DF from 1990 to 1992. Prior to that Ms. Kunda served as an account executive for Leo Burnett USA
(from 1987 to 1990) and J. Walter Thompson (from 1986 to 1987). Ms. Kunda is a member of the Board of Directors of the American
Advertising Federation and the Association of American Advertising Agencies chairing the Hispanic Committee.

JOHN VINCENT (VIN) WEBER, 54, has been our director since February 1993. Mr. Weber served in the
United States House of Representatives from 1981 to 1993, representing Minnesotas 2nd Congressional District. Since 1994,
Mr. Weber has been a Partner of Clark & Weinstock, Inc., providing strategic advice to institutions interested in issues
before the legislative and executive branches of the federal government. Mr. Weber is Chairman of the National Endowment for
Democracy, a private, nonprofit organization created in 1983 to strengthen democratic institutions around the world through
non-governmental efforts. He also serves on the Board of The Council on Foreign Relations and co-chaired a major independent task
force on U.S. Policy Toward Reform in the Arab World with former U.S. Secretary of State Madeleine Albright. He was co-director of
the Domestic Policy Project of the Aspen Institute and currently serves as a full Trustee for the Institute and is a fellow at the
Humphrey Institute at the University of Minnesota. In addition, Mr. Weber serves on the U.S. Secretary of States Advisory
Committee on Democracy Promotion.

Executive Officers

Information regarding our executive officers is set forth under Executive Officers of the
Registrant in Item 1 of this Annual Report on Form 10-K.

Compliance with Section 16(a) of the Exchange Act

Information required by this Item will be included in the 2007 Proxy Statement under the heading
Section 16(a) Beneficial Ownership Reporting Compliance, and such information is incorporated herein by
reference.

Audit Committee Members and Audit Committee Financial Expert

Information required by this Item will be included in the 2007 Proxy Statement under the headings
Board and Committee Structure and Audit Committee and such information is incorporated herein by
reference.

Code of Ethics and Business Conduct

We have in place a Code of Ethics and Business Conduct that applies to our principal executive
officer, principal financial officer, principal accounting officer, all officers, directors, and employees and all of our
subsidiaries. The Code of Ethics and Business Conduct may be accessed free of charge by visiting our investor relations website at
www.lenoxgroupinc.com by clicking on Corporate Governance.

We intend to post on our website any amendment to, or waiver from, a provision of the Code of Ethics
and Business Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer,
and other persons performing similar functions, in accordance with the rules of the Securities and Exchange Commission and the New
York Stock Exchange.

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|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

Information required by this Item will be included in the 2007 Proxy Statement in the sections
captioned Director Compensation, Executive Compensation (except for the information set forth under the
subcaption Compensation Committee Report) and Compensation Committee Interlocks and Insider Participation
and such information is incorporated herein by reference.

|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding the Companys equity compensation plans as of December 30, 2006, is shown
below:

|                                                               |  |                                                                                   |           |                                                                   |   |                                                                                                                                             |  |  |         | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | --------- | ----------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|Plan Category                                                  |  | Number of Securities to be Issued upon Exercise of Outstanding Options and
Rights |           | Weighted-Average Exercise Price of Outstanding Options and Rights |   | Number of Securities Remaining Available for Future Issuance under Equity Compensation
Plans (Excluding Securities Reflected in Column (a)) | 
|                                                               |  |                                                                                   |           |                                                                   |   |                                                                                                                                             | 
|                                                               |  | (a)                                                                               |           | (b)                                                               |   | (c)                                                                                                                                         | 
|Equity compensation
plans approved by  security holders        |  |                                                                                   | 2,079,478 |                                                                   | $ | 13.74                                                                                                                                       |  |  | 296,556 | 
|Equity compensation
  plans not approved
  by security holders |  |                                                                                   |          |                                                                   |   |                                                                                                                                            |  |  |        | 
|                                                               |  |                                                                                   |           |                                                                   |   |                                                                                                                                             |  |  |         | 
|Total                                                          |  |                                                                                   | 2,079,478 |                                                                   | $ | 13.74                                                                                                                                       |  |  | 296,556 | 
|                                                               |  |                                                                                   |           |                                                                   |   |                                                                                                                                             |  |  |         | 

Information required by this Item will be included in the 2007 Proxy Statement in the section
captioned Security Ownership of Certain Beneficial Owners and Management, and such information is incorporated herein
by reference.

|         |                                                                          
|-------- | -------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this Item will be included in the 2007 Proxy Statement in the sections
captioned Certain Relationships and Related Transactions and Board and Committee Structure and such
information is incorporated herein by reference.

|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item will be included in the 2007 Proxy Statement in the section
captioned Principal Accountant Fees and Services and such information is incorporated herein by reference.

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PART IV

|         |                                           
|-------- | ------------------------------------------
|        
|         |                                           
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The Exhibits, and other documents filed as part of this Annual Report on Form 10-K, including those
exhibits which are incorporated by reference herein, are:

| |    |                                                                                                     |      | 
| | -- | --------------------------------------------------------------------------------------------------- | ---- | 
| |    |                                                                                                     | Page | 
| |    |                                                                                                     |      | 
| | 1. | Financial
  Statements                                                                              |      | 
| |    | Managements Report on Internal Control over Financial Reporting                                    | F-1  | 
| |    | Report of Independent Registered Public Accounting
Firm  Internal Control over Financial Reporting | F-2  | 
| |    | Report of Independent Registered Public Accounting Firm  Consolidated Financial Statements         | F-4  | 
| |    | Consolidated Balance Sheets
  as of December 30, 2006 and December 31, 2005                         | F-5  | 
| |    | For the years ended
  December 30, 2006, December 31, 2005, and January 1, 2005:                    |      | 
| |    | Consolidated Statements of Operations                                                               | F-6  | 
| |    | Consolidated Statements of Cash Flows                                                               | F-7  | 
| |    | Consolidated Statements of Stockholders
Equity                                                     | F-8  | 
| |    | Notes to Consolidated
  Financial Statements                                                        | F-9  | 
| | 2. | Financial
  Statement Schedule                                                                      |      | 
| |    | II.   Valuation
  and Qualifying Accounts                                                           | S-1  | 
| |    | All
  other schedules have been omitted because they are not applicable.                            |      | 
| | 3. | Exhibits                                                                                            |      | 
| |    | Exhibits
  required in connection with this Annual Report on Form 10-K are listed below.            |      | 

|        |      |             |                                                                                                                                                                                                                                                                                                                                                        
|------- | ---- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | Description
|        |      |            
|        | 3.1  |             | Restated Certificate of
  Incorporation of the Company. (Incorporated herein by reference to Exhibit
  3.1 of the Companys Annual Report on Form 10-K for the fiscal year ended
  December 31 2005. SEC File No. 1-11908.)                                                                                                                            
|       
|        | 3.2  |             | Certificate of Designation,
  Preferences and Rights of Series A Junior Participating Preferred Stock of
  the Company. (Incorporated herein by reference to Exhibit 1.1 of the
  Companys Amendment No. 1, dated May 12, 1997, to Registration Statement on
  Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                                 
|       
|        | 3.3  |             | Restated By-Laws of the
  Company. (Incorporated herein by reference to Exhibit 3.3 of the Companys
  Annual Report on Form 10-K for the fiscal year ended December 31, 2005. SEC
  File No. 1-11908).                                                                                                                                                
|       
|        | 4.1  |             | Specimen Form of Companys
  Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of
  the Companys Annual Report on Form 10-K for the fiscal year ended December
  31, 1994. SEC File No. 1-11908.)                                                                                                                            
|       
|        | 4.2  |             | Rights Agreement (including
  Exhibits A, B and C thereto) dated as of April 23, 1997, between the Company
  and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated
  herein by reference to Exhibit 1 of the Companys Registration Statement on
  Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                       
|       
|        | 4.3  |             | First Amendment dated as of
  March 13, 1998, to Rights Agreement between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 1 to the Companys Amendment No. 2, dated March 16,
  1998, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File
  No. 1-11908.)
|       
|        | 4.4  |             | Amendment No. 2 to Rights
  Agreement, dated as of February 25, 1999, between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 99.2 of the Companys Current Report on Form 8-K dated
  February 26, 1999. SEC File No. 1-11908.)                                           
|       
|        | 4.5  |             | Letter Agreement Adopting
  the Rights Agreement, dated as of March 14, 2005, between the Company and
  Wells Fargo Shareholder Services, as Rights Agent. (Incorporated herein by
  reference Exhibit 4.5 of the Companys Report on Form 10-K dated March 17,
  2005. SEC File No. 1-11908.)                                                         
|       
|        | 10.1 |             | Lease Agreement dated April
  14, 1999 between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
  Rogers warehouse and distribution facility. (Incorporated herein by reference
  to Exhibit 10.4 of the Companys Annual Report on Form 10-K for the fiscal
  year ended January 1, 2000. SEC File No. 1-11908.)                              
|       
|        | 10.2 |             | Guaranty of Lease dated
  April 14, 1999 between the Company and Ryan Companies US, Inc. pertaining to
  the Rogers warehouse and distribution facility. (Incorporated herein by
  reference to Exhibit 10.5 of the Companys Annual Report on Form 10-K for the
  fiscal year ended January 1, 2000. SEC File No. 1-11908.)                           
|       
|        | 10.3 |             | First Amendment to Lease
  Agreement between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
  Rogers warehouse and distribution facility, dated April 28, 2000.
  (Incorporated herein by reference to Exhibit 10.3 of the Companys Report on
  Form 10-K dated March 17, 2005. SEC File No. 1-11908.)                                      

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| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4  |  | Second Amendment to Lease Agreement between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
Rogers warehouse and distribution facility, dated January 23, 2003. (Incorporated herein by reference to Exhibit 10.4 of the
Companys Report on Form 10-K dated March 17, 2005. SEC File No. 1-11908.)                                                                                                                           
|
| | 10.5  |  | Credit Agreement, dated as of November 25, 2003 among the Company, the Bank parties thereto and Bank
One NA as LC Issuer, Swing Line Lender and as Administrative Agent. (Incorporated herein by reference to Exhibit 10.1 of the
Companys 8-K filed on December 1, 2003. SEC File No. 1-11908.)                                                                                                                                      
|
| | 10.6  |  | Guarantee and Collateral Assignment, dated as of November 25, 2003, by the Company and certain of
its direct or indirect subsidiaries in favor of Bank One, NA (Incorporated herein by reference to Exhibit 10.2 of the
Companys 8-K filed on December 1, 2003. SEC File No. 1-11908.)                                                                                                                                                
|
| | 10.7  |  | Form of Indemnification Agreement between the Company and its directors and executive officers.
(Incorporated herein by reference to Exhibit 10.24 of the Companys Registration Statement on Form S-1, No.
33-61514.)                                                                                                                                                                                                                 
|
| | 10.8  |  | Department 56, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of the
Companys Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                                                                                                                     
|
| | 10.9  |  | Department 56, Inc. 1993 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.10 of
the Companys Annual Report on Form 10-K for the fiscal year ended December 29, 2001. SEC File No. 1-11908.)
                                                                                                                                                                                                                    
|
| | 10.10 |  | Department 56, Inc. 1995 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.11 of
the Companys Annual Report on Form 10-K for the fiscal year ended December 29, 2001. SEC File No. 1-11908.)
                                                                                                                                                                                                                    
|
| | 10.11 |  | Department 56, Inc. 1997
  Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.12 of
  the Companys Annual Report on Form 10-K for the fiscal year ended December
  29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                               
|
| | 10.12 |  | Department 56, Inc. 2004
  Cash Incentive Plan. (Incorporated herein by reference to Exhibit 10.10 of
  the Companys Annual Report on Form 10-K for the fiscal year ended January 3,
  2004. SEC File No. 1-11908.)                                                                                                                                                                                                                  
|
| | 10.13 |  | Department 56, Inc. 2004
  Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.11 of
  the Companys Annual Report on Form 10-K for the fiscal year ended January 3,
  2004. SEC File No. 1-11908.)                                                                                                                                                                                                                 
|
| | 10.14 |  | Form of Executive Stock
  Option Agreement in connection with Department 56, Inc. 1992 Stock Option
  Plan, Department 56, Inc. 1993 Stock Incentive Plan, Department 56, Inc. 1995
  Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.13 of the Companys Annual
  Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No.
  1-11908.) 
|
| | 10.15 |  | Form of Performance 
  Accelerated Vesting Stock Option Agreement in connection with Department 56,
  Inc. 1993, 1995 and 1997 Stock Incentive Plans. (Incorporated herein by
  reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for
  the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                           
|
| | 10.16 |  | Forms of Letter Agreement
  between the Company and its executive officers. (Incorporated herein by
  reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for
  the fiscal year ended December 28, 2002. SEC File No. 1-11908.)                                                                                                                                                                                    
|
| | 10.17 |  | Form of Department 56, Inc.
  Restricted Stock Agreement. (Incorporated herein by reference to Exhibit
  10.16 of the Companys Annual Report on Form 10-K for the fiscal year ended
  December 29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                      
|
| | 10.18 |  | Form of Department 56, Inc.
  2001 Non-Officer Stock Option Plan. (Incorporated herein by reference to
  Exhibit 10.17 of the Companys Annual Report on Form 10-K for the fiscal year
  ended December 29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                              
|
| | 10.19 |  | Asset Purchase Agreement By
  and Among Department 56, Inc., Axis Holdings Corporation, Axis Corporation,
  All Shareholders of Axis Corporation, and Kirk Willey in the Capacity of
  Shareholders Representative. (Incorporated herein by reference to Exhibit
  10.19 of the Companys Annual Report on Form 10-K for the fiscal year ended
  December 29, 2001. SEC File No. 1-11908.)                                           
|
| | 10.20 |  | Letter Agreement between
  Department 56, Inc. and David Dewey, dated December 15, 2003. (Incorporated
  herein by reference to Exhibit 10.18 of the Companys Annual Report on Form
  10-K for the fiscal year ended January 3, 2004. SEC File No. 1-11908.)                                                                                                                                                                         
|
| | 10.21 |  | Separation Agreement and
  General Release between Department 56, Inc. and David Weiser, dated November
  9, 2004.(Incorporated herein by reference to Exhibit
  10.21 of the Companys Report on Form 10-K dated March 17, 2005. SEC File No.
  1-11908.)                                                                                                                                                                            
|
| | 10.22 |  | Form of Stock Option
  Agreement for Officers under the Department 56, Inc. 2004 Stock Incentive
  Plan. (Incorporated herein by reference to Exhibit 10.1 of the Companys Form
  8-K filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                   
|
| | 10.23 |  | Form of Performance Share
  Agreement under the Department 56, Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.2 of the Companys Form 8-K
  filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                           
|
| | 10.24 |  | Form of Stock Option
  Agreement for Directors under the Department 56, Inc. 2004 Stock Incentive
  Plan. (Incorporated herein by reference to Exhibit 10.3 of the Companys Form
  8-K filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                  
|

37

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| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.25 |  | Form of Restricted Stock
  Agreement under the Department 56, Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.4 of the Companys Form 8-K
  filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 10.26 |  | Department 56, Inc.
  Executive Nonqualified Excess Plan Adoption Agreement, dated February 17,
  2005, and Plan Document. (Incorporated herein by reference to Exhibit 10.26
  of the Companys Report on Form 10-K dated March 17, 2005. SEC File No.
  1-11908)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 10.27 |  | Stock Purchase Agreement,
  dated as of July 21, 2005, by and between Department 56, Inc. and
  Brown-Forman Corporation. (Incorporated herein by reference to Exhibit 10.1
  of the Companys Report on Form 8-K, filed on July 25, 2005. SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 10.28 |  | Revolving Credit Agreement
  dated as of September 1, 2005, among D 56, Inc., Department 56 Retail, Inc.,
  Time to Celebrate Inc. and Lenox, Incorporated, as Borrowers, Department 56,
  Inc. and the other Guarantors party thereto, as Guarantors, the Lenders party
  thereto, UBS Securities LLC, as Arranger and Co-Syndication Agent, UBS AG,
  Stamford Branch, as Issuing Bank and Administrative Agent, UBS Loan Finance
  LLC, as Swingline Lender, JP Morgan Chase Bank, N.A., as Collateral Agent and
  Co-Syndication Agent, and Wells Fargo Foothill, LLC and Bank of America, N.A.
  as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.1
  of the Companys Report on Form 8-K, filed on September 6, 2005, SEC File No.
  1-11908.)
|
| | 10.29 |  | Term Loan Credit Agreement dated as of September 1, 2005, among D 56, Inc., Department 56 Retail,
Inc., Time to Celebrate, Inc. and Lenox, Incorporated, as Borrowers, Department 56, Inc. and the other Guarantors party thereto,
as Guarantors, the Lenders party thereto, UBS Securities LLC, as Sole Arranger and Syndication Agent, UBS AG, Stamford Branch, as
Administrative Agent and Collateral Agent, and Wells Fargo Foothill, LLC, as Documentation Agent. (Incorporated herein by
reference to Exhibit 10.2 of the Companys Report on Form 8-K, filed on September 6, 2005, SEC File No. 1-11908.)                                                                                                                                                               
|
| | 10.30 |  | Security Agreement by D 56,
  Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc., and the other Guarantors
  party thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative
  Agent, dated as of September 1, 2005. (Incorporated herein by reference to
  Exhibit 10.3 of the Companys Report on Form 8-K, filed on September 6, 2005,
  SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                             
|
| | 10.31 |  | Security Agreement by D 56,
  Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc., and the other Guarantors
  party thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative
  Agent, dated as of September 1, 2005. (Incorporated herein by reference to
  Exhibit 10.4 of the Companys Report on Form 8-K, filed on September 6, 2005,
  SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                             
|
| | 10.32 |  | Letter Agreement, dated
  September 26, 2005, between Linda Jones Miller and Department 56, Inc.
  (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
  Form 8-K, filed on September 28, 2005, SEC File No. 1- 11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | 10.33 |  | Form of Retention Agreement
  between Lenox, Incorporated and certain executive officers. (Incorporated
  herein by reference to Exhibit 10.1 of the Companys Report on Form 8-K,
  filed on November 2, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | 10.34 |  | Form of Letter Agreement
  between Department 56, Inc. and certain executive officers. (Incorporated
  herein by reference to Exhibit 10.2 of the Companys Report on Form 8-K,
  filed on November 2, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10.35 |  | Form of Restricted Stock
  Agreement for certain executive officers under the Department 56 2004 Stock
  Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 of the
  Companys Report on Form 8-K, filed on November 2, 2005, SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 10.36 |  | 2005 Form of Stock Option
  Agreement for Officers under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
  Form 8-K, filed on December 14, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | 10.37 |  | 2005 Form of Stock Option
  Agreement for Directors under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.2 of the Companys Report on
  Form 8-K, filed on December 14, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 10.38 |  | Agreement of Lease, dated
  as of December 30, 2005, by and between Island View TCI, L.P. and Lenox,
  Incorporated. (Incorporated herein by reference to Exhibit 10.1 of the
  Companys Report on Form 8-K, filed on December 30, 2005, SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 10.39 |  | Agreement of Sale, dated as
  of December 30, 2005, by and between PREI Wheeler Way Associates, LP and
  Lenox, Incorporated. (Incorporated herein by reference to Exhibit 10.2 of the
  Companys Report on Form 8-K, filed on December 30, 2005, SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 10.40 |  | 2005 Form of Stock Option
  Agreement for Officers under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
  Form 8-K, filed on January 5, 2006, SEC File No. 1-11908.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10.41 |  | 2005 Form of Stock Option
  Agreement for Directors under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.2 of the Companys Report on
  Form 8-K, filed on January 5, 2006, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 10.42 |  | Agreement of Lease, dated
  as of December 30, 2005, by and between Island View TCI, L.P. and Lenox,
  Incorporated. (Incorporated herein by reference to Exhibit 10.1 of the
  Companys Report on Form 8-K, filed on January 6, 2006, SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 10.43 |  | Agreement of Sale, dated as
  of December 30, 2005, by and between PREI Wheeler Way Associates, LP and
  Lenox, Incorporated. (Incorporated herein by reference to Exhibit 10.2 of the
  Companys Report on Form 8-K, filed on January 6, 2006, SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
|

38

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| |       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.44 |  | Amendment, dated April 27,
  2006, to the Revolving Credit Agreement, dated as of September 1, 2005, among
  D 56, Inc., Department 56 Retail, Inc., Time to Celebrate Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc. and the other Guarantors
  party thereto, as Guarantors, the Lenders party thereto, UBS Securities LLC,
  as Arranger and Co-Syndication Agent, UBS AG, Stamford Branch, as Issuing
  Bank and Administrative Agent, UBS Loan Finance LLC, as Swingline Lender, JP
  Morgan Chase Bank, N.A., as Collateral Agent and Co-Syndication Agent, and
  Wells Fargo Foothill, LLC and Bank of America, N.A. as Co-Documentation
  Agents. (Incorporated herein by reference to Exhibit 10.1 of the Companys
  Report on Form 8-K, filed on May 3, 2006, SEC File No. 1-11908.)
|
| | 10.45 |  | Amendment, dated April 27,
  2006, to the Term Loan Credit Agreement, dated as of September 1, 2005, among
  D 56, Inc., Department 56 Retail, Inc., Time to Celebrate, Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc. and the other Guarantors
  party thereto, as Guarantors, the Lenders party thereto, UBS Securities LLC,
  as Sole Arranger and Syndication Agent, UBS AG, Stamford Branch, as
  Administrative Agent and Collateral Agent, and Wells Fargo Foothill, LLC, as
  Documentation Agent. (Incorporated herein by reference to Exhibit 10.2 of the
  Companys Report on Form 8-K, filed on May 3, 2006, SEC File No. 1-11908.)                                                                                                                                               
|
| | 10.46 |  | Agreement of Sale as of
  October 3, 2006 by and between Lenox, Incorporated and BTR Capital Fund II,
  LLC. (Incorporated herein by reference to Exhibit 10.1 of the Companys
  Report on Form 8-K, filed on October 5, 2006, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 10.47 |  | Purchase and Sale Agreement as of December 11, 2006 by and between Lenox, Incorporated and First
Industrial Acquisitions, Inc. (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on Form 8-K, filed on
December 14, 2006, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | 10.48 |  | Industrial Building Bond-Type Lease dated December 28, 2006 between FR Net Lease Co Investment
Program 13, LLC and Lenox, Incorporated. (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on Form
8-K, filed on January 3, 2007, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 10.49 |  | Resignation/Retirement Agreement between the Lenox Group Inc. and Susan E. Engel, dated effective as
of January 4, 2007, including the form of Release entered into by Ms. Engel effective January 4, 2007. (Incorporated herein by
reference to Exhibit 10.1 of the Companys Report on Form 8-K, filed on January 9, 2007, SEC File No. 1-11908.)
                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 10.50 |  | Form of Senior Management Change in Control Agreement. (Incorporated herein by reference to Exhibit
10.1 of the Companys Report on Form 8-K, filed on January 17, 2007, SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | 10.51 |  | Consulting Agreement between Lenox Group Inc. and Carl Marks Advisory Group LLC (CMAG),
dated January 4, 2007.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 10.52 |  | Amendment, dated January 24, 2007, to Consulting Agreement between Lenox Group Inc. and Carl Marks
Advisory Group LLC (CMAG), dated January 4, 2007.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | 10.53 |  | Waiver and Fourth Amendment, dated as of February 9, 2007, to the Revolving Credit Agreement,
dated as of September 1, 2005, among D56, Inc., Lenox Retail, Inc. and Lenox, Incorporated, as Borrowers, Lenox Group Inc.,
Lenox Sales, Inc. and FL 56 Intermediate Corp., as Guarantors, the Lenders party thereto, UBS Securities LLC, as Arranger and
Co-Syndication Agent, UBS AG, Stamford Branch, as Issuing Bank and Administrative Agent, UBS Loan Finance LLC, as Swingline
Lender, JP Morgan Chase Bank, N.A., as Collateral Agent and Co-Syndication Agent, and Wells Fargo Foothill, LLC and Bank of
America, N.A. as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
Form 8-K, filed on February 14, 2007, SEC File No. 1-11908.)              
|
| | 10.54 |  | Waiver and Third Amendment, dated as of February 9, 2007, to the Term Loan Credit Agreement,
dated as of September 1, 2005, among D56, Inc., Lenox Retail, Inc. and Lenox, Incorporated, as Borrowers, Lenox Group Inc.,
Lenox Sales, Inc. and FL 56 Intermediate Corp., as Guarantors, the Lenders party thereto, UBS Securities LLC, as Sole
Arranger and Syndication Agent, UBS AG, Stamford Branch, as Administrative Agent and Collateral Agent, and Wells Fargo
Foothill, LLC, as Documentation Agent. (Incorporated herein by reference to Exhibit 10.2 of the Companys Report on
Form 8-K, filed on February 14, 2007, SEC File No. 1-11908.)                                                                                                                                                           
|
| | 21.1  |  | Subsidiaries of the Company. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 23.1  |  | Consent of Independent Registered Public Accounting Firm. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 32.1  |  | Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|  |                                          
|- | -----------------------------------------
| 
|  |                                          
| | Management contract or compensatory plan.
| 
|* | Filed herewith.                          

39

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Table of Contents

SIGNATURES

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

|                       |                  |                          
|---------------------- | ---------------- | -------------------------
|                       | LENOX GROUP INC.
|                       |                 
|Date: March
  15, 2007 | By:              | /s/ MARC L. PFEFFERLE    
|                       |                 
|                       |                  | Marc
  L. Pfefferle      
|                       |                  | Chief
  Executive Officer

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

|                            |  |                                                                                                 |  |                 
|--------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----------------
|Signature                   |  | Capacity in which signed                                                                        |  | Date            
|                            |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  MARC L. PFEFFERLE     |  | Chief Executive Officer                                                                         |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Marc
  L. Pfefferle         |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  TIMOTHY J. SCHUGEL    |  | Chief Financial Officer
  and
  Chief Operating Officer
  (Principal Financial Officer)         |  | March
  15, 2007
|                            |  |                                                                                                 | 
|Timothy
  J. Schugel        |  |                                                                                                 | 
|                            |  |                                                                                                 |  |                 
|/s/
  GREGG A. PETERS       |  | Vice President of Finance
  and
  Principal Accounting Officer
  (Principal Accounting Officer) |  | March
  15, 2007
|                            |  |                                                                                                 | 
|Gregg
  A. Peters           |  |                                                                                                 | 
|                            |  |                                                                                                 |  |                 
|/s/
  JAMES E. BLOOM        |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|James
  E. Bloom            |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  STEWART M. KASEN      |  | Chairman and Director                                                                           |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Stewart
  M. Kasen          |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  DR. REATHA CLARK KING |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Dr.
  Reatha Clark King     |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  CHARLES N. HAYSSEN    |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Charles
  N. Hayssen        |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  JOHN V. WEBER         |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|John
  V. Weber             |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  GLENDA B. GLOVER      |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Glenda
B. Glover            |  |                                                                                                 |  |                 
|                            |  |                                                                                                 |  |                 
|/s/
  DOLORES A. KUNDA      |  | Director                                                                                        |  | March
  15, 2007
|                            |  |                                                                                                 |  |                 
|Dolores
A. Kunda            |  |                                                                                                 |  |                 

41

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Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

Management
of Lenox Group Inc. (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control system was designed to provide reasonable assurance to management and
the board of directors regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.

Management
assessed the effectiveness of the Companys internal control over financial
reporting as of December 30, 2006. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
ControlIntegrated Framework.

Based
on this assessment and those criteria, management believes the Companys
internal control over financial reporting was effective as of December 30,
2006.

The
Companys independent auditors have issued an attestation report on
managements assessment of the Companys internal control over financial
reporting. This report appears on the following page.

F-1

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Internal Control over Financial Reporting

To the Board
of Directors and Stockholders of 
     Lenox Group Inc.:

We have audited managements
assessment, included in the accompanying Managements Report on Internal
Controls over Financial Reporting, that Lenox Group Inc. and subsidiaries (the
Company) maintained effective internal control over financial reporting as of
December 30, 2006, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO Framework). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A companys internal control
over financial reporting is a process designed by, or under the supervision of,
the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America (generally accepted accounting
principles). A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the
internal control over financial reporting to future periods are subject to the
risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

F-2

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Table of Contents

In our opinion, managements
assessment that the Company maintained effective internal control over
financial reporting as of December 30, 2006, is fairly stated, in all material
respects, based on the criteria established in the COSO Framework. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 30, 2006, based on the criteria
established in the COSO Framework.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 30, 2006, of the Company, and
our report dated March 15, 2007, expressed an unqualified opinion on those
financial statements and financial statement schedule and included explanatory
paragraphs relating to the Companys ability to continue as a going concern and
to the changes in its method of accounting for defined benefit and pension and
postretirement plans and stock-based compensation in 2006.

Minneapolis,
Minnesota 
March 15, 2007

F-3

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Consolidated Financial Statements

To the Board
of Directors and Stockholders of 
     Lenox Group Inc.:

We have audited the accompanying
consolidated balance sheets of Lenox Group Inc. and subsidiaries (the
Company) as of December 30, 2006 and December 31, 2005, and the related
consolidated statements of operations, cash flows, and changes in stockholders
equity for each of the three years in the period ended December 30, 2006. Our
audits also included the financial statement schedule listed in the Index at
Item 15. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on the consolidated financial statements and financial
statement schedule based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 30, 2006 and December 31, 2005,
and the results of its operations and its cash flows for each of the three
years in the period ended December 30, 2006, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Notes 1 and 8 to the
consolidated financial statements, at December 30, 2006, the Company would not
have been in compliance with certain financial covenants had the lender not
temporarily amended its revolving credit facility and term loan credit facility
and temporarily waived certain covenants. The Company is attempting to
renegotiate amendments to the revolving and term credit facilities or obtain
new credit agreements with other lenders. The Companys difficulties in meeting
its loan agreement covenants and financing needs raise substantial doubt about
its ability to continue as a going concern. Managements plans concerning these
matters are also discussed in Notes 1 and 8 to the consolidated financial
statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

As discussed in Notes 1 and
10 to the consolidated financial statements, in 2006, the Company changed its
method of accounting for defined benefit pension and postretirement benefit
plans and as discussed in Note 14 to the consolidated financial statements, in
2006, the Company changed its method of accounting for stock-based
compensation.

We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Companys internal control over
financial reporting as of December 30, 2006, based on the criteria established
in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated March 15, 2007
expressed an unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys internal control over
financial reporting.

Minneapolis,
Minnesota 
March 15, 2007

F-4

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|                                             
|---------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES            
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|(In thousands, except per share amounts)     
|AS OF DECEMBER 30, 2006 AND DECEMBER 31, 2005
|                                             

|                                                                                                         |  |      |          |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                                                                                         |  | 2006 |          | 2005 |  
|ASSETS                                                                                                   |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Current assets:                                                                                          |  |      |          |      |   |          |  
|Cash and cash equivalents                                                                                |  | $    | 875      |      | $ | 1,279    |  
|Accounts receivable, net of allowances of $13,456
and $13,534,
  respectively                            |  |      | 52,059   |      |   | 55,563   |  
|Inventories                                                                                              |  |      | 101,925  |      |   | 94,346   |  
|Deferred taxes                                                                                           |  |      | 13,896   |      |   | 13,380   |  
|Income tax receivable                                                                                    |  |      | 956      |      |   |         |  
|Other current assets                                                                                     |  |      | 9,306    |      |   | 8,411    |  
|                                                                                                         |  |      |          |      |   |          |  
|Total current assets                                                                                     |  |      | 179,017  |      |   | 172,979  |  
|                                                                                                         |  |      |          |      |   |          |  
|Property and equipment, net                                                                              |  |      | 49,471   |      |   | 71,428   |  
|Assets held for sale                                                                                     |  |      |         |      |   | 17,018   |  
|Goodwill                                                                                                 |  |      |         |      |   | 53,769   |  
|Trademarks                                                                                               |  |      | 119,439  |      |   | 121,971  |  
|Other intangibles                                                                                        |  |      | 14,135   |      |   | 17,037   |  
|Marketable securities                                                                                    |  |      | 2,098    |      |   | 2,449    |  
|Other assets                                                                                             |  |      | 9,637    |      |   | 13,277   |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                        
|                                                                                                         |  | $    | 373,797  |      | $ | 469,928  |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Current liabilities:                                                                                     |  |      |          |      |   |          |  
|Current portion of long-term debt                                                                        |  | $    | 49,056   |      | $ | 10,000   |  
|Borrowings on revolving credit facility                                                                  |  |      | 47,510   |      |   | 10,468   |  
|Accounts payable                                                                                         |  |      | 35,248   |      |   | 31,270   |  
|Accrued compensation and benefits payable                                                                |  |      | 6,428    |      |   | 16,538   |  
|Income taxes payable                                                                                     |  |      |         |      |   | 6,590    |  
|Severance and restructuring reserves                                                                     |  |      | 1,939    |      |   | 12,201   |  
|Other current liabilities                                                                                |  |      | 8,576    |      |   | 6,554    |  
|Current liabilities of discontinued
operations                                                           |  |      |         |      |   | 32       |  
|                                                                                                         |  |      |          |      |   |          |  
|Total current liabilities                                                                                |  |      | 148,757  |      |   | 93,653   |  
|                                                                                                         |  |      |          |      |   |          |  
|Deferred compensation obligation                                                                         |  |      | 2,085    |      |   | 2,489    |  
|Pension obligations                                                                                      |  |      | 30,664   |      |   | 87,014   |  
|Postretirement obligations                                                                               |  |      | 15,853   |      |   | 28,560   |  
|Deferred taxes                                                                                           |  |      | 18,297   |      |   | 1,424    |  
|Long-term debt                                                                                           |  |      |         |      |   | 90,250   |  
|Deferred gain on sale-leaseback                                                                          |  |      | 3,845    |      |   |         |  
|Other noncurrent liabilities                                                                             |  |      | 12,617   |      |   | 4,789    |  
|                                                                                                         |  |      |          |      |   |          |  
|Commitments and contingencies (Note 15)                                                                  |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Stockholders equity:                                                                                    |  |      |          |      |   |          |  
|Preferred stock, $.01 par value; authorized 20,000
shares; no shares
  issued                            |  |      |          |      |   |          |  
|Common stock, $.01 par value; authorized 100,000
shares; issued 23,379
  and 23,244 shares, respectively |  |      | 234      |      |   | 232      |  
|Additional paid-in capital                                                                               |  |      | 64,085   |      |   | 65,691   |  
|Unearned compensation  restricted
shares                                                                |  |      |         |      |   | (3,469   | )
|Treasury stock, at cost; 9,272 and 9,214 shares,
respectively                                            |  |      | (217,186 | )    |   | (217,188 | )
|Retained earnings                                                                                        |  |      | 266,153  |      |   | 316,483  |  
|Accumulated other comprehensive income                                                                   |  |      | 28,393   |      |   |         |  
|                                                                                                         |  |      |          |      |   |          |  
|Total stockholders equity                                                                               |  |      | 141,679  |      |   | 161,749  |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  | $    | 373,797  |      | $ | 469,928  |  
|                                                                                                         |  |      |          |      |   |          |  

See notes to consolidated financial statements.

F-5

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|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|CONSOLIDATED STATEMENTS OF OPERATIONS                               
|(In thousands, except per share amounts)                            
|YEARS ENDED DECEMBER 30, 2006, DECEMBER 31, 2005 AND JANUARY 1, 2005
|                                                                    

|                                                             |  |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                             |  | 2006 |         | 2005 |   | 2004    |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|NET SALES                                                    |  | $    | 502,506 |      | $ | 331,728 |   | $ | 162,908 |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|COST OF SALES                                                |  |      | 257,932 |      |   | 172,845 |   |   | 73,958  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|Gross profit                                                 |  |      | 244,574 |      |   | 158,883 |   |   | 88,950  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|OPERATING EXPENSES -                                         |  |      |         |      |   |         |   |   |         |  
|Selling, general and administrative                          |  |      | 234,676 |      |   | 126,394 |   |   | 53,834  |  
|Pension curtailment and settlement gains                     |  |      | (14,783 | )    |   |        |   |   |        |  
|Goodwill impairment                                          |  |      | 55,269  |      |   |        |   |   |        |  
|Trademark impairment                                         |  |      | 3,743   |      |   |        |   |   |        |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS           |  |      | (34,331 | )    |   | 32,489  |   |   | 35,116  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|OTHER EXPENSE (INCOME):                                      |  |      |         |      |   |         |   |   |         |  
|Interest expense                                             |  |      | 16,697  |      |   | 5,735   |   |   | 493     |  
|Litigation settlement                                        |  |      |        |      |   |        |   |   | (6,871  | )
|Other, net                                                   |  |      | 35      |      |   | (744    | ) |   | (414    | )
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES |  |      | (51,063 | )    |   | 27,498  |   |   | 41,908  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(BENEFIT) PROVISION FOR INCOME TAXES                         |  |      | (1,795  | )    |   | 10,146  |   |   | 15,088  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                     |  |      | (49,268 | )    |   | 17,352  |   |   | 26,820  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX                |  |      |        |      |   | (2,182  | ) |   | (3,036  | )
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|NET (LOSS) INCOME                                            |  | $    | (49,268 | )    | $ | 15,170  |   | $ | 23,784  |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME PER SHARE  BASIC:                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                     |  | $    | (3.58   | )    | $ | 1.27    |   | $ | 2.01    |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                            |  |      |        |      |   | (0.16   | ) |   | (0.23   | )
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|NET (LOSS) INCOME PER SHARE  BASIC                          |  | $    | (3.58   | )    | $ | 1.11    |   | $ | 1.78    |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME PER SHARE  DILUTED:                           |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                     |  | $    | (3.58   | )    | $ | 1.26    |   | $ | 1.98    |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                            |  |      |        |      |   | (0.16   | ) |   | (0.22   | )
|                                                             |  |      |         |      |   |         |   |   |         |  
|                                                             |  |      |         |      |   |         |   |   |         |  
|NET (LOSS) INCOME PER SHARE  DILUTED                        |  | $    | (3.58   | )    | $ | 1.10    |   | $ | 1.76    |  
|                                                             |  |      |         |      |   |         |   |   |         |  

See notes to consolidated financial statements.

F-6

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|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|CONSOLIDATED STATEMENTS OF CASH FLOWS                               
|(In thousands)                                                      
|YEARS ENDED DECEMBER 30, 2006, DECEMBER 31, 2005 AND JANUARY 1, 2005
|                                                                    

|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | - | - | ------- | -
|                                                                                                     |  | 2006 |          | 2005 |   | 2004     |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |  |      |          |      |   |          |   |   |         |  
|Net (loss) income                                                                                    |  | $    | (49,268  | )    | $ | 15,170   |   | $ | 23,784  |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|Adjustments to reconcile net (loss) income to net cash (used in)
  provided by operating activities: |  |      |          |      |   |          |   |   |         |  
|Loss from discontinued operations                                                                    |  |      |         |      |   | 2,182    |   |   | 3,036   |  
|Depreciation                                                                                         |  |      | 12,581   |      |   | 6,872    |   |   | 3,609   |  
|Goodwill impairment                                                                                  |  |      | 55,269   |      |   |         |   |   |        |  
|Trademark impairment                                                                                 |  |      | 3,743    |      |   |         |   |   |        |  
|(Gain) loss on disposal of assets                                                                    |  |      | (1,457   | )    |   | 669      |   |   | 184     |  
|Pension curtailment and settlement gains                                                             |  |      | (14,783  | )    |   |         |   |   |        |  
|Amortization of other intangibles                                                                    |  |      | 2,902    |      |   | 1,460    |   |   | 140     |  
|Amortization of deferred financing fees                                                              |  |      | 1,944    |      |   | 796      |   |   | 75      |  
|Stock-based compensation                                                                             |  |      | 1,518    |      |   | 989      |   |   | 389     |  
|Deferred taxes                                                                                       |  |      | 843      |      |   | (2,413   | ) |   | 1,311   |  
|Excess tax benefits from stock based
compensation                                                    |  |      | (7       | )    |   | 272      |   |   | 519     |  
|Changes in assets and liabilities:                                                                   |  |      |          |      |   |          |   |   |         |  
|Accounts receivable                                                                                  |  |      | 7,389    |      |   | 12,030   |   |   | (7,489  | )
|Inventories                                                                                          |  |      | (6,451   | )    |   | 36,442   |   |   | (2,281  | )
|Other assets                                                                                         |  |      | (238     | )    |   | 2,600    |   |   | (667    | )
|Accounts payable                                                                                     |  |      | (219     | )    |   | (15,425  | ) |   | 536     |  
|Accrued compensation and benefits payable                                                            |  |      | (6,750   | )    |   | (146     | ) |   | (46     | )
|Income taxes payable                                                                                 |  |      | (7,146   | )    |   | 2,275    |   |   | (1,966  | )
|Pension & postretirement obligations                                                                 |  |      | (8,221   | )    |   | (1,915   | ) |   |        |  
|Other liabilities                                                                                    |  |      | (6,873   | )    |   | (632     | ) |   | 496     |  
|Net cash (used in) provided by operating activities from discontinued
  operations                   |  |      | (32      | )    |   | (800     | ) |   | 3,303   |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|Net cash (used in) provided by operating
activities                                                  |  |      | (15,256  | )    |   | 60,426   |   |   | 24,933  |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                |  |      |          |      |   |          |   |   |         |  
|Purchases of property and equipment                                                                  |  |      | (12,385  | )    |   | (1,905   | ) |   | (2,184  | )
|Proceeds from sale of assets                                                                         |  |      | 44,385   |      |   |         |   |   |        |  
|Acquisitions                                                                                         |  |      | (2,849   | )    |   | (204,036 | ) |   |        |  
|Net sale (purchase) of available-for-sale
securities                                                 |  |      |         |      |   | 11,150   |   |   | (1,150  | )
|Net cash used in investing activities from
discontinued operations                                   |  |      |         |      |   | (3       | ) |   | (29     | )
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|Net cash provided by (used in) investing
activities                                                  |  |      | 29,151   |      |   | (194,794 | ) |   | (3,363  | )
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                |  |      |          |      |   |          |   |   |         |  
|Proceeds from the exercise of common stock
options                                                   |  |      | 340      |      |   | 1,640    |   |   | 4,862   |  
|Payments of deferred financing fees                                                                  |  |      | (397     | )    |   | (10,125  | ) |   |        |  
|Excess tax benefits from stock based
compensation                                                    |  |      | 7        |      |   |         |   |   |        |  
|Borrowings on revolving credit agreement                                                             |  |      | 265,201  |      |   | 121,500  |   |   | 15,000  |  
|Principal payments on revolving credit
agreement                                                     |  |      | (228,159 | )    |   | (111,032 | ) |   | (15,000 | )
|Principal payments on capital leases                                                                 |  |      | (97      | )    |   |         |   |   |        |  
|Purchases of treasury stock                                                                          |  |      |         |      |   | (79      | ) |   | (146    | )
|Borrowings on long-term debt                                                                         |  |      |         |      |   | 100,000  |   |   |        |  
|Principal payments on long-term debt                                                                 |  |      | (51,194  | )    |   |         |   |   |        |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|Net cash (used in) provided by financing
activities                                                  |  |      | (14,299  | )    |   | 101,904  |   |   | 4,716   |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                 |  |      | (404     | )    |   | (32,464  | ) |   | 26,286  |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                     |  |      | 1,279    |      |   | 33,743   |   |   | 7,457   |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                           |  | $    | 875      |      | $ | 1,279    |   | $ | 33,743  |  
|                                                                                                     |  |      |          |      |   |          |   |   |         |  

See notes to consolidated financial statements.

F-7

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|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                     
|(In thousands)                                                      
|YEARS ENDED DECEMBER 30, 2006, DECEMBER 31, 2005 AND JANUARY 1, 2005
|                                                                    

|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|----------------------------------------------------------------- |  | --------------- | ------ | ----------------------------- |  | ------ | -------- | ------------------------------ | --- | ---------------------------------- | - | ---------------- | - | ------------------- | ----------- | ------------------------------ | - | -------- | - | --------------------------- | -------- | - | - | ------ | - | - | ------- | - | - | ------- | -
|                                                                  |  | Common Stock    |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |       
|                                                                  |  |                 |        |                               |  |        | Unearned |                                |     |                                    |   |                  |   |                     | Accumulated |                                |   |          |   |                             |          |  
|                                                                  |  | Shares
  Issued |        | Treasury
  Shares
  Purchased |  | Amount |          | Additional
  Paid-in
  Capital |     | Compensation
  Restricted
  Shares |   | Treasury
  Stock |   | Retained
  Earnings |             | Other
  Comprehensive
  Income |   | Total    |   | Comprehensive Income (loss) |         
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |         
|BALANCE AS OF JANUARY 3, 2004                                     |  |                 | 22,363 |                               |  | (9,195 | )        | $                              | 224 |                                    | $ | 54,020           |   | $                   | (514        | )                              | $ | (216,963 | ) |                             | $277,529 |   |   |       |   | $ | 114,296 |   | $ | 114,296 |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|Net income                                                        |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             | 23,784   |   |   |        |   |   | 23,784  |   |   |         |  
|Shares issued
  upon the exercise of common stock options         |  |                 | 398    |                               |  |        |          |                                | 4   |                                    |   | 4,858            |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 4,862   |   |   |         |  
|Tax benefit related to stock options
exercised                    |  |                 |        |                               |  |        |          |                                |     |                                    |   | 519              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 519     |   |   |         |  
|Restricted shares surrendered                                     |  |                 |        |                               |  | (9     | )        |                                |     |                                    |   |                  |   |                     | 53          |                                |   | (146     | ) |                             |          |   |   |        |   |   | (93     | ) |   |         |  
|Restricted shares
  amortization                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   | 34               |   |                     | 228         |                                |   |          |   |                             |          |   |   |        |   |   | 262     |   |   |         |  
|Other                                                             |  |                 | 8      |                               |  |        |          |                                |     |                                    |   | 127              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 127     |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|BALANCE AS OF JANUARY 1, 2005                                     |  |                 | 22,769 |                               |  | (9,204 | )        |                                | 228 |                                    |   | 59,558           |   |                     | (233        | )                              |   | (217,109 | ) |                             | 301,313  |   |   |       |   | $ | 143,757 |   | $ | 143,757 |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|Net income                                                        |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             | 15,170   |   |   |        |   |   | 15,170  |   |   |         |  
|Shares issued
  upon the exercise of common stock options         |  |                 | 148    |                               |  |        |          |                                | 1   |                                    |   | 1,639            |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 1,640   |   |   |         |  
|Tax benefit
  related to stock options exercised                  |  |                 |        |                               |  |        |          |                                |     |                                    |   | 272              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 272     |   |   |         |  
|Restricted shares
  surrendered                                   |  |                 |        |                               |  | (10    | )        |                                |     |                                    |   | (67              | ) |                     | 67          |                                |   | (79      | ) |                             |          |   |   |        |   |   | (79     | ) |   |         |  
|Restricted shares
  amortization                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     | 766         |                                |   |          |   |                             |          |   |   |        |   |   | 766     |   |   |         |  
|Restricted shares
  issued                                        |  |                 | 309    |                               |  |        |          |                                | 3   |                                    |   | 4,066            |   |                     | (4,069      | )                              |   |          |   |                             |          |   |   |        |   |   | 0       |   |   |         |  
|Other                                                             |  |                 | 18     |                               |  |        |          |                                |     |                                    |   | 223              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 223     |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|BALANCE AS OF DECEMBER 31, 2005                                   |  |                 | 23,244 |                               |  | (9,214 | )        |                                | 232 |                                    |   | 65,691           |   |                     | (3,469      | )                              |   | (217,188 | ) |                             | 316,483  |   |   |       |   |   | 161,749 |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|Net loss                                                          |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             | (49,268  | ) |   |        |   |   | (49,268 | ) |   | (49,268 | )
|Change in
  cumulative translation adjustment                     |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   | (4     | ) |   | (4      | ) |   | (4      | )
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|Comprehensive
  loss                                              |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   | $ | (49,272 | )
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|Effect of
  accounting change (SFAS 123R)                         |  |                 |        |                               |  |        |          |                                |     |                                    |   | (3,469           | ) |                     | 3,469       |                                |   |          |   |                             |          |   |   |        |   |   | 0       |   |   |         |  
|Effect of
  accounting change (SFAS 158), net of tax of $(16,753) |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             | (1,062   | ) | $ | 28,397 |   |   | 27,335  |   |   |         |  
|Shares issued
  upon the exercise of common stock options         |  |                 | 34     |                               |  |        |          |                                | 1   |                                    |   | 339              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 340     |   |   |         |  
|Tax benefit
  related to stock options exercised                  |  |                 |        |                               |  |        |          |                                |     |                                    |   | 7                |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 7       |   |   |         |  
|Restricted shares
  surrendered                                   |  |                 |        |                               |  | (58    | )        |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 0       |   |   |         |  
|Restricted shares
  amortization                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   | 1,194            |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 1,194   |   |   |         |  
|Restricted shares
  issued                                        |  |                 | 83     |                               |  |        |          |                                | 1   |                                    |   | (1               | ) |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 0       |   |   |         |  
|Stock-based
  compensation                                        |  |                 | 18     |                               |  |        |          |                                |     |                                    |   | 324              |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   | 324     |   |   |         |  
|Other                                                             |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   | 2        |   |                             |          |   |   |        |   |   | 2       |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  
|BALANCE AS OF DECEMBER 30, 2006                                   |  |                 | 23,379 |                               |  | (9,272 | )        | $                              | 234 |                                    | $ | 64,085           |   | $                   | 0           |                                | $ | (217,186 | ) | $                           | 266,153  |   | $ | 28,393 |   | $ | 141,679 |   |   |         |  
|                                                                  |  |                 |        |                               |  |        |          |                                |     |                                    |   |                  |   |                     |             |                                |   |          |   |                             |          |   |   |        |   |   |         |   |   |         |  

See notes to consolidated financial statements.

F-8

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Table of Contents

|                                                  
|--------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                 
|                                                  
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|(In thousands, except share and per share amounts)
|                                                  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Business  Lenox Group Inc. and its subsidiaries (the Company) is a leading designer,
distributor, wholesaler and retailer of fine quality tabletop, collectibles and other giftware products. The Company sells its
product through gift, specialty retailers, department stores, and general merchandise chains, as well as through the
Companys own retail stores and direct channels of distribution, including Internet, catalog and mail order. The Company
markets its products principally under the Department 56, Lenox, Dansk and Gorham brand names. The majority of the
Companys products are developed and designed by the Companys in-house creative team and are manufactured for the
Company by independently owned foreign manufacturers located primarily in the Peoples Republic of China. The Company also
owns and operates one domestic manufacturing facility that produces certain of its products. Approximately 2% of total revenue is
derived from customers outside the United States and all long-lived assets are located within the United States.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Principles of Consolidation  The consolidated financial statements of the Company
include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Effective September 1, 2005, the Company completed the acquisition of Lenox, Incorporated
(Lenox). These financial statements and footnotes reflect the Lenox assets acquired, liabilities assumed, and results
of operations of Lenox from the acquisition date of September 1, 2005. See Note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The consolidated financial statements of the Company have been prepared on the assumption that it
will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | On February 9, 2007, the Company entered into waivers and amendments to the revolving credit
facility and the term loan credit facility in connection with the Companys noncompliance with the financial covenants under
the credit agreements for the period ended December 30, 2006. Pursuant to the waivers and amendments, the lenders granted the
Company a limited waiver of noncompliance through and including April 30, 2007, and temporarily amended the agreements to adjust
the leverage ratio and interest coverage ratio levels for the first quarter of 2007. In addition, the amendment to the term loan
facility increased the applicable margin for loans by 0.25% per annum. As consideration for the amendments, the Company paid
amendment fees of $0.2 million.                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | In order to avoid defaulting under its existing credit facilities, on or before April 30, 2007, the
Company will either have to negotiate amendments to the revolving and term credit facilities or obtain new credit agreements with
other lenders. The Company is currently in discussions with the agent under its existing credit facilities as well as with other
potential lenders regarding a modified or new lending arrangement. While the Company is optimistic it will be able to amend its
existing facilities or enter into new facilities, it cannot provide assurance that it will occur, which raises substantial doubt
about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.                                                                                                                                    

F-9

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fiscal Year End  The Companys policy is to end its fiscal year on the Saturday
closest to December 31. The years ended January 1, 2005, December 31, 2005 and December 30, 2006 included 52 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Management Estimates  The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Cash Equivalents  All highly liquid debt instruments with original maturities of three
months or less are considered to be cash equivalents. These investments are carried at cost, which approximates market
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Short-Term Investments  The Company has historically held short-term investments
consisting of Auction Rate Securities which represent funds available for current operations. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, these short-term investments are classified as
available-for-sale and are carried at cost, or par value, which approximates the fair market value. These securities have stated
maturities beyond three months but are priced and traded as short-term instruments due to the liquidity provided through the
interest rate mechanism of 28 to 49 days. The Company did not hold any Auction Rate Securities at the end of 2006 or 2005.                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Marketable Securities  The Company classifies the marketable securities designated to
fund its deferred compensation plan as trading securities under SFAS No. 115. In accordance with the provisions of
this statement, the investment balance is stated at fair market value, based on quoted market prices. Realized and unrealized
gains and losses are reflected in earnings. As the assets designated to fund the deferred compensation plan reflect amounts due to
employees (but available for general creditors of the Company in the event the Company becomes insolvent), the Company has
recorded the investment balance as a non-current asset and has established a corresponding other long-term liability entitled
Deferred compensation obligation on the Consolidated Balance Sheets.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Allowance for Sales Returns and Credits  The Company records an allowance for credits
related to possible returned or damaged product, markdowns and pricing and shipping discrepancies. The allowance is based on
historical ratios of credit to sales, the historical average length of time between the sale and the credit, and other
factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Allowance for Doubtful Accounts  The Company records an allowance for estimated
uncollectible accounts receivable based on an evaluation of its accounts receivable balance. This evaluation includes a number of
factors including the age of the receivable, the financial condition of the customer, the current business environment, and the
historical collection experience for customers of similar background and nature.                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Inventories  Inventories consist of raw materials, work-in-process and finished goods
and are stated at the lower of average cost, which approximates first-in, first-out cost, or net realizable value. For product
sourced from independent manufacturers, the Company records inventory at the date of taking title, which typically occurs when
product is delivered to a foreign port. As a result, at certain times during the year, the Company has significant in-transit
quantities, as inventory is sourced primarily from the Peoples Republic of China and other Pacific Rim countries. Each
period, the Company adjusts identified excess and slow-moving inventory to its net realizable value.                                                                                             

F-10

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property and Equipment  Property and equipment are stated at cost. Depreciation is
computed on a straight-line method over the estimated useful lives of the assets (or in the case of leasehold improvements, the
shorter of the estimated useful lives or lease terms). Estimated useful lives of the Companys property and equipment are as
follows:

| |                                  |  |            
| | -------------------------------- |  | -----------
| | Leasehold improvements           |  | 7-10 years 
| | Furniture and fixtures           |  | 5-10 years 
| | Computer hardware and
  software |  | 2-5 years  
| | Tooling                          |  | 3-5 years  
| | Other equipment                  |  | 3-10 years 
| | Building and improvements        |  | 20-45 years

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Major improvements and
  replacements of property are capitalized. Maintenance, repairs, and minor
  improvements are expensed. Assets held for sale are stated at the lower of
  their carrying amount or fair value, less costs to sell.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Long-Lived
  Assets  The
  Companys principal long-lived assets are its property and equipment which
  consists of its corporate headquarter buildings, its manufacturing facility,
  and the computer equipment, furniture and fixtures, machinery, and leasehold
  improvements at its corporate headquarter buildings, distribution centers,
  showrooms and retail stores. The Company annually reviews its long-lived
  assets for impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Goodwill,
  Trademarks, and Other Intangible Assets  Goodwill represents the excess of the
  cost of acquired businesses over the fair value of identifiable tangible net
  assets and identifiable intangible assets purchased. During 2006, the Company
  wrote off its remaining goodwill. See Note 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The primary identifiable
  intangible assets of the Company include trademarks, customer relationships,
  favorable lease interests and non-compete agreements. Under the provisions of
  SFAS No. 142, identifiable intangibles with finite lives are amortized and
  those identifiable intangibles with indefinite lives are not amortized.
  Identifiable intangible assets that are subject to amortization are evaluated
  for impairment whenever events or changes in circumstances indicate that the
  carrying amount may not be recoverable. Identifiable intangible assets not
  subject to amortization are tested for impairment annually or more frequently
  if events warrant. The impairment test consists of a comparison of the fair
  value of the intangible asset with its carrying amount. During the fourth
  quarter of 2006, the Company completed its annual impairment test for those
  identifiable assets not subject to amortization and recorded a trademark
  impairment charge of $3.7 million. See Note 7.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Deferred Financing Fees  The Company amortizes deferred financing fees over the life of
the related debt agreement. Deferred financing fee amortization is included in interest expense in the Companys Consolidated
Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Derivatives  The Companys policy is not to use freestanding derivatives and not
to enter into contracts with terms that cannot be designated as normal purchases or sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Revenue Recognition  The Company sells its products through wholesale channels, through
Company-owned retail stores and directly to consumers. Revenue from sales to wholesale customers and from sales direct to the
consumer is recognized when product is shipped, while revenue from sales of merchandise to retail customers is recognized at the
time of sale. The Company believes that these are the times when persuasive evidence of an arrangement exists, delivery has
occurred, the Companys price is fixed and collectibility is reasonably assured. Revenue is recognized net of any applicable
discounts and allowances. Customers, whether wholesale, retail or direct, do have the right to return product in certain limited
situations. Such rights of return have not precluded revenue recognition because the Company has a long history with such returns
on which it constructs a reserve.                                                                                                                         

F-11

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cost of
  Sales  The
  Companys cost of sales principally includes the cost of product purchased
  from manufacturers, cost of manufactured product, inbound and outbound
  freight costs, duties, royalties, provisions for excess and obsolete product,
  and costs to purchase, receive, inspect and warehouse certain product.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Selling,
  General and Administrative Expense  The Companys selling, general and administrative expenses
  principally consist of expenses associated with the Companys wholesale sales
  force and retail stores; costs to develop new product, product samples and
  sculpt product; costs to purchase, receive, inspect and warehouse certain
  product; corporate compensation and benefit expense; facilities expense; bad
  debt expense; marketing and advertising expense; and other general and
  administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Advertising
  Expense  The
  Company records advertising expense in accordance with Statement of Position
  No. 93-7. Advertising expense is principally expensed when incurred. Certain
  direct response advertising costs are capitalized and amortized over periods
  not exceeding one year. Capitalized direct response advertising costs
  included on the Companys Consolidated Balance Sheets in other current assets
  for December 30, 2006 and December 31, 2005 were $2,756 and $2,061, respectively.
  Advertising expense (including amortization of direct response advertising
  costs and Payments to Customers described below) for 2006, 2005, and 2004
  was $43,840, $19,561, $1,476, respectively. The significant increase in
  advertising expense for 2006 compared to 2005 and 2004 was due to the
  acquisition of Lenox. The 2006 expense includes twelve months of the Lenox
  business compared to four months in 2005. These amounts are included in
  selling, general and administrative expense within the Companys Consolidated
  Statements of Operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Payments
  to Customers  The
  Company reimburses certain customers for cooperative advertising based on
  pre-negotiated amounts or up to a pre-determined percentage of the amount of
  product shipped to the customer. Cooperative advertising costs under these
  programs are expensed when product is shipped to the customer. Cooperative
  advertising expense for 2006, 2005, and 2004 was $9,939, $4,711, and $1,203,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Product
  Development Expense
   The Companys product development costs consist principally of salaries for
  internal creative talent, costs incurred in developing product samples, and
  royalties paid to outside artists. The Company expenses as incurred the
  salaries of creative talent and the cost to develop product samples and
  records these amounts in selling, general and administrative expense. The
  Company capitalizes into inventory the cost of royalties paid to outside
  artists and records it in cost of sales as the product is sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Freight
  Expense  Freight
  expenses for products shipped to customers (freight-out) are included in the
  cost of products sold, in accordance with Emerging Issues Task Force Issue
  No. 00-10, Accounting for Shipping and Handling Fees and Costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Pre-Opening
  Costs  Non-capital
  expenditures associated with opening new Company-operated retail stores are
  expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Income
  Taxes  Deferred
  income taxes are recognized for the tax consequences in future years of
  differences between the tax bases of assets and liabilities and their
  financial reporting amounts at each year-end based on enacted tax laws and
  statutory tax rates applicable to the periods in which the differences are
  expected to affect taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-12

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Foreign
  Currency Exchange Rate Gains and Losses  The Company imports most of its products
  and, while the majority of these purchases are denominated in United States
  dollars, some of the purchases are denominated in foreign currency. In
  addition, the Companys sales to Canadian customers are denominated in
  Canadian dollars. Foreign exchange rate gains and losses are included in
  other expense (income) within the accompanying Consolidated Statements of
  Operations. During 2006, 2005, and 2004 the Company recognized a loss of $171
  and a gain of $181 and $303, respectively from the depreciation/appreciation
  of the Canadian dollar relative to the United States dollar. The Company may
  periodically enter into foreign exchange contracts or build foreign currency
  deposits as a partial hedge against currency fluctuations. The Company has
  not entered into any foreign exchange contracts during 2006, 2005 or 2004.     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Pension and Postretirement Benefits  The Company
  sponsors various defined benefit pension plans as well as postretirement
  plans providing retiree health care and retiree life insurance benefits.
  Benefits are based on such factors as years of service and compensation level
  during employment. The benefits expected to be paid are expensed over the
  employees expected service. To determine the expected benefits to be paid,
  the Company has to make assumptions regarding interest rates, return on plan
  assets and expected health care trend rates. Actual experience different from
  these assumptions could result in materially different benefit payments.                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Environmental Matters  In accordance with Statements of Position (SOP) 96-1,
Environmental Remediation Liabilities, the Company measures its environmental liabilities on a discounted basis as the
Company believes the amount and timing of cash payments for its liabilities are reliably determinable. Accruals for environmental
liabilities are included in other noncurrent liabilities in the Consolidated Balance Sheets. See Note 18.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Stock-based compensation  Effective January 1, 2006, the Company adopted SFAS No. 123R
(revised 2004), Share-Based Payment (SFAS 123R), which revised SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123),
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). This standard requires compensation costs
related to share-based payment transactions to be recognized in the financial statements. The Company adopted the standard using
the modified prospective transition method, which requires the application of the accounting standard to all share-based awards
issued on or after the date of adoption and any outstanding share-based awards that were issued but not vested as of the date of
adoption. See Note 14.                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Fair Value of Financial Instruments  The Companys financial instruments are cash,
short-term investments, marketable securities, accounts receivable, accounts payable, borrowings on revolving credit facility and
long-term debt. The recorded amounts of cash, marketable securities, accounts receivable, accounts payable and borrowings on
revolving credit facility approximate their fair value based on their short term nature. The recorded value of long term-debt
approximates its fair market value as the Companys interest rates are variable and approximate market rates.                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Net Income (Loss) per Common Share  Net income (loss) per common share is calculated by
dividing net income (loss) by the weighted average number of shares outstanding during the period. Net income (loss) per common
share assuming dilution reflects per share amounts that would have resulted had the Companys dilutive outstanding stock
options been converted to common stock. Restricted stock is considered outstanding on the date the stock becomes vested when
computing net income (loss) per common share  basic. Restricted stock, to the extent it is probable that the stock will
become vested, is considered outstanding on the grant date when computing net income (loss) per common share  assuming
dilution. For the 52 weeks ended December 30, 2006, all options and unvested restricted stock were considered anti-dilutive and
excluded from the computation of common equivalent shares because the Company reported a net loss. See Note 17.

F-13

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reclassifications  Certain previous year amounts have been reclassified to conform to
current year presentation. These reclassifications, as discussed below, had no impact on consolidated net income (loss) or
retained earnings.                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In connection with the process to finalize the purchase accounting for the Lenox acquisition (see
Note 3), the Company identified certain items that were classified differently on the Statement of Operations by Department 56
(the acquiring company) and Lenox (the acquired company). In order to have consistent classification across the Company, the
Company has reclassified these items as follows:                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Costs to develop new product, product samples and sculpt product were historically recorded in Cost
of Sales (in the Wholesale segment) by Department 56. The Company has reclassified these expenses to Selling, General and
Administrative expense for all periods presented (with product samples costs included in the Wholesale segment as a selling
expense and new product development and sculpting costs included in the Corporate category as general and administrative expenses
are generally not allocated to operating segments).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Licensing income was historically recorded in Selling, General and Administrative expense (in the
Corporate category) by Lenox. The Company has reclassified this income to Net Sales (in the Corporate category) for all periods
presented.                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Freight costs incurred to ship product from its distribution centers to its company-owned retail
stores were historically recorded in Selling, General and Administrative expense (in the Retail segment) by Lenox. The Company has
reclassified these costs to Cost of Sales (in the Retail segment) for all periods presented.                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The impact of the above reclassifications for the years ended December 31, 2005 and
January 1, 2005 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                           | 2005 |  | 2004
|---------------------------------------------------------- | ---- |  | ----
|                                                           |      |  |     
|Net sales (as previously reported)                         |      |  | $   
|Reclassification of licensing income                       |      |  |     
|                                                           |      |  |     
|Net sales (as reported)                                    |      |  | $   
|                                                          
|Cost of sales (as previously reported)                     |      |  | $   
|Reclassification of product development/samples            |      |  |     
|Reclassification of freight                                |      |  |     
|                                                           |      |  |     
|Cost of sales (as reported)                                |      |  | $   
|                                                          
|Gross profit (as previously reported)                      |      |  | $   
|Reclassification of licensing income                       |      |  |     
|Reclassification of product development/samples            |      |  |     
|Reclassification of freight                                |      |  |     
|                                                           |      |  |     
|Gross profit (as reported)                                 |      |  | $   
|                                                          
|Operating expenses (as previously reported)                |      |  | $   
|Reclassification of licensing income                       |      |  |     
|Reclassification of product development/samples            |      |  |     
|Reclassification of freight                                |      |  |     
|                                                           |      |  |     
|Operating expenses (as reported)                           |      |  | $   
|                                                          
|Income from continuing operations (as previously reported) |      |  | $   
|Reclassification of licensing income                       |      |  |     
|Reclassification of product development/samples            |      |  |     
|Reclassification of freight                                |      |  |     
|                                                           |      |  |     
|Income from continuing operations (as reported)            |      |  | $   

F-14

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | New Accounting Standards
  On July 13, 2006, Financial Accounting Standards Board (FASB) Interpretation
  (FIN) No. 48, Accounting for Uncertainty
  in Income Taxes - an Interpretation of FASB Statement No. 109(FIN 48),
  was issued. FIN 48 clarifies the accounting for uncertainty in income taxes
  recognized in an enterprises financial statements in accordance with FASB
  Statement No. 109, Accounting for Income
  Taxes. FIN 48 also prescribes a recognition threshold and
  measurement attribute for the financial statement recognition and measurement
  of a tax position taken or expected to be taken in a tax return. The new FASB
  standard also provides guidance on derecognition, classification, interest
  and penalties, accounting in interim periods, disclosure and transition. The
  provisions of FIN 48 are effective for fiscal years beginning after December
  15, 2006. The Company is currently evaluating the effect that the adoption of
  FIN 48 will have on its consolidated results of operations and financial
  condition.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In September
  2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS 157) to
  establish a consistent framework for measuring fair value and expand
  disclosures on fair value measurements. The provisions of SFAS 157 are
  effective for fiscal years beginning after November 15, 2007. The Company is
  currently evaluating the effect that the adoption of SFAS 157 will have on
  its consolidated results of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In September
  2006, the FASB issued SFAS No. 158, EmployersAccounting for Defined Benefit Pension
  and Other Postretirement Plans, an amendment of FASB Statements No 87, 88,
  106, and 132(R)(SFAS 158).SFAS 158 requires plan sponsors of
  defined benefit pension and other postretirement benefit plans (collectively,
  postretirement plans) to recognize the funded status of their
  postretirement benefit plans in the statement of financial position, measure
  the fair value of plan assets and benefit obligations as of the date of the
  fiscal year-end statement of financial position, and provide additional
  disclosures. On December 30, 2006, the Company adopted the recognition,
  measurement and disclosure provisions of SFAS 158. The effect of adopting
  SFAS 158 on the Companys financial condition at December 30, 2006 has been
  included in the accompanying consolidated financial statements. See Note 10
  for further discussion of the effect of adopting SFAS 158 on the Companys
  consolidated financial statements.     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In February
  2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and
  Financial Liabilities (SFAS 159). SFAS 159 expands opportunities
  to use fair value measurement in financial reporting and permits entities to
  choose to measure many financial instruments and certain other items at fair
  value. This statement is effective for fiscal years beginning after November
  15, 2007. The Company is currently evaluating the effect that the adoption of
  SFAS 159 will have on its consolidated results of operations and financial
  condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In September
  2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
  No. 108, Considering
  the Effects of Prior Year Misstatements when Quantifying Misstatements in
  Current Year Financial Statements (SAB 108). SAB 108 addresses
  diversity in practice in quantifying financial statement misstatements. SAB
  108 requires that a company quantify misstatements based on their impact on
  each of its financial statements and related disclosures. SAB 108 is
  effective for fiscal years ending after November 15, 2006, allowing a
  one-time transitional cumulative effect adjustment to retained earnings as of
  January 1, 2006 for errors that were not previously deemed material, but are
  material under the guidance in SAB 108. The adoption of SAB 108 did not have
  a material impact on our consolidated results of operations and financial
  condition.                                                                                                                                                             

F-15

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Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | In October
  2005, the Company committed to a plan to cease operations of its Time to
  Celebrate business. Time to Celebrate ceased operations in December 2005, and
  in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
  Long-Lived Assets(SFAS No. 144), the Company has reclassified Time to
  Celebrates results into discontinued operations for all periods presented.
  Prior to being classified as discontinued operations, Time to Celebrates
  operating results had been presented in the retail reportable segment.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As a result
  of the decision to cease Time to Celebrates operations, in 2005 the Company
  recognized a $594 charge within cost of sales to write-down inventory to its
  net realizable value.                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The results from Time to Celebrates operations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                |  |         |        |                        |      |         |  |                         |        |   |      |   | 
| | ---------------------------------------------- |  | ------- | ------ | ---------------------- | ---- | ------- |  | ----------------------- | ------ | - | ---- | - | 
| |                                                |  | 2005    |        | 2004                   |     
| |                                                |  |         |        |                        |     
| |                                                |  | Dollars |        | Percent of
  Net Sales |      | Dollars |  | Percent of 
  Net Sales |       
| |                                                |  |         |       
| |                                                |  |         |        |                        |      |         |  |                         |        |   |      |   | 
| | Net sales                                      |  | $       | 2,038  |                        | 100  | %       |  | $                       | 1,807  |   | 100  | % | 
| | Gross profit                                   |  |         | (215   | )                      | (11  | )       |  |                         | 176    |   | 10   |   | 
| | Selling, general and administrative
  expenses |  |         | 3,054  |                        | 150  |         |  |                         | 2,689  |   | 149  |   | 
| | Loss from operations                           |  |         | (3,269 | )                      | (160 | )       |  |                         | (2,513 | ) | (139 | ) | 
| | Other expense                                  |  |         | 140    |                        | 7    |         |  |                         | 87     |   | 5    |   | 
| | Loss before income taxes                       |  |         | (3,409 | )                      | (167 | )       |  |                         | (2,600 | ) | (144 | ) | 
| | Income tax benefit                             |  |         | 1,227  |                        | 60   |         |  |                         | 936    |   | 52   |   | 
| | Net loss                                       |  |         | (2,182 | )                      | (107 | )       |  |                         | (1,664 | ) | (92  | ) | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December
  2003, the Company committed to a plan to cease operations of its Geppeddo
  seasonal kiosk business. Geppeddo ceased operations during the first quarter
  of 2004, and in accordance with SFAS No. 144, the Company has reclassified
  Geppeddos results into discontinued operations for all periods presented.
  Prior to being classified as discontinued operations, Geppeddos operating
  results had been presented in the retail reportable segment.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The results
  from Geppeddos operations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                |  |         |        |                        |  |     |  
| | ---------------------------------------------- |  | ------- | ------ | ---------------------- |  | --- | -
| |                                                |  | 2004    |       
| |                                                |  |         |       
| |                                                |  | Dollars |        | Percent of
  Net Sales | 
| |                                                |  |         |       
| |                                                |  |         |        |                        |  |     |  
| | Net sales                                      |  | $       | 3,396  |                        |  | 100 | %
| | Gross profit                                   |  |         | 855    |                        |  | 25  |  
| | Selling, general and administrative
  expenses |  |         | 3,147  |                        |  | 93  |  
| | Impairment of assets                           |  |         |       |                        |  |    |  
| | Amortization of other intangibles              |  |         |       |                        |  |    |  
| | Loss from operations                           |  |         | (2,292 | )                      |  | (67 | )
| | Other income                                   |  |         | (147   | )                      |  | 4   |  
| | Loss before income taxes                       |  |         | (2,145 | )                      |  | (63 | )
| | Income tax benefit                             |  |         | 773    |                        |  | 23  |  
| | Net loss                                       |  |         | (1,372 | )                      |  | (40 | )

F-16

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Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Lenox Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Effective
  September 1, 2005, the Company completed the acquisition of all of the
  capital stock of Lenox, Incorporated (Lenox) from Brown-Forman Corporation
  for $204.0 million, which included transaction costs of $7.6 million. The
  acquisition of Lenox, which sells products under the Lenox, Dansk
  and Gorham
  brand names, added strong, market-leading brands and complementary product
  lines and distribution channels to the Companys portfolio.                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Goodwill
  recorded as part of the initial purchase price allocation was $16.7 million
  at December 31, 2005. During the first eight months of 2006, finalization of
  the purchase price allocation resulted in adjustments of $1.5 million, which
  increased this amount to $18.2 million. The $1.5 million increase in goodwill
  was primarily due to further adjustments of preliminary valuations of the
  acquired tangible assets and assumed liabilities. In the fourth quarter of
  2006, the Company recognized a goodwill impairment charge of $18.2 million as
  a result of lower than projected sales and profits from the Lenox wholesale
  reporting unit as compared to that which was originally projected at the date
  of the Acquisition. See Note 7.     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Willitts Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Effective
  May 1, 2006, the Company completed its acquisition of certain assets and the
  assumption of certain liabilities of Willitts, a California-based designer
  and wholesaler of collectible and home décor products. The acquisition of the
  Willitts product lines, which include Thomas Blackshears Ebony Visions and
  Possible Dreams, added a broad range of diversity and contemporary expression
  to the Companys product portfolio. The cash purchase price, which is based
  primarily upon the historical cost of the assets acquired less the
  obligations assumed as of the closing date, was $2.8 million. In addition to
  the cash purchase price, the Company may be required to make additional
  payments contingent on performance through 2009.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Of the $2.8
  million cash purchase price, $1.2 million was allocated to indefinite-lived
  trademarks and the remaining $1.6 million was allocated to tangible assets
  purchased net of assumed liabilities. The results of operations from the
  acquired net assets since the acquisition date have been included in the
  Companys consolidated financial statements and are not considered material.                                                                                                                                                                                                                                                                                                                                                                       

F-17

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Table of Contents

|   |                                                          
|-- | ---------------------------------------------------------
|4. | INVENTORIES                                              
|   |                                                          
|   | Inventories from continuing operations were comprised of:

|                  |  |                        |         |                        |   |        | 
|----------------- |  | ---------------------- | ------- | ---------------------- | - | ------ | 
|                  |  | December
  30, 
  2006 |         | December
  31, 
  2005 |  
|                  |  |                        |         |                        |  
|                  |  |                        |         |                        |   |        | 
|Raw materials     |  | $                      | 3,925   |                        | $ | 4,038  | 
|Work-in-process   |  |                        | 4,793   |                        |   | 6,442  | 
|Finished goods    |  |                        | 93,207  |                        |   | 83,866 | 
|                  |  |                        |         |                        |   |        | 
|Total inventories |  | $                      | 101,925 |                        | $ | 94,346 | 
|                  |  |                        |         |                        |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain of
  the Companys manufacturing flatware and giftware utilize fine silver as its
  principal raw material. The Company has a precious metals consignment
  arrangement with a major financial institution whereby the Company has the
  ability to obtain up to $9.0 million in consigned inventory to use in the
  manufacture of such products. As required by the terms of the consignment
  agreement, the Company does not take title to consigned inventory until
  product is sold. Accordingly, the Company does not include the value of
  consigned inventory or the corresponding liability in the financial
  statements. The value of consigned inventory as of December 30, 2006,
  December 31, 2005 and January 1, 2005 was $5.6, $3.8, and $0.0 million,
  respectively. Additionally, the Company expensed consignment fees related to
  this agreement of $0.3 million and $0.0 million for the 52 weeks ended
  December 30, 2006 and December 31, 2005, respectively. The consignment agreement
  may be terminated by the Company upon one weeks notice to the financial
  institution or by the financial institution upon 90 days written notice to
  the Company. On February 15, 2007, the Company received notice from the
  financial institution with which it has its precious metals consignment
  arrangement that such institution is terminating the consignment facility
  effective May 16, 2007.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|   |                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------
|5. | PROPERTY AND
  EQUIPMENT                                                                            
|   |                                                                                                     
|   | Property and
  equipment at December 30, 2006 and December 31, 2005 is comprised of the
  following:

|                                 |  |      |        |      |   |        | 
|-------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                 |  | 2006 |        | 2005 |  
|                                 |  |      |        |      |   |        | 
|Land                             |  | $    | 1,666  |      | $ | 3,186  | 
|Leasehold
  improvements         |  |      | 13,123 |      |   | 10,118 | 
|Furniture
  and fixtures         |  |      | 9,810  |      |   | 8,100  | 
|Computer
  hardware and software |  |      | 19,647 |      |   | 17,503 | 
|Tooling                          |  |      | 1,391  |      |   | 931    | 
|Other
  equipment                |  |      | 23,068 |      |   | 21,847 | 
|Building and
  improvements      |  |      | 14,061 |      |   | 33,696 | 
|Construction
  in process        |  |      | 1,859  |      |   | 1,580  | 
|                                 |  |      |        |      |   |        | 
|                                 |  |      | 84,625 |      |   | 96,961 | 
|Less
  accumulated depreciation  |  |      | 35,154 |      |   | 25,533 | 
|                                 |  |      |        |      |   |        | 
|Property and
  equipment, net    |  | $    | 49,471 |      | $ | 71,428 | 
|                                 |  |      |        |      |   |        | 

| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | The Company
  had accrued property and equipment purchases at December 30, 2006 and
  December 31, 2005 of $1,203 and $311, respectively.

F-18

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | ASSETS SOLD                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In the second quarter of 2006, the Company sold its Langhorne, PA
  facility for $9.9 million, net of closing costs. As these assets, including
  land and building, were recently purchased as part of the acquisition of
  Lenox, no gain or loss was recognized. In the fourth quarter of 2006, the
  Company sold its Pomona facility for $6.6 million, net of closing costs and
  recognized a $1.1 million gain. The amounts for the Langhorne and Pomona
  facilities were included in the 2005 assets held for sale on the Consolidated
  Balance Sheets. The Company has leased back a portion of the Langhorne, PA
  facility for office, warehousing, distribution and retail space. The term of
  the lease is through April 2008. The Company has also leased back square
  footage at the Pomona facility to continue various operations which include a
  retail lease, space for the manufacturing of sterling silver products, space
  for its technical center and space for customer service offices. These
  leasebacks are considered minor as defined by SFAS No. 28, Accounting
  for Sales with Leasebacks.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In the fourth quarter of 2006, the Company sold its Hagerstown, MD
  facility for net proceeds of $26.3 million, net of closing costs. The Company
  has leased back space for its distribution center for a non-terminable
  primary term of 15 years. The Company will also be responsible for all operating
  expenses including taxes and insurance on the property and the cost of
  services, repairs, maintenance and replacements to the property. The Company
  recognized a gain of $4.1 million on the sale of the facility, $0.3 million
  of this deferred gain was recorded in other current liabilities and $3.8
  million was recorded in deferred gain on sale-leaseback in noncurrent
  liabilities on the Consolidated Balance Sheets. In accordance with SFAS No.
  13, Accounting
  for Leases, and SFAS No. 28, Accounting for Sales with Leasebacks,
  the Company has deferred this gain and will recognize it over the period of
  the leaseback.                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|7. | GOODWILL AND
  OTHER INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Changes in
  the carrying amount of goodwill for the year ended December 30, 2006 by
  segment were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|--------------------------------- |  | --------- | ------- | ------ |  | ------ |  | ------ | - | ------------ | - | ------- | - | - | ------- | -
|                                  |  | Wholesale |         | Retail |  | Direct |  | Other* |   | Consolidated |  
|                                  |  |           |         |        |  |        |  |        |   |              |  
|                                  |  |           |         |        |  |        |  |        |   |              |  
|Balance at
  December 31, 2005    |  | $         | 37,074  |        |  |       |  |        |  |              | $ | 16,695  |   | $ | 53,769  |  
|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|Allocation
  of acquired goodwill |  |           | 16,695  |        |  |       |  |        |  |              |   | (16,695 | ) |   |        |  
|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|Adjustment
  to acquired goodwill |  |           | 1,500   |        |  |       |  |        |  |              |   |        |   |   | 1,500   |  
|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|Goodwill
  impairment             |  |           | (55,269 | )      |  |       |  |        |  |              |   |        |   |   | (55,269 | )
|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|Balance at
  December 30, 2006    |  |           |        |        |  |       |  |        |  |              |   |        |   |   |        |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * In the
  third quarter of 2006, the Company allocated the goodwill acquired in
  connection with the purchase of Lenox to the Lenox wholesale reporting unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | During the
  second quarter of 2006, the Company re-forecast its 2006 gift and specialty
  channel sales within the Department 56 wholesale reporting unit. The Company
  also experienced a decline in the quoted market price of its stock in the
  second quarter. Given these events, the Company determined it was more likely
  than not that a reduction of the fair value of the Department 56 wholesale
  reporting unit may have occurred. As a result, the Company completed a review
  of the Department 56 wholesale reporting unit goodwill in accordance with
  SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Based on
  the results of this analysis, the Company recorded an impairment charge of
  $37.1 million to write-down the goodwill related to the Department 56
  wholesale reporting unit. The fair value of that reporting unit was estimated
  using the expected present value of future cash flows.

F-19

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the fourth quarter of 2006, the Company
  completed its annual impairment test of goodwill, originally recorded from
  the acquisition of Lenox, in accordance with SFAS 142. The Company recognized
  a goodwill impairment charge of $18.2 million as a result of lower than
  projected sales and profits from the Lenox wholesale reporting unit as
  compared to that which was originally projected at the date of the
  Acquisition. The fair value of the Lenox wholesale reporting unit was
  estimated using the expected present value of future cash flows.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Intangible assets, other than goodwill, are
  comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | ----------------------------------- |  | ------------------------- | ------- | -------------------------- | - | ------- | - | ------------------------- | ------- | -------------------------- | - | ------- |  | - | ------ | - | - | ------- | 
| |                                     |  | December 30, 2006         |         | December 31, 2005          |  
| |                                     |  |                           |         |                            |  
| |                                     |  | Gross
  carrying
  amount |         | Accumulated
  amortization |   | Net     |   | Gross
  carrying
  amount |         | Accumulated
  amortization |   | Net     | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         | 
| | Finite-life
  intangible assets     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Customer relationships              |  | $                         | 15,300  |                            | $ | (2,202  | ) | $                         | 13,098  |                            | $ | 15,300  |  | $ | (551   | ) | $ | 14,749  | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Favorable lease interests           |  |                           | 2,542   |                            |   | (1,881  | ) |                           | 661     |                            |   | 2,542   |  |   | (770   | ) |   | 1,772   | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Non-compete agreements              |  |                           | 2,705   |                            |   | (2,329  | ) |                           | 376     |                            |   | 2,705   |  |   | (2,189 | ) |   | 516     | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Indefinite-life
  intangible assets |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Trademarks                          |  |                           | 123,578 |                            |   | (4,139  | ) |                           | 119,439 |                            |   | 126,110 |  |   | (4,139 | ) |   | 121,971 | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 
| | Total
  Intangibles                 |  | $                         | 144,125 |                            | $ | (10,551 | ) | $                         | 133,574 |                            | $ | 146,657 |  | $ | (7,649 | ) | $ | 139,008 | 
| |                                     |  |                           |         |                            |   |         |   |                           |         |                            |   |         |  |   |        |   |   |         | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the fourth quarter of 2006, the Company
  recognized a trademark impairment of $3.7 million related to lower than
  projected sales of Dansk and Gorham product from that estimated at the time
  of the original purchase price allocation. In determining the fair value of
  its trademarks, the Company applies the income approach, using the relief
  from royalty method. These trademark costs were originally recorded as part
  of the acquisition of Lenox. As part of the acquisition of Willitts, $1.2
  million of the cash purchase price was allocated to indefinite-lived
  trademarks.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Intangible asset amortization expense for the years
  ended December 30, 2006, December 31, 2005 and January 1, 2005 was $2,902,
  $1,460 and $140, respectively. Expected future amortization expense for
  finite-lived intangible assets is as follows:                                                                                                                                                                                                                                                                                                                                                 

| |            |  |   |        | 
| | ---------- |  | - | ------ | 
| | 2007       |  | $ | 2,149  | 
| | 2008       |  |   | 1,938  | 
| | 2009       |  |   | 1,846  | 
| | 2010       |  |   | 1,560  | 
| | 2011       |  |   | 1,242  | 
| | Thereafter |  |   | 5,400  | 
| |            |  |   |        | 
| |            |  | $ | 14,135 | 
| |            |  |   |        | 

| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The above amortization expense forecast is an
  estimate. Actual amounts of amortization expense may differ from estimated
  amounts due to additional intangible asset acquisitions, impairment of
  intangible assets, accelerated amortization of intangible assets and other
  events.

F-20

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|   |                                    
|-- | -----------------------------------
|8. | DEBT                               
|   |                                    
|   | Debt is comprised of the following:

| |                                                                             |  |                                          |   |                       |   |                       |  |   |         | 
| | --------------------------------------------------------------------------- |  | ---------------------------------------- | - | --------------------- | - | --------------------- |  | - | ------- | 
| |                                                                             |  | AverageInterest rate
  December 30, 2006 |   | December
  30,
  2006 |   | December
  31,
  2005 | 
| |                                                                             |  |                                          |   |                       |   |                       | 
|
| | Revolving credit
  facility                                                 |  | 7.96                                     | % |                       | $ | 47,510                |  | $ | 10,468  | 
| | Note payable to
  Maryland Department of Business and Economic Development1 |  | 3                                        | % |                       |   | 150                   |  |   | 150     | 
| | Note payable to
  the County Commissioners of Washington County, Maryland1  |  | 0                                        | % |                       |   | 100                   |  |   | 100     | 
| | Term loan
  facility2                                                       |  | 9.14                                     | % |                       |   | 48,806                |  |   | 100,000 | 
| |                                                                             |  |                                          |   |                       |   |                       |  |   |         | 
| | Total debt                                                                  |  |                                          |   |                       | $ | 96,566                |  | $ | 110,718 | 
| |                                                                             |  |                                          |   |                       |   |                       |  |   |         | 

|  |                                                                          
|- | -------------------------------------------------------------------------
|1 | Included in noncurrent long-term debt at December 31, 2005.              
|2 | $90.0 million included in noncurrent long-term debt at December 31, 2005.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The note payable to the Maryland Department of Business and Economic Development is a conditional promissory note
that accrues interest at 3% per year. The principal and interest payments are deferred until December 31, 2006 and thereafter are
subject to multiple maturity dates determined by the Companys employment levels at the Hagerstown, MD distribution facility.
As of December 30, 2006, the Company had not achieved the employment levels required to qualify for full or partial debt
forgiveness and therefore has classified the entire note payable as a current liability. Under the terms of this note the
outstanding principal balance of the loan and accrued interest are due March 31, 2007.                                                                                                                                                                                                                                                                                                                                                                          
|
| | The note payable to the County Commissioners of Washington County, Maryland is a conditional grant agreement that
bears no interest charges. The principal payments are deferred until December 31, 2006 and thereafter are subject to multiple
maturity dates determined by the Companys employment levels at the Hagerstown, MD distribution facility. If the Company
meets certain employment levels at December 31, 2006, 2007, and 2008 as defined by the terms of the agreement, the note may be
fully or partially forgiven. As of December 30, 2006, the Company had not achieved the employment levels required to qualify for
full or partial debt forgiveness and therefore has classified the entire note payable as a current liability.                                                                                                                                                                                                                                                                                                                                               
|
| | To finance the acquisition of Lenox, the Company entered into a revolving credit facility and a term loan facility
(the credit facilities). The credit facilities were obtained to finance the purchase of Lenox and to payoff existing indebtedness
under the Companys old revolving credit facility, and the revolving credit facility is also available to finance working
capital needs. In connection with the new credit facilities, the Company recorded $10.1 million in deferred financing fees, which
is included in other assets on the Consolidated Balance Sheets and is being amortized over the lives of the credit facilities.
During 2006, the Company entered into amendments to its credit facilities that required the payment of an amendment fee of $0.4
million, which was added to the unamortized balance at the time of amendment. The unamortized balance was $7.9 million and $9.5
million at December 30, 2006 and December 31, 2005, respectively. The revolving credit facility expires on September 1, 2010 and
the term loan facility expires on September 1, 2011.
|
| | The credit facilities are secured by a first-priority lien on substantially all of the real and personal property
of the Company. In addition, the Company has pledged the common stock of its subsidiaries, direct and indirect, as collateral
under the credit facilities, and the Company and its material subsidiaries, direct and indirect, have guaranteed repayment of
amounts borrowed under the credit facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-21

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The revolving credit facility provides for
  borrowings up to $175 million, which may be in the form of letters of credit
  and revolving credit loans. The revolving credit facility allows the Company
  to choose between two interest rate options in connection with its revolving
  credit loans. The interest rate options are the Alternate Base Rate (as
  defined) or the Adjusted LIBOR Rate (as defined) plus an applicable margin.
  The applicable margin ranges from 0% to 0.75% for Alternate Base Rate loans and
  from 1.75% to 2.5% for Adjusted LIBOR Rate loans.                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Borrowings under the revolving credit facility are
  subject to certain borrowing base limitations, and the Companys borrowing
  capacity fluctuates during the year based upon accounts receivable and inventory
  levels. The Companys borrowing capacity under the revolving credit facility
  as of December 30, 2006, was $100.2 million, of which $47.6 million was
  available for additional borrowings or letters of credit at such date. The
  revolving credit facility provides for commitment fees of 0.375% per annum on
  the daily average of the unused commitment.                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The term loan facility provides for term loans in
  the aggregate principal amount of up to $100.0 million, and allows the
  Company to choose between two interest rate options in connection with its
  loans under the facility. The interest rate options are the Alternate Base
  Rate (as defined) or the Adjusted LIBOR Rate (as defined) plus an applicable
  margin. The applicable margin (as amended) was 2.75% for Alternate Base Rate
  loans and 3.75% for Adjusted LIBOR Rate loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In connection with the credit facilities amendments
  in 2006, the Company obtained limited consent to sell the manufacturing
  facility located in Pomona, NJ and its distribution/office facility located
  in Langhorne, PA, provided that 100% of the net cash proceeds of such sales
  were used to repay a portion of the indebtedness with respect to the term
  loan facility. During 2006, the Company also obtained consent to enter into a
  sale and leaseback transaction for its distribution facility located in
  Hagerstown, MD, provided that 100% of the net cash proceeds of such sale were
  used to repay of portion of the indebtedness with respect to the term loan
  facility. The sale of these facilities resulted in repayments of indebtedness
  under the term loan facility of $42.8 million during 2006. The Company also
  made scheduled amortization payments of indebtedness under the term loan
  facility of $8.3 million.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The contractual maturity of the Companys $48,806
  term loan facility on December 30, 2006 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|     |  |                          |        | 
|---- |  | ------------------------ | ------ | 
|Year |  | Contractual
  Maturities |       
|     |  |                          |       
|2007 |  | $                        | 5,423  | 
|2008 |  |                          | 5,423  | 
|2009 |  |                          | 5,423  | 
|2010 |  |                          | 5,423  | 
|2011 |  |                          | 27,114 | 

| |                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the term loan facility, the Company is also
  obligated to make mandatory prepayments if certain events occur in the future
  such as asset sales, additional debt issuances, common and preferred stock
  issuances, and excess cash flow generation.                                                                 
| |                                                                                                                                                                                                                                                                                                                              
| | In accordance with Accounting Research Bulletin No.
  43, the Company has classified the entire principal amount of its term debt
  as of December 30, 2006 as a current liability on the Consolidated Balance
  Sheets as its noncompliance with the financial covenants allows the debt to
  be called by the term lenders.

F-22

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The credit facilities (as amended) contain customary
  financial conditions and covenants, including restrictions on additional
  indebtedness, liens, investments, capital expenditures, issuances of capital
  stock and dividends. The credit facilities also require maintenance of
  minimum levels of interest coverage and maximum levels of leverage, in each
  case at the end of each fiscal quarter. The minimum interest coverage ratio
  (as defined within the credit facility agreements) requires the Company to
  maintain a minimum ratio of Consolidated EBITDA (as defined within the credit
  facility agreements, which excludes non-cash impairment charges) to interest
  expense over a 12-month period ending on each fiscal quarter. The minimum
  ratio to be maintained at each quarter-end over the term of the facilities is
  defined within the credit facility agreements (as amended) and ranges from
  2.35:1.0 to 3.75:1.0 (except for 1.25:1.0 during the first quarter of 2007 as
  referenced below). The maximum leverage ratio (as defined within the credit
  facility agreements) requires the Company to maintain a maximum ratio of debt
  (as measured at the end of each fiscal quarter) to Consolidated EBITDA over a
  12-month period ending on each fiscal quarter. The maximum leverage ratio to
  be maintained at each quarter-end over the term of the facilities is defined
  within the credit facility agreements (as amended) and ranges from 2.0:1.0 to
  5.75:1.0. As of December 30, 2006, the Companys interest coverage ratio was
  2.26:1.0 (compared to the minimum allowed for the period of 2.70:1.0), the
  leverage ratio was 2.70:1.0 (compared to the maximum allowed for the period
  of 2.35:1.0). With these ratios, the Company was not in compliance with the
  financial covenants under the credit facilities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | On February 9, 2007, the
  Company entered into waivers and amendments to the revolving credit facility
  and the term loan credit facility in connection with the Companys
  noncompliance with the financial covenants under the credit agreements for
  the period ended December 30, 2006. Pursuant to the waivers and amendments,
  the lenders granted the Company a limited waiver of noncompliance through and
  including April 30, 2007, and temporarily amended the agreements to adjust
  the leverage ratio and interest coverage ratio levels for the first quarter
  of 2007. In addition, the amendment to the term loan facility increased the
  applicable margin for loans by 0.25% per annum. As consideration for the
  amendments, the Company paid amendment fees of $0.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In order to avoid defaulting under its existing
  credit facilities, on or before April 30, 2007, the Company will either have
  to negotiate amendments to the revolving and term credit facilities or obtain
  new credit agreements with other lenders. The Company is currently in discussions
  with the agent under its existing credit facilities as well as with other
  potential lenders regarding a modified or new lending arrangement. While the
  Company is optimistic it will be able to amend its existing facilities or
  enter into new facilities, it cannot provide assurance that it will occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Company paid interest of $14,706, $15,255, and
  $542 during the years ended December 30, 2006, December 31, 2005, and January
  1, 2005, respectively. Interest paid in 2006 and 2005 included payments of
  deferred financing fees of $397 and $10,126, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-23

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Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9. | SEVERANCE AND RESTRUCTURING COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In connection with the
  acquisition of Lenox, the Company assumed severance reserves of $0.2 million
  related to plant closings, retail store closings and general restructurings
  that took place prior to the Companys acquisition of Lenox. At September 1,
  2005, the acquisition date, the Company accrued additional an $13.8 million
  related to an additional plant closing, retail store closings, and general
  restructurings that were planned as part of the acquisition. This additional
  charge increased goodwill recorded from the acquisition of Lenox. In 2006,
  finalization of the severance and restructuring reserves resulted in
  cumulative adjustment of $0.6 million.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The table below shows a
  reconciliation of the severance and restructuring reserve activity as of
  December 30, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                      |  |                  |        |                                       |   |                                     |                  |                                |        |   |   |        |   |   |     |   |   |         |  
| | ---------------------------------------------------- |  | ---------------- | ------ | ------------------------------------- | - | ----------------------------------- | ---------------- | ------------------------------ | ------ | - | - | ------ | - | - | --- | - | - | ------- | -
| |                                                      |  | Plant
  Closings |        | Retail
  Store
  Closings
  Severance |   | General
  Restructuring
  Severance |                  | Post
  Acquisition
  Severance |        |   |  
| |                                                      |  |                  |        |                                       |   |                                     | Total
  Reserves |                               
| |                                                      |  | Severance        |        | Other                                 |   |                                     |                  |                                |       
| |                                                      |  |                  |        |                                       |   |                                     |                  |                                |        |   |   |        |  
|
| | Assumed at acquisition date                          |  |                  |       |                                       |   |                                    |                  | $                              | 115    |   | $ | 87     |   |   |    |   | $ | 202     |  
| | Recorded at acquisition date and charged to
goodwill |  | $                | 4,804  |                                       | $ | 2,790                               |                  |                                | 1,822  |   |   | 4,402  |   |   |    |   |   | 13,818  |  
| | Incurred                                             |  |                  | (1,110 | )                                     |   | (181                                | )                |                                | (144   | ) |   | (384   | ) |   |    |   |   | (1,819  | )
| |                                                      |  |                  |        |                                       |   |                                     |                  |                                |        |   |   |        |   |   |     |   |   |         |  
| | Balance, December 31, 2005                           |  | $                | 3,694  |                                       | $ | 2,609                               |                  | $                              | 1,793  |   | $ | 4,105  |   |   |    |   | $ | 12,201  |  
|
| | Adjustment to Lenox opening balance
sheet            |  |                  |       |                                       |   |                                    |                  |                                |       |   |   | 600    |   |   |    |   |   | 600     |  
| | Additional provisions                                |  |                  |       |                                       |   | 119                                 |                  |                                |       |   |   |       |   |   | 453 |   |   | 572     |  
| | Incurred                                             |  |                  | (3,687 | )                                     |   | (1,727                              | )                |                                | (1,765 | ) |   | (4,188 | ) |   | (67 | ) |   | (11,434 | )
| |                                                      |  |                  |        |                                       |   |                                     |                  |                                |        |   |   |        |   |   |     |   |   |         |  
| | Balance, December 30, 2006                           |  | $                | 7      |                                       | $ | 1,001                               |                  | $                              | 28     |   | $ | 517    |   | $ | 386 |   | $ | 1,939   |  
| |                                                      |  |                  |        |                                       |   |                                     |                  |                                |        |   |   |        |   |   |     |   |   |         |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | BENEFIT PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Pension and Postretirement benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company has various defined benefit pension plans and postretirement health care plans providing
retirement and health care benefits (and related assets associated with the plans). The following discussion provides information
about the Companys obligations related to these plans, the assets dedicated to meeting the obligations, and the amounts the
Company recognized in its financial statements as a result of sponsoring these plans. The Company used its fiscal year end as the
measurement date to determine the amounts of the plan obligations and assets presented below.                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Curtailment,
  Plan Amendment and Settlement Gains                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | On October 31, 2006, the Company announced the freeze of the Companys defined benefit pension
plans as of December 31, 2006. As a result of the freeze, employees will not accrue additional benefits under the defined benefit
pension plans after December 31, 2006. In addition, the Companys pension obligation is significantly reduced because
benefits payable to employees will not incorporate future compensation increases. In accordance with SFAS No. 88 (as amended)
Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
(SFAS 88), the Company accounted for this suspension as a plan curtailment, re-measured its assets and obligations as of October
31, 2006, and recognized a curtailment gain of $13,188.

F-24

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Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 31, 2006, the Company also announced the discontinuation of eligibility for
postretirement welfare benefits for employees who were not retired as of December 31, 2006. In accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions (SFAS 106), the Company accounted for this
discontinuation as a negative plan amendment, re-measured its obligations as of October 31, 2006, and reflected a negative prior
service cost which is being amortized into net periodic benefit cost pursuant to the Companys historical accounting policy.
Because the benefits payable under the postretirement welfare plan were not related to future compensation increases, there was no
plan curtailment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In the fourth quarter of the Companys 2006 fiscal year, the Company recorded a plan settlement
as a result of significant lump-sum cash payments made to employees from one of its defined benefit pension plans. Under SFAS 88,
a plan settlement is defined as a transaction that (a) is an irrevocable action, (b) relieves the employer (or the plan) of
primary responsibility for a pension benefit obligation, and (c) eliminates significant risks related to the obligation and the
assets used to effect the settlement. In accordance with SFAS 88, the Company recorded a gain of $1,595 which was a prorata
portion of the unrecognized net actuarial gain at the time of the settlement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Adoption of SFAS 158                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On December 30, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158.
SFAS 158 required the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the
projected benefit obligations) of its pension and postretirement health care plans in the December 30, 2006 statement of financial
position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated
other comprehensive income at adoption represents the net unrecognized actuarial gains and prior service costs which were
previously netted against the plans funded status in the Companys statement of financial position pursuant to the
provisions of SFAS 87. These amounts will be subsequently recognized as net periodic benefit costs pursuant to the Companys
historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and
are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive
income. Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts
recognized in accumulated other comprehensive income at adoption of SFAS 158.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On December 30, 2006, the Company also early adopted the measurement date provisions of SFAS 158
which requires the Company to measure plan assets and benefit obligations as of the date of its fiscal year-end statement of
financial position. Accordingly, the Company has used a measurement date of December 30, 2006 to determine the amounts of the plan
obligations and assets presented below. Under the transition provisions of SFAS 158, net periodic benefit cost for the period
between the measurement date that is used for the immediately preceding fiscal year-end (i.e. the Companys measurement date
that was used for its fiscal year ended December 31, 2005 was September 30, 2005) and the beginning of the fiscal year that the
measurement date provisions are applied (i.e. January 1, 2006) shall be recognized, net of tax, as a separate adjustment to
retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-25

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Table of Contents

The incremental effects of adopting the provisions of SFAS 158 on the Companys statement of
financial position at December 30, 2006 are presented in the following table. The adoption of SFAS 158 had no effect on the
Companys consolidated statement of operations for the year ended December 30, 2006, or for any prior period presented, and
it will not effect the Companys operating results in future periods. Prior to
  Adopting
  SFAS 158

Effect of
  Adopting
  SFAS 158

As Reported
  at December
  30, 2006Pension
  obligations, net of assets

$
63,217

$
(31,924
)
$
31,293Postretirement
  obligations


29,270


(12,164
)

17,106Deferred
  income tax liability


1,544


16,753


18,297Retained
  earnings


267,215


(1,062
)

266,153Accumulated
  other comprehensive income


(4
)

28,397


28,393 Included in accumulated other comprehensive income at December 30, 2006 are the following amounts
that have not yet been recognized in net periodic benefit cost: Pension
  Benefits

Medical and
  Life Insurance
  Benefits

Total
  BenefitsUnrecognized
  prior service cost




$
5,527

$
5,527Unrecognized
  actuarial gains

$
20,503


2,367


24,321$
20,503

$
7,894

$
28,397 The estimated actuarial gains for all pension plans that will be amortized from accumulated other
comprehensive income into net periodic benefit cost during the 2007 fiscal year is $1,194. The estimated prior service cost and
actuarial gains for the postretirement plan that will be amortized from accumulated other comprehensive income into net periodic
benefit cost during the 2007 fiscal year is $698 and $163, respectively. Obligations We provide eligible employees with pension and other postretirement benefits based on such factors
as years of service and compensation level during employment. The pension obligation shown below consists of benefits earned by
employees to date based on current salary levels (accumulated benefit obligation). This table shows how the present
value of our obligation changed from the beginning of the Companys fiscal year to the end of the Companys fiscal year. Pension
  Benefits
  FY 2006

Medical and Life
  Insurance Benefits
  FY 2006

Pension
  Benefits 
  FY 2005

Medical and Life 
  Insurance Benefits
  FY 2005Obligation at beginning of the year

$
188,931

$
27,772

$
200,380

$
28,075Service cost


4,647


840


2,001


172Interest cost


9,461


1,341


3,329


454Actuarial gain


(14,483
)

(2,824
)

(16,188
)

(869
)Benefits paid


(15,210
)

(1,256
)

(591
)

(60
)Plan amendments





(9,030
)Adjustment due to change in Measurement
  date


1,426


263





Gain due to curtailment


(13,188
)







Obligation at end of the year

$
161,584

$
17,106

$
188,931

$
27,772


F-26

---

Table of Contents

Service cost represents the present value of the benefits attributed to service rendered by
employees during the year. Interest cost is the increase in the present value of the obligation due to the passage of time.
Actuarial loss (gain) is the change in the value of the obligation resulting from experience different from that assumed or from a
change in actuarial assumptions. (The actuarial assumptions used are discussed at the end of this note). As shown above, our pension and postretirement obligations were reduced by net benefit payments in
2006 of $15,210 and $1,256, respectively. Expected benefit payments and expected Medicare Part D subsidy receipts over the next
ten years are as follows: Pension Benefits
Medical and Life
  Insurance Benefits

Medicare
  Subsidies2007

$
8,366


$
1,253


$
(0
)2008


8,449



1,305



(258
)2009


8,697



1,274



(276
)2010


9,116



1,283



(288
)2011


9,439



1,309



(296
)2012-2016


54,216



7,117



(1,695
)  Assets The Company specifically invests certain assets in order to fund its pension benefit obligations.
The Companys investment goal is to earn a total return over time that will grow assets sufficient to fund its plans
liabilities, after providing appropriate levels of contributions and accepting prudent levels of investment risk. In order to
achieve this goal, plan assets are invested primarily in funds or portfolios of funds actively managed by outside managers.
Investment risk is managed to prudent levels by company policies that require diversification of asset classes, manager styles and
individual holdings. The Company measures and monitors investment risk through periodic performance reviews and periodic
asset/liability studies. Asset allocation is the most important method of achieving the Companys investment goals and
is based on its assessment of the plans long-term return objectives and the appropriate balances needed for liquidity,
stability, and diversification. The allocation of the Companys pension plan assets at fair value on December 30, 2006 and
the target allocation for 2007, by asset category, are as follows: Actual
  2006

Actual
  2005

TargetEquity
  securities

71
%

71
%

75
%Debt
  securities

13
%

15
%

15
%Real estate

5
%

5
%

5
%Other

11
%

9
%

5
%Total

100
%

100
%

100
%


F-27

---

Table of Contents

This table shows how the fair value of the pension assets changed from the beginning of the
Companys fiscal year to the end of the Companys fiscal year. (The Company does not have assets set aside for
postretirement medical or life insurance benefits). Pension Benefits FY 2006

Medical and Life Insurance Benefits FY 2006

Pension Benefits FY 2005

Medical and Life Insurance Benefits FY 2005Fair value at beginning of year  (Acquisition date for FY
2005)

$
116,160




$
110,966


Actual return on plan assets


18,327





1,305


Company contributions


13,046

$
1,256


4,480

$
60Benefits paid


(15,210
)

(1,256
)

(591
)

(60
)Adjustment due to change in Measurement
  date


(2,032
)







Fair value at end of the year

$
130,291

$


$
116,160


 Consistent with the Companys funding policy, the Company expects to contribute approximately
$8.0 million to its pension plans and approximately $1.2 million to its postretirement plans in 2007. Funded Status The funded status of a plan refers to the difference between the obligations and assets. The table
below shows the funded status of the plan. Pension
  Benefits
  FY 2006

Medical and Life
  Insurance Benefits
  FY 2006

Pension
  Benefits
  FY 2005

Medical and Life
  Insurance Benefits
  FY 2005Assets

$
130,291




$
116,160


Obligations


(161,584
)
$
(17,106
)

(188,931
)
$
(27,772
)Funded
  Status


(31,293
)

(17,106
)

(72,771
)

(27,772
)Unrecognized
  net gain








(14,243
)

(788
)Accrued
  postretirement benefits

$
(31,293
)
$
(17,106
)
$
(87,014
)
$
(28,560
) The under-funded status of the pension plans of $31,293 at December 30, 2006 is recognized in the
accompanying Consolidated balance sheet as a current liability (reported in other current liabilities) of $629 and a non-current
liability of $30,664 (reported in pension obligations). The under-funded status of the postretirement healthcare plan of $17,106
at December 30, 2006 is recognized as a current liability of $1,253 (reported in other current liabilities) and a non-current
liability of $15,853 (reported in post retirement obligations). No plan assets are expected to be returned to the Company during
the fiscal year-ended December 29, 2007. The accumulated benefit obligation for each of the Companys benefit plans exceeds the plan
assets. The total accumulated benefit obligation for all plans was $178,690 and $176,547 at the end of 2006 and 2005,
respectively.


F-28

---

Table of Contents

Pension Expense This table shows the components of the net periodic benefit expense recognized from the beginning of
the Companys fiscal year to the end of the Companys fiscal year. Pension
  Benefits
  FY 2006

Medical and Life
  Insurance Benefits
  FY 2006

Pension
  Benefits
  FY 2005

Medical and Life
  Insurance Benefits
  FY 2005Service cost

$
4,647

$
840

$
2,001

$
172Interest
  cost


9,461


1,341


3,329


454Expected
  return on assets


(9,629
)




(3,154
)

Amortization
  of:Prior service cost (benefit)





(116
)




Actuarial gain


(426
)

(16
)




Net periodic benefit expense before
  curtailment and settlement gains


4,053


2,049





SFAS 88 curtailment gain


(13,188
)







SFAS 88 settlement gain


(1,595
)







Net periodic benefit expense

$
(10,730
)
$
2,049

$
2,176

$
626 The pension expense recorded during the year was estimated at the beginning of the fiscal year. As a
result, the amount is calculated using an expected return on plan assets rather than the actual return. The difference between
actual and expected returns is included in the unrecognized net gain or loss at the end of the year. Assumptions and Sensitivity The Company uses various assumptions to determine the obligations and expense related to its pension
and postretirement healthcare plans. The assumptions used in computing benefit plan obligations as of the end of the year were as
follows: Pension Benefits FY 2006

Medical and Life Insurance Benefits FY 2006

Pension Benefits FY 2005

Medical and Life Insurance Benefits FY 2005Discount rate

5.75
%

5.75
%

5.25
%

5.25
%Rate of salary increase

4.00
%




4.00
%

Expected return on plan assets

8.50
%




8.50
%

 The assumptions used in computing benefit plan expense during the year were as follows: Pension Benefits FY 2006

Medical and Life Insurance Benefits FY 2006

Pension Benefits FY 2005

Medical and Life Insurance Benefits FY 2005Discount rate, beginning of the year

5.25
%

5.25
%

5.00
%

5.00
%Discount rate at curtailmentRe-measurement date

5.75
%

5.75
%Rate of salary increase

4.00
%




4.00
%

Expected return on plan assets

8.50
%




8.00
%

 The discount rate represents the interest rate used to discount the cash flow stream of benefit
payments to a net present value as of the current date. A lower assumed discount rate increases the present value of the benefit
obligation.


F-29

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Table of Contents

The assumed rate of salary increase reflects the expected annual increase in salaries as a result of
inflation, merit increases, and promotions. A lower assumed rate decreases the present value of the benefit obligation. The expected return on plan assets represents the long-term rate of return that the Company assumes
will be earned over the life of the pension assets, considering the distribution of those assets among investment classes and the
related historical rates of return. The assumed healthcare cost trend rates as of the end of the year were as follows: Medical and Life Insurance Benefits FY 2006

Medical and Life Insurance Benefits FY 2005Healthcare cost trend rate:Present rate before age 65


7.19%


8.31%Present rate age 65 and after


7.94%


9.56% The Company projects healthcare cost trend rates to decline gradually to 5.5% by 2010 and to remain
level after that. Assumed healthcare cost trend rates have a significant effect on the amounts reported for postretirement
healthcare plans. A one percentage point increase in assumed healthcare cost trend rates would increase the accumulated
postretirement benefit obligation as of December 30, 2006 by $896 and the annual aggregate service and interest cost by $296. A
one percentage point decrease in assumed healthcare cost trend rates would decrease the accumulated postretirement benefit
obligation as of December 30, 2006 by $851 and the annual aggregate service and interest cost by $243. Savings Plan The Company has qualified contributory retirement plans (the Plans) under Section 401(k) of the
Internal Revenue Code which covers substantially all full-time and certain part-time employees who meet certain eligibility
requirements. Voluntary contributions are made by participants and Company matching contributions are made at the discretion of
the Board of Directors, subject to certain limitations. Certain of the Plans also allow the Company to make discretionary
profit-sharing contributions to the Plan up to the maximum amount deductible for income tax purposes. All Company contributions
are invested in a series of diversified investment options at the election of the employee. The Company does not make matching or
profit sharing contributions in Company stock. The Companys total profit-sharing contributions were $0, $1,254, and $1,717
for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively.


F-30

---

Table of Contents

|    |                                                                                                                                              |  |  |  |  |  |  |  |  |  | 
|--- | -------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  |  |  | 
|11. | INCOME TAXES                                                                                                                                 |  |  |  |  |  |  |  |  |  | 
|    | The
  provision for income taxes for the years ended December 30, 2006, December
  31, 2005, and January 1, 2005 consisted of the following: | 

| |                                                                   |  |      |        |      |   |        |   |   |        |  
| | ----------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                                   |  | 2006 |        | 2005 |   | 2004   |  
| |                                                                   |  |      |        |      |   |        |   |   |        |  
| | Current:                                                          |  |      |        |      |   |        |   |   |        |  
| | Federal                                                           |  | $    | (1,475 | )    | $ | 10,830 |   | $ | 13,138 |  
| | State                                                             |  |      | (198   | )    |   | 1,964  |   |   | 787    |  
| | Foreign                                                           |  |      | 44     |      |   | 16     |   |   | 25     |  
| | Deferred:                                                         |  |      |        |      |   |        |   |   |        |  
| | Federal                                                           |  |      | 741    |      |   | (2,154 | ) |   | 991    |  
| | State                                                             |  |      | 103    |      |   | (510   | ) |   | 147    |  
| | Adjustment
  of prior year tax accruals                           |  |      | (1,010 | )    |   |       |   |   |       |  
| |                                                                   |  |      |        |      |   |        |   |   |        |  
| | (Benefit)
  provision for income taxes from continuing operations |  |      | (1,795 | )    |   | 10,146 |   |   | 15,088 |  
| | Provision for income taxes
  from discontinued operations         |  |      |       |      |   | (1,227 | ) |   | (1,709 | )
| |                                                                   |  |      |        |      |   |        |   |   |        |  
| | (Benefit) provision for
  income taxes                            |  | $    | (1,795 | )    | $ | 8,919  |   | $ | 13,379 |  
| |                                                                   |  |      |        |      |   |        |   |   |        |  

| |                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2006, the Company reversed $1,010 of tax accruals
that were no longer needed as a result of the expiration of the applicable statue of limitations and the completion of tax audits.
The reconciliation between income tax expense based on statutory income tax rates and the provision for income taxes is as follows:

| |                                                                   |  |      |         |      |   |        |   |   |        |  
| | ----------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | - | - | ------ | -
| |                                                                   |  | 2006 |         | 2005 |   | 2004   |  
| |                                                                   |  |      |         |      |   |        |   |   |        |  
| | (Benefit)
  provision for income taxes at federal statutory rate  |  | $    | (17,872 | )    | $ | 9,624  |   | $ | 14,667 |  
| | Valuation
  allowance                                             |  |      | (1,520  | )    |   |       |   |   |       |  
| | State income
  taxes, net of federal income tax benefit           |  |      | 58      |      |   | 979    |   |   | 664    |  
| | Goodwill
  impairment                                             |  |      | 18,030  |      |   |       |   |   |       |  
| | Charitable
  donations of inventory                               |  |      | (104    | )    |   | (32    | ) |   | (66    | )
| | Adjustment
  of prior year tax accruals                           |  |      | (1,010  | )    |   |       |   |   |       |  
| | Other                                                             |  |      | 623     |      |   | (425   | ) |   | (177   | )
| |                                                                   |  |      |         |      |   |        |   |   |        |  
| | (Benefit)
  provision for income taxes from continuing operations |  |      | (1,795  | )    |   | 10,146 |   |   | 15,088 |  
| | Provision for income taxes
  from discontinued operations         |  |      |        |      |   | (1,227 | ) |   | (1,709 | )
| |                                                                   |  |      |         |      |   |        |   |   |        |  
| | (Benefit) provision for
  income taxes                            |  | $    | (1,795  | )    | $ | 8,919  |   | $ | 13,379 |  
| |                                                                   |  |      |         |      |   |        |   |   |        |  

| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | The components of the net deferred tax (liability) asset
at December 30, 2006 and December 31, 2005 were as follows:

| |                                            |  |      |        |      |   |        |  
| | ------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
| |                                            |  | 2006 |        | 2005 |  
| |                                            |  |      |        |      |   |        |  
| | DEFERRED TAX
  ASSETS:                     |  |      |        |      |   |        |  
| | Defined benefit pension reserve
obligation |  | $    | 8,415  |      | $ | 28,919 |  
| | Asset valuation reserves                   |  |      | 13,629 |      |   | 8,890  |  
| | Minority interest activity                 |  |      |       |      |   | 1,520  |  
| | Deferred compensation                      |  |      | 1,422  |      |   | 1,014  |  
| | Accrued liabilities                        |  |      | 2,148  |      |   | 783    |  
| | Severance and restructuring reserves       |  |      | 665    |      |   | 5,184  |  
| | Other deferred tax assets                  |  |      | 1,166  |      |   | 891    |  
| | Deferred gain on sale of facility          |  |      | 1,565  |      |   |       |  
| | Less: Deferred tax valuation allowance     |  |      |       |      |   | (1,520 | )
| |                                            |  |      |        |      |   |        |  
| | Total deferred tax assets                  |  |      | 29,010 |      |   | 45,681 |  

F-31

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Table of Contents

| |                                     |  |      |         |      |   |         |  
| | ----------------------------------- |  | ---- | ------- | ---- | - | ------- | -
| |                                     |  | 2006 |         | 2005 |  
| |                                     |  |      |         |      |   |         |  
| | DEFERRED TAX LIABILITIES:           |  |      | (28,975 | )    |   | (26,127 | )
| | Intangible assets                   |  |      | (2,009  | )    |   | (5,294  | )
| | Property and equipment depreciation |  |      | (2,427  | )    |   | (2,304  | )
| |                                     |  |      |         |      |   |         |  
| | Prepaids and other                  |  |      | (33,411 | )    |   | (33,725 | )
| |                                     |  |      |         |      |   |         |  
| | Total deferred tax liabilities      |  | $    | (4,401  | )    | $ | 11,956  |  
| |                                     |  |      |         |      |   |         |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The $4,401 net deferred tax liability at December 30, 2006 is presented as a net deferred current
asset of $13,896 and a net deferred noncurrent liability of $18,297. The $11,956 net deferred tax asset at December 31, 2005 is
presented as a net deferred current asset of $13,380 and a net deferred noncurrent liability of $1,424.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company paid income taxes of $1,897, $8,979, and $10,746 during the years ended December 30,
2006, December 31, 2005, and January 1, 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|12. | DEFERRED COMPENSATION OBLIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company has a deferred compensation plan with certain key employees. Under this plan, employees
may elect to defer (contribute) a portion of their eligible compensation into the plan. The Company, at its discretion, may also
contribute amounts into the plan on behalf of the key employees. The Company funds this plan by purchasing and owning securities
which are considered trading securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, and are consequently marked-to-market. These securities are recorded in Marketable Securities in the
Companys Consolidated Balance Sheets. The plan participants bear the potential economic risks and rewards of the
investments performance and their interests in the underlying plan assets are subordinate to general creditors.                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|13. | CONCENTRATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | At December 30, 2006 one customer accounted for approximately 17% of the Companys total
accounts receivable. For the twelve months ended December 30, 2006, this same customer accounted for approximately 17% of the
Companys total net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|14. | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Effective January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), Share-Based Payment(SFAS 123R), which revised SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). This standard requires compensation costs related to share-based
payment transactions to be recognized in the financial statements. The Company adopted the standard using the modified prospective
transition method, which requires the application of the accounting standard to all share-based awards issued on or after the date
of adoption and any outstanding share-based awards that were issued but not vested as of the date of adoption. Accordingly, the
Company did not restate the financial information for 2005 and 2004 as a result of the adoption.                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Total stock-based compensation expense for the year ended December 30, 2006 was $1,518. The adoption
of SFAS 123R in 2006 resulted in the recognition of incremental pre-tax stock-based compensation expense for the year ended
December 30, 2006 of $181, and an increase in net loss of $112 (the impact on basic and diluted earnings per share during the year
ended December 30, 2006 was $0.01). The adoption also resulted in a reduction in cash flows from operating activities of $7 and an
increase in cash flows from financing activities of $7 for the year ended December 30, 2006. Additionally, upon adoption of SFAS
123R, the Company reclassified unearned compensation on non-vested restricted stock of $3,469 to additional paid-in capital. The
cumulative effect adjustment for forfeitures related to nonvested restricted stock and options was not material.

F-32

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Table of Contents

Total stock-based compensation expense for the years ended December 31, 2005
and January 1, 2005 was $989 and $389, respectively (which are included in the net income as reported figures in the table below).
Prior to 2006, the Company applied APB 25 and the disclosure-only provisions of SFAS 123. The following table illustrates the
effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensations for the years ended December 31, 2005 and January 1, 2005.

|                                                       |  |      |        |      |   |        |  
|------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                                       |  | 2005 |        | 2004 |  
|                                                       |  |      |        |      |  
|Net income:                                            |  |      |        |      |   |        |  
|As reported                                            |  | $    | 15,170 |      | $ | 23,784 |  
|Stock-based compensation, net of related
  tax effects |  |      | (2,388 | )    |   | (1,587 | )
|                                                       |  |      |        |      |   |        |  
|Pro forma                                              |  |      | 12,782 |      |   | 22,197 |  
|                                                       |  |      |        |      |   |        |  
|Net income
  per common share  basic:                 |  |      |        |      |   |        |  
|As reported                                            |  | $    | 1.11   |      | $ | 1.78   |  
|Pro forma                                              |  |      | 0.94   |      |   | 1.66   |  
|                                                       |  |      |        |      |   |        |  
|Net income
  per common share  assuming dilution:     |  |      |        |      |   |        |  
|As reported                                            |  | $    | 1.10   |      | $ | 1.76   |  
|Pro forma                                              |  |      | 0.93   |      |   | 1.64   |  

The Company
estimates the fair values of each option using the Black-Scholes option-pricing
model using the following assumptions:

|                                  |  |      |             |      |  |             |  |  |             | 
|--------------------------------- |  | ---- | ----------- | ---- |  | ----------- |  |  | ----------- | 
|                                  |  | 2006 |             | 2005 |  | 2004        | 
|                                  |  |      |             |      |  |             | 
|Risk-free
  interest rate         |  |      | 4.6% - 5.1% |      |  | 3.8% - 4.1% |  |  | 3.8% - 3.9% | 
|Expected
  dividend yield         |  |      | 0%          |      |  | 0%          |  |  | 0%          | 
|Expected
  stock price volatility |  |      | 49%         |      |  | 32%         |  |  | 50%         | 
|Expected
  life (in years)        |  |      | 6           |      |  | 6           |  |  | 6           | 

The expected term of options is based on the historical exercise behavior of
employees. The expected volatility is based on historical volatility for a period equal to the stock options expected term.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

Stock Incentive Plans

As of December 30, 2006, the Company had incentive plans allowing the Company
to grant options, stock appreciation rights, shares or performance units to employees, directors, officers, consultants and
advisors. As of December 30, 2006, 296,556 shares were available for granting under the stock incentive plans.

Stock Options  Under the stock incentive plans, all employee
options granted have an exercise price equal to the market value of the common stock at the date of grant, generally have a term
of ten years and are exercisable at various times after the first anniversary date of the grant date.

F-33

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Table of Contents

A summary of the status of the Companys stock option activity as of
December 30, 2006 and changes during the year then ended is presented below:

|                                     |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|------------------------------------ |  | ------ | --------- | ------------------------------------- | - | ------------------------------------------------- |  | --------------------------------------- | --- |  | - | -- | 
|                                     |  |        |           | 2006                                  |  
|                                     |  |        |           |                                       |   |                                                   | 
|                                     |  | Shares |           | Weighted
  Average
  Exercise
  Price |   | Weighted
  Remaining
  Contractual
  Life (Years) |  | Average
  Aggregate
  Intrinsic
  Value |    
|                                     |  |        |           |                                       |   |                                                   |  |                                         |    
|Outstanding
  at beginning of year   |  |        | 2,207,191 |                                       | $ | 14.32                                             |  |                                         |     |  |   |    | 
|Granted                              |  |        | 107,068   |                                       |   | 9.50                                              |  |                                         |     |  |   |    | 
|Exercised                            |  |        | (33,600   | )                                     |   | 10.08                                             |  |                                         |     |  |   |    | 
|Forfeited                            |  |        | (25,567   | )                                     |   | 15.77                                             |  |                                         |     |  |   |    | 
|Expired or
  Canceled                |  |        | (175,614  | )                                     |   | 18.89                                             |  |                                         |     |  |   |    | 
|                                     |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|Outstanding
  at end of year         |  |        | 2,079,478 |                                       |   | 13.74                                             |  |                                         | 5.4 |  | $ | 34 | 
|                                     |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|Options
  exercisable at end of year |  |        | 1,964,409 |                                       |   | 13.97                                             |  |                                         | 5.2 |  | $ | 0  | 

The vested or expected to vest approximates
shares outstanding as the Company does not anticipate significant forfeitures.

The
weighted-average grant date fair value of options granted for the years ended
December 30, 2006, December 31, 2005 and January 1, 2005 was estimated to be
$5.04, $5.25 and $8.27 per share, respectively. The total intrinsic value of
options that were exercised for the years ended December 30, 2006, December 31,
2005 and January 1, 2005 was $86, $755 and $1,443, respectively. As of December
30, 2006, the total unrecognized compensation cost related to stock options was
$400 and is expected to be recognized over a weighted average period of 1.0
years.

Cash received
from option exercises for the years ended December 30, 2006, December 31, 2005
and January 1, 2005 was $340, $1,640 and $4,862, respectively. The actual tax
benefit realized for the tax deductions from option exercises totaled $32, $272
and $519 for years ended December 30, 2006, December 31, 2005 and January 1,
2005, respectively.

Performance- and Time- Vesting Restricted
Stock  The Company granted 83,534 restricted shares
of common stock to executive officers, directors and employees during the 52
weeks ended December 30, 2006. Under SFAS 123R, these shares are considered to
be nonvested shares, as defined. Of these shares, 31,034 shares were performance-vesting
and 52,500 shares were time-vesting. Performance-vesting shares may be earned
and become vested in a specific percentage depending upon the extent to which
the target performance is met as of the last day of the performance cycle.
Time-vesting shares generally become vested after the duration of a specified
period of time.

F-34

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Table of Contents

A summary of the status of the Companys nonvested restricted stock
activity as of December 30, 2006 and changes during the year then ended is presented below:

|                                   |  |        |         |                        |   |       | 
|---------------------------------- |  | ------ | ------- | ---------------------- | - | ----- | 
|                                   |  | 2006   |        
|                                   |  |        |        
|                                   |  | Shares |         | Grant Date  Fair Value |  
|                                   |  |        |         |                        |  
|                                   |  |        |         |                        |   |       | 
|Outstanding
  at beginning of year |  |        | 312,282 |                        | $ | 13.72 | 
|Granted                            |  |        | 83,534  |                        |   | 8.64  | 
|Vested                             |  |        | (10,000 | )                      |   | 12.52 | 
|Forfeited                          |  |        | (58,287 | )                      |   | 13.14 | 
|                                   |  |        |         |                        |   |       | 
|Outstanding
  at end of year       |  |        | 327,529 |                        |   | 12.61 | 
|                                   |  |        |         |                        |   |       | 

As of December 30, 2006, the total unrecognized compensation cost related to
nonvested restricted stock granted was $2.3 million. Of this amount, $1.1 million is expected to be recognized over a weighted
average period of 1.0 years, and the remaining $1.2 million relates to the performance-vesting restricted stock for which target
performance is not expected to be met and therefore the cost is not expected to be recognized. The total fair value of restricted
stock vested for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 was $125, $197 and $177, respectively.

Shareholder Rights Plan In April 1997, the Company adopted a
shareholder rights plan. Under the shareholder rights plan, each shareholder received a dividend of one preferred share purchase
right for each share held of the Companys common stock. Each right entitles the holder to purchase one one-thousandth of a
share of Series A Participating Preferred Stock at an exercise price of $100, subject to adjustment, or at the discretion of the
Board of Directors of the Company, the right to purchase common stock of the Company at a 50% discount. The rights become
exercisable only upon the occurrence of certain events involving a buyer acquiring 18.5% or greater beneficial ownership in the
Companys common stock or the announcement of a tender offer or exchange offer which, if consummated, would give the buyer
beneficial ownership of an 18.5% or greater position in the Company. Preferred share purchase rights owned by the buyer become
null and void following this occurrence. The rights will expire April 2007, and the Company may redeem the rights at any time
(prior to the occurrence of a specified event) at a price of one cent per right. If the Company is acquired in a merger or similar
transaction after such an occurrence, all rights holders, except the buyer, will have the right to purchase stock in the buyer at
a 50% discount.

|    |                                
|--- | -------------------------------
|15. | COMMITMENTS
  AND CONTINGENCIES

Operating Leases  The Company leases warehouse, office and
retail store space, equipment, and showroom display facilities under renewable operating leases with remaining terms of up to 10
years. In addition to the base rent, the Company pays its proportionate share of taxes, special assessments, and operating
expenses of the warehouse and retail store space and showroom display facilities.

F-35

---

Table of Contents

The following is a schedule of future annual minimum lease payments for
noncancelable operating leases as of December 30, 2006:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2007       |  | $ | 16,126  | 
|2008       |  |   | 13,985  | 
|2009       |  |   | 12,508  | 
|2010       |  |   | 10,248  | 
|2011       |  |   | 9,172   | 
|Thereafter |  |   | 52,906  | 
|           |  |   |         | 
|           |  | $ | 114,945 | 
|           |  |   |         | 

Certain of the Companys leases contain pre-determined rent increases
over the life of the lease. These rent increases are included in the above-referenced minimum lease table in the year in which the
rent increase occurs. When recording rent expense, the Company amortizes the total amount of the rent payments on a straight-line
basis over the term of the lease. When the Company receives leasehold improvement funding as an incentive to enter into a lease,
the Company amortizes these incentives against rent expense on a straight line basis over the term of the lease. The
Companys rent expense was $13,224, $7,275, and $4,127 for the years ended December 30, 2006, December 31, 2005, and January
1, 2005, respectively.

Letters of Credit  The Company had outstanding standby and
commercial letters of credit of $5,516 at December 30, 2006 relating primarily to securing our performance to third-parties under
self-insurance programs as well as for purchase commitments issued to foreign suppliers and vendors.

Legal Proceedings  In August 2004, plaintiffs purporting to
represent a class of consumers who purchased tableware sold in the United States filed suit against Federated Department Stores,
the May Department Stores Company, Waterford Wedgwood U.S.A. and Lenox, Incorporated (Lenox) in United States District
Court for the Northern District of California. In November 2004, plaintiffs filed a consolidated amended complaint alleging that
for the period beginning at least as early as May 1 2001, through the filing of the amended complaint on November 12, 2004,
defendants violated Section 1 of the Sherman Act by conspiring to fix prices and to boycott sales to Bed, Bath & Beyond
(hereinafter the Action). Plaintiffs seek to recover an undisclosed amount of damages, trebled in accordance with
antitrust laws, as well as costs, attorneys fees and injunctive relief.

On February 22, 2007, without admitting any violation of any statute or law
or any liability or wrongdoing whatsoever, Lenox entered into a settlement agreement with the plaintiff class representatives.
Pursuant to the terms of the settlement agreement, Lenox has agreed to pay $0.5 million, in return for which Lenox and its
affiliates will be completely released from any and all claims, demands and actions concerning the Action and any claims that
could have been alleged in the Action. This settlement agreement is subject to approval of the court and a final judgment
dismissing the Action with prejudice as to Lenox. Plaintiffs and Lenox have agreed to use their best efforts promptly to seek
court approval of the settlement agreement and dismissal of the Action with prejudice.

In addition to the above Action, the Company is involved in various legal
proceedings, claims, and governmental audits in the ordinary course of its business. The Company believes it has meritorious
defenses to all proceedings, claims, and audits. Management believes the impact, if any, of these legal proceedings would not be
material to the results of operations, financial position or cash flows of the Company.

F-36

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Table of Contents

|    |                                                
|--- | -----------------------------------------------
|16. | SEGMENTS OF THE COMPANY AND RELATED INFORMATION

In connection with the Companys acquisition of Lenox, the Company
redefined its operating segments to include three reportable segments  Wholesale, Retail, and Direct. Although the product
produced and sold for each segment is similar, the type of customer for the product and the method used to distribute the product
are different. The segmentation of these operations also reflects how the Companys chief executive officer currently reviews
the results of these operations. Operating income (loss) from continuing operations for each operating segment includes
specifically identifiable operating costs such as cost of sales and selling expenses. General and administrative expenses are
generally not allocated to specific operating segments and are therefore reflected in the corporate category. Other components of
the statement of operations, which are classified below operating income (loss) from continuing operations, are also not allocated
by segment. In addition, the Company does not account for or report assets, capital expenditures or certain depreciation and
amortization by segment. Net sales derived from customers outside the United States for the years ended December 30, 2006, December
31, 2005 and January 1, 2005 were approximately 2%, 3% and 4%, respectively. All long-lived assets are located within the United
States. All transactions between operating segments have been eliminated and are not included in the following table.

The following table presents the Companys segment information for the
last three fiscal years:

|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|---------------------------------------------------- |  | -------------------------------- | ------- | -------------- |  | -------------------------------- | - | --------------- | ------- | ----------------------------- |  | -------------- | - | - | ------- | - |  | ----- | -
|(In thousands)                                       |  | 52 WEEKSENDED  DECEMBER 30, 2006 |         | % of Net Sales |  | 52 WEEKSENDED  DECEMBER 31, 2005 |   | % of  Net Sales |         | 52 WEEKSENDED JANUARY 1, 2005 |  | % of Net Sales |  
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |  
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|WHOLESALE:                                           |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|Net sales                                            |  | $                                | 330,352 |                |  | 100.0                            | % | $               | 217,009 |                               |  | 100.0          | % | $ | 153,139 |   |  | 100.0 | %
|Gross profit                                         |  |                                  | 135,928 |                |  | 41.1                             | % |                 | 90,800  |                               |  | 41.8           | % |   | 81,693  |   |  | 53.3  | %
|Selling expenses                                     |  |                                  | 42,324  |                |  | 12.8                             | % |                 | 26,473  |                               |  | 12.2           | % |   | 16,218  |   |  | 10.6  | %
|Goodwill impairment                                  |  |                                  | 55,269  |                |  | 16.7                             | % |                 |        |                               |  | 0.0            | % |   |        |   |  | 0.0   | %
|Income from continuing operations                    |  |                                  | 38,335  |                |  | 11.6                             | % |                 | 64,327  |                               |  | 29.6           | % |   | 65,475  |   |  | 42.6  | %
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|RETAIL:                                              |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|Net sales                                            |  | $                                | 72,367  |                |  | 100.0                            | % | $               | 72,777  |                               |  | 100.0          | % | $ | 9,769   |   |  | 100.0 | %
|Gross profit                                         |  |                                  | 40,364  |                |  | 55.8                             | % |                 | 41,659  |                               |  | 57.2           | % |   | 7,256   |   |  | 74.3  | %
|Selling expenses                                     |  |                                  | 32,712  |                |  | 45.2                             | % |                 | 22,397  |                               |  | 30.8           | % |   | 6,559   |   |  | 67.1  | %
|Income from continuing operations                    |  |                                  | 7,652   |                |  | 10.6                             | % |                 | 19,262  |                               |  | 26.5           | % |   | 697     |   |  | 7.1   | %
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|DIRECT:                                              |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|Net sales                                            |  | $                                | 98,020  |                |  | 100.0                            | % | $               | 41,129  |                               |  | 100.0          | % |   |         |   |  |       |  
|Gross profit                                         |  |                                  | 66,515  |                |  | 67.9                             | % |                 | 25,611  |                               |  | 62.3           | % |   |         |   |  |       |  
|Selling expenses                                     |  |                                  | 46,904  |                |  | 47.9                             | % |                 | 16,971  |                               |  | 41.3           | % |   |         |   |  |       |  
|Income from continuing operations                    |  |                                  | 19,611  |                |  | 20.0                             | % |                 | 8,640   |                               |  | 21.0           | % |   |         |   |  |       |  
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|CORPORATE:                                           |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|Unallocated net sales                                |  | $                                | 1,767   |                |  |                                  |   | $               | 813     |                               |  |                |   |   |         |   |  |       |  
|Unallocated general and administrative expenses      |  |                                  | 112,736 |                |  |                                  |   |                 | 60,553  |                               |  |                |   | $ | 31,056  |   |  |       |  
|Unallocated pension curtailment and settlement gains |  |                                  | (14,783 | )              |  |                                  |   |                 |        |                               |  |                |   |   |         |   |  |       |  
|Unallocated trademark impairment                     |  |                                  | 3,743   |                |  |                                  |   |                 |        |                               |  |                |   |   |         |   |  |       |  
|Loss from operations                                 |  |                                  | (99,929 | )              |  |                                  |   |                 | (59,740 | )                             |  |                |   |   | (31,056 | ) |  |       |  
|                                                     |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|CONSOLIDATED:                                        |  |                                  |         |                |  |                                  |   |                 |         |                               |  |                |   |   |         |   |  |       |  
|Net sales                                            |  | $                                | 502,506 |                |  |                                  |   | $               | 331,728 |                               |  |                |   | $ | 162,908 |   |  |       |  
|Operating (loss) income from continuing operations   |  |                                  | (34,331 | )              |  | 6.8                              | % |                 | 32,489  |                               |  | 9.8            | % |   | 35,116  |   |  | 21.6  | %

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|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17. | INCOME (LOSS) PER COMMON SHARE                                                                                                                                           
|    |                                                                                                                                                                          
|    | The following tables reconcile income (loss) from continuing operations per common share and income
(loss) from continuing operations per common share assuming dilution:

| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | ----------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
| |                                                                               |  | 2006 |            | 2005 |   | 2004       | 
| |                                                                               |  |      |            |      |   |            | 
| | (Loss) Income from continuing operations                                      |  | $    | (49,268    | )    | $ | 17,352     |  | $ | 26,820     | 
| | Weighted average number of shares
  outstanding                               |  |      | 13,749,000 |      |   | 13,669,000 |  |   | 13,342,000 | 
| | (Loss) Income per share from continuing
  operations  basic                  |  | $    | (3.58      | )    | $ | 1.27       |  | $ | 2.01       | 
|
| | (Loss) Income from continuing operations                                      |  | $    | (49,268    | )    | $ | 17,352     |  | $ | 26,820     | 
| | Weighted average number of shares
  outstanding                               |  |      | 13,749,000 |      |   | 13,669,000 |  |   | 13,342,000 | 
| | Dilutive impact of options outstanding                                        |  |      |           |      |   | 83,000     |  |   | 188,000    | 
| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | Weighted average number of shares and
  potential dilutive shares outstanding |  |      | 13,749,000 |      |   | 13,752,000 |  |   | 13,530,000 | 
| | (Loss) Income per share from continuing
  operations  assuming dilution      |  | $    | (3.58      | )    | $ | 1.26       |  | $ | 1.98       | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Options to purchase 1,923,909, 865,949, and 618,477 shares of common stock were outstanding at
December 30, 2006, December 31, 2005, and January 1, 2005, respectively, but were not included in the computation of income (loss)
per common share assuming dilution because the exercise prices were greater than the average market price of the common stock.
Also excluded from the computation of income (loss) per common share assuming dilution for the year ended December 30, 2006 were
155,569 options to purchase shares of common stock and 327,529 outstanding shares of nonvested restricted stock, which were
excluded because they had an antidilutive effect on earnings per share.                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|18. | ENVIRONMENTAL MATTERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | As a result of the acquisition of Lenox, the Company is responsible for the cleanup and/or
monitoring of two environmental sites located in New Jersey pursuant to an Administrative Consent Order and Memorandum of
Understanding with the New Jersey Department of Environmental Protection (NJDEP). The Company is also responsible for
monitoring solid waste management units at its Pomona, NJ manufacturing facility pursuant to a Hazardous & Solid Waste
Amendment (HSWA) permit with the U.S. Environmental Protection Agency. The Company accrues for losses associated with
environmental cleanup obligations when such losses are probable and can be reasonably estimated.                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | At one of the NJDEP sites there are other potentially responsible parties who bear part of the cost
of the cleanup, in which case the Companys accrual is based on the Companys estimated share of the total costs. A
portion of the cleanup costs with respect to the two NJDEP sites is paid by insurance. The estimated recovery of cleanup costs is
recorded as an asset when receipt is deemed probable.                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | As of December 30, 2006, the Company estimated, based on engineering studies, total remediation and
ongoing monitoring costs to be $3.7 million, including the effects of inflation. Accordingly, the Company recorded a liability of
approximately $2.6 million in other noncurrent liabilities, which represents the net present value of the estimated future costs
discounted at 5.25%. In accordance with Statements of Position (SOP) 96-1, Environmental Remediation Liabilities, the
Company measures this liability on a discounted basis as it believes the amount and timing of cash payments for the liability are
reliably determinable. The estimated insurance recovery assets as of December 30, 2006 were $1.2 million and are included in other
assets.

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|    |                  
|--- | -----------------
|19. | SUBSEQUENT EVENTS

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 4, 2007, the Company entered into a consulting agreement with the Carl Marks
Advisory Group LLC (CMAG). On January 5, 2007, the Company announced that Susan Engel, the Companys Chief Executive Officer,
Chairwoman of the Board and a director, had stepped down from all of those positions effective immediately. On January 5, 2007,
the Company also announced that Stewart Kasen, the current Lead Director, was elected as Chairman of the Board. The Company
announced that Marc Pfefferle, a partner at CMAG, was elected as interim Chief Executive Officer, replacing Susan Engel
immediately.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On January 24, 2007, the Company entered into an amendment to the consulting agreement it signed
with CMAG on January 4, 2007. Pursuant to the amendment, CMAG will provide the Company with an additional Managing Director to
assist in the development of the 2007 business plan incorporating cost savings and profit improvement action plans and financial
analysis and modeling related to the overall business, segment profitability and balance sheet tasks.                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On February 9, 2007, the Company entered into waivers and amendments to the Revolving Credit
Agreement dated September 1, 2005 and the Term Loan Credit Agreement dated September 1, 2005. The waivers and amendments were
entered into in connection with the Companys noncompliance with certain financial covenants under the credit agreements for
the period ended December 30, 2006. Pursuant to the waivers and amendments, the lenders granted the Company a limited waiver of
noncompliance through and including April 30, 2007.                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On February 26, 2007, the Company announced its intention to close the distribution center located
in Rogers, MN in October 2007. The Company intends to integrate over the next several months activity currently conducted in the
Rogers facility into its distribution center located in Hagerstown, MD.                                                                                                                                                                                                                                                                                                                  

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Table of Contents

LENOX GROUP INC. AND SUBSIDIARIES

|                                                             
|-------------------------------------------------------------
|SCHEDULE II
  VALUATION AND QUALIFYING ACCOUNTS(In thousands)
|                                                             

|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|--------------------------------------- |  | ------------------------------- | ------ | --------------------------------- | - | --------------- |  | ---------- | ----- | ---------------------- | - | ------ | --- | - | ------ | 
|Description                             |  | Balance
  Beginning
  of Period |        | Charged to
  Costs and
  Expenses |   | Other
  Changes |  | Deductions |       | Balance
  End ofPeriod |  
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |  
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Year ended December 30, 2006:           |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Allowance for doubtful accounts         |  | $                               | 6,866  |                                   | $ | 4,961           |  | $          | 20    | (a)                    | $ | 5,274  | (c) | $ | 6,573  | 
|Allowance for sales returns and credits |  |                                 | 6,668  |                                   |   | 20,612          |  |            |      |                        |   | 20,397 |     |   | 6,883  | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|                                        |  | $                               | 13,534 |                                   | $ | 25,573          |  | $          | 20    |                        | $ | 25,671 |     | $ | 13,456 | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Year ended December 31, 2005:           |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Allowance for doubtful accounts         |  | $                               | 5,051  |                                   | $ | 3,025           |  | $          | 2,729 | (b)                    | $ | 3,939  | (c) | $ | 6,866  | 
|Allowance for sales returns and credits |  |                                 | 1,352  |                                   |   | 9,734           |  |            | 4,373 | (b)                    |   | 8,791  |     |   | 6,668  | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|                                        |  | $                               | 6,403  |                                   | $ | 12,759          |  | $          | 7,102 | (b)                    | $ | 12,730 |     | $ | 13,534 | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Year ended January 1, 2005:             |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|Allowance for doubtful accounts         |  | $                               | 5,714  |                                   | $ | 1,614           |  |            |      |                        | $ | 2,277  | (c) | $ | 5,051  | 
|Allowance for sales returns and credits |  |                                 | 2,964  |                                   |   | 3,043           |  |            |      |                        |   | 4,655  |     |   | 1,352  | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 
|                                        |  | $                               | 8,678  |                                   | $ | 4,657           |  | $          |      |                        | $ | 6,932  |     | $ | 6,403  | 
|                                        |  |                                 |        |                                   |   |                 |  |            |       |                        |   |        |     |   |        | 

|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Purchase
  accounting adjustments.                                                                                                                         
|(b) | Amounts
  acquired as part of the acquisition of Lenox, Incorporated.                                                                                      
|(c) | Accounts determined to be uncollectible and charged against allowance account, net of collections on
accounts previously charged against allowance account.

S-1

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