UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 30, 2000   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|    | OR                                                                                                                                                
|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to  to .

Commission file number 1-11908

DEPARTMENT 56, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

13-3684956(I.R.S. Employer
Identification No.)One Village Place
6436 City West Parkway
Eden Prairie, MN(Address of principal executive offices)

55344(Zip Code)


(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 registeredCommon Stock, par value $.01 per share

New York Stock Exchange


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

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

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

The
aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $111,489,536 as of March 22, 2001 (based on the closing price of
consolidated trading in the Common Stock on that date as published inYahoo! Finance). For purposes of this computation, shares held by affiliates and
by directors and officers of the registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons
are affiliates of the registrant.

Number
of Shares of Common Stock, par value $.01 per share, outstanding as of March 22, 2001: 12,881,813.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the 2001 Annual Meeting of Stockholders filed with the Securities and Exchange Commission concurrently with this
Form 10-K (the "2001 Proxy Statement") are incorporated by reference in Part III.

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FORM 10-K TABLE OF CONTENTS

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|
|Part I     |  |                                                                                      
|Item 1.    |  | Business                                                                              |  | 1   
|Item 2.    |  | Properties                                                                            |  | 7   
|Item 3.    |  | Legal Proceedings                                                                     |  | 7   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 8   
|Part II    |  |                                                                                      
|Item 5.    |  | Market for the Registrant's Common Equity and Related Stockholder Matters             |  | 8   
|Item 6.    |  | Selected Financial Data                                                               |  | 9   
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 17  
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 17  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 17  
|Part III   |  |                                                                                      
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 18  
|Item 11.   |  | Executive Compensation                                                                |  | 18  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 18  
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 18  
|Part IV    |  |                                                                                      
|Item 14.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 19  
|Signatures |  | 21                                                                                   

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PART I

Item 1. BUSINESS

General:

Department 56, Inc. (including its direct and indirect subsidiaries, "Department 56" or "the Company") is a leading designer, importer and distributor of fine quality
collectibles and other giftware products sold through gift, home accessory and specialty retailers. The Company is best known for its Village Series of collectible, handcrafted, lit ceramic and
porcelain houses, buildings and related accessories in The Original Snow Village® Collection and The Heritage Village Collection® as well as its extensive line of
holiday and home decorative accessories, including its Snowbabies collectible porcelain and pewter handpainted figurines.

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 has since changed its name to
"D 56, Inc." and has continued as the Company's principal operating subsidiary.

The
Company seeks complementary businesses that reinforce synergies, allow it to supplement its internal product development, and accelerate its penetration into new markets and new channels. In this
connection, in the first quarter of fiscal year 2000 the Company completed a $4.0 million strategic minority investment in 2-Day Designs, Inc., a manufacturer and marketer of
high quality accent furniture and wooden accessories sold primarily through furniture, home furnishings, and catalog retailers. The Company's focused, multi-faceted strategy is intended to position
Department 56 as the premier giftware and collectibles company for the future.

Products:

Village Series Products Department 56 is best known for its Village Series, several
series of collectible, handcrafted, lit ceramic and porcelain houses, buildings and related accessories that depict nostalgic scenes. The Company introduces new lit pieces, limited edition pieces,
figurines and other accessories each year to complement and provide continuity to the collections. To allow for these new introductions and to keep each series appropriately balanced, the Company has
traditionally retired a number of its existing pieces from production each year. Retirement decisions are based on management's judgment as to, among other things, expected consumer demand, whether a
piece continues to fit the evolving design characteristics of a series, manufacturing considerations and, importantly, injecting an element of surprise.

Village Accessories Department 56 also produces a range of accessories for its villages, including
figurines, vehicles, landscaping, lighting and other decorative items. The sale of accessories for its Village Series is an important part of the Company's strategy to encourage the continued purchase
of its products. Accessories allow collectors to refresh their collections by changing their displays and by creating personalized settings. Many of the accessories can be used interchangeably between
the various villages, although certain accessories are designed uniquely for specific villages.

General Giftware The Company offers a wide range of other decorative giftware and home accessory items,
including the Company's Snowbabies and Snowbunnies® collectible figurines, Candle Crown candle extinguishers, Secret Boxes, Christmas, Easter, Halloween, and
non-seasonal decorative items, tableware, decorative tins, acrylics, "teddy bears" and other "plush" items, and gift bags. Department 56

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develops these decorative giftware and home accessories both to satisfy specific consumer demand and to introduce new product concepts that may develop into important product lines for the Company in
the future. Snowbabies figurines, originally introduced in 1987 as part of the Company's general Christmas collection, rapidly became a popular product line and subsequently have achieved their own
collectible status. Candle Crown candle extinguishers and Secret Boxes, introduced in 2000, provide new product categories to the North American gift and collectible marketplace which enable
continuity purchases. General Giftware products are generally offered as a line of products developed around a central design theme. The Company updates its product offerings twice a year and
currently maintains an aggregate of approximately 4,100 stock keeping units, of which approximately 3,400 are General Giftware products.

Customers:

The Company's principal customers (accounting for approximately 90% of its sales) are approximately 15,000 independent gift retailers across the United States. These retailers
include approximately 1,600 independently owned Gold Key and Showcase Dealers, who receive special recognition and qualify for improved sales terms, and who must satisfy certain requirements, such as
maintaining the Company's products on display in an attractive setting for at least six months. Approximately 10% of the Company's sales are made to department stores and mail order houses. No single
account represented more than 3% of the Company's sales in fiscal 2000. The Company provides volume discounts to its customers with respect to most of its products. The Company has generally had only
limited sales outside the United States. International sales were less than 3% of the Company's sales in fiscal 2000.

As
part of the Company's strategy of selective distribution, only approximately 5,500 retailers receive the Company's Village Series and/or Snowbabies products. Certain of the Company's lit Village
Series products and porcelain Snowbabies figurines have been sold on allocation. The Company periodically evaluates and adjusts its distribution network, and reviews its policies with a view of
optimizing both the Company's distribution strategy and the store-level operations of its independent retailers. While the Company remains committed to selective distribution for the
Village Series and Snowbabies products, the Company plans to continue to seek complimentary retailers (at times, with a less-than-full offering of the Company's product
assortment) to maintain sufficient market presence to accelerate consumer awareness and interest.

Marketing and Advertising:

Department 56 sells its products through nine corporate showrooms and three independently operated wholesale showrooms which cover the major giftware market areas in the United
States and Canada. The Company's headquarters in Eden Prairie, Minnesota has a 10,000 square-foot atrium showroom where all of its products, including retired Village Series lighted pieces
and Snowbabies figurines, are displayed. The Company has also launched its business-to-business extranet ("WIN" or Web Information Network) in order to develop greater
operational efficiencies and merchandising effectiveness for the Company and its retailers in the future. In addition, the Company sells through giftware trade shows throughout the United States and
Canada. During 2000, the Company opened a retail store in the Desert Passage retail complex at Aladdin Casino and Resort in Las Vegas, Nevada. During 2001 the Company plans to open its third store at
Downtown Disney®, a retail and entertainment complex located next to the Disneyland® theme park in Anaheim, California. The Company will continue to consider the
creation of additional corporately owned stores during 2001 to increase the visibility of the brand and

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cultivate consumer awareness. Tests have been conducted of product sales through home television shopping, direct mail, Internet-based retailers and corporate gift programs. The Company intends to
maintain flexibility in its marketing and distribution strategies in order to take advantage of opportunities that may develop in the future.

The
Company advertises its products to retailers principally through trade journals, giftware trade shows and brochures, and provides merchandising and product information to its collectible product
dealers through a newsletter and WIN. It advertises to consumers through brochures, point-of-sale information and seasonal advertisements in magazines and newspapers, and booth presence at major
collectibles expos. The Company has also expanded its consumer advertising through use of
cooperative advertising with its Gold Key Dealers using various media formats. In addition, the Company publishes and sells Fifty-Six, a quarterly consumer-oriented magazine which contains
product-related articles and description of its product lines,
and maintains an interactive consumer information center on an Internet web site (www.department56.com). Department 56 maintains a toll-free telephone line for collector questions and
participates in collector conventions. The Company also operates a collectors' club to which consumers of its Snowbabies product line may subscribe for exclusive product offerings and information.

Design and Production:

The Company has an ongoing program of new product development. Each year, the Company introduces new products in its existing product lines and also develops entirely new
design concepts. The Company endeavors to develop new products which, although not necessarily similar to the products currently marketed by the Company, fit the Company's quality and yield criteria.

Department
56 believes that its relationships with its manufacturers, and the quality of their craftsmanship, provide a competitive advantage and are a significant contributor to the Company's
success. The Company imports most of its products from the Pacific Rim, primarily The People's Republic of China, Taiwan (Republic of China) and The Philippines. The Company also imports a small
percentage of its products from sources in India, and occasionally from sources in Europe (primarily Germany, England, Poland and Czechoslovakia). During fiscal 2000, the Company imported products
from approximately 190 independent manufacturing sources, some of which are represented by independent trading companies. The Company's single largest manufacturing source represented approximately
18% of the Company's imports in fiscal 2000. The Company's emphasis on high-quality craftsmanship at affordable prices limits the sources from which the Company chooses to obtain products. The Company
has long-standing relationships with the majority of its manufacturers (many for 15 years or more) and often purchases (typically on a year-to-year basis) a
manufacturer's entire output for a year. As a result of these relationships, the Company has experienced a low turnover of its manufacturing sources.

The
design and manufacture of the Company's Village Series products are complex processes. The path from final conception of the design idea to market introduction typically takes approximately
12 months, although the Company continues to investigate processes intended to reduce this time. Products other than the Company's collectibles lines can generally be introduced within a few
months after a decision is made to produce the product. The Company's Village Series products are
principally composed of ceramic and porcelain clays and the Company's other products are designed in a variety of media, including paper, ceramic and resin.

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Distribution and Systems:

The products sold by the Company in the United States and Canada are generally shipped by ocean freight from abroad and then by rail to the Company's distribution center,
located within the northwest quadrant of the Minneapolis/St. Paul metropolitan area. Shipments from the Company to its customers are handled primarily by United Parcel Service or commercial trucking
lines.

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 customers. The Company also uses handheld
optical scanners and bar coded labels in accepting orders at wholesale showrooms throughout the United States. In addition, computer and communication software systems allow on-line
information access between the Company's headquarters and its showrooms, and those systems generally provide direct linkage with the Company's field salesforce. These systems also provide a range of
order and product information and ordering capabilities to customers subscribing to WIN.

Backlog and Seasonality:

The Company receives products, pays its suppliers and ships products throughout the year, although the majority of shipments historically have occurred in the second and third
quarters of each year as retailers stock merchandise in anticipation of the winter holiday season. The Company continues to ship merchandise until mid-December each year. Accordingly, the
Company's backlog typically is lowest at the beginning of January. As of December 30, 2000, Department 56 had
unfilled wholesale orders of approximately $4.6 million compared to $5.4 million at January 1, 2000. All of the backlog is scheduled to be shipped to customers during the current
fiscal year. Approximately 7% to 8% of the Company's total annual customer orders have been cancelled in each of the last three years for a number of reasons, but primarily due to inventory shortages
and customer credit considerations.

Department
56 historically has experienced a significant seasonal pattern in its working capital requirements and operating results. During the first quarter of each of the last three years, the
Company received approximately 64% to 65% of its annual orders for such year. The Company offers extended payment terms to many of its customers for seasonal merchandise. Accordingly, the Company
collects a substantial portion of its accounts receivable in the fourth and first quarters. Due to the seasonal pattern of shipping and accounts receivable collection, the Company generally has had
greater working capital needs in its second and third quarters and has experienced greater cash availability in its fourth and first quarters. The Company typically finances its operations through net
cash and marketable securities balances, internally generated cash flow and short-term seasonal borrowings. As a result of the Company's sales pattern, the Company has historically
recorded a substantial portion of its revenues in its second and third quarters.

Trademarks and Other Proprietary Rights:

The Company owns 32 U.S. trademark registrations and has pending U.S. trademark applications with respect to certain of its logos and brandnames. In addition, the Company from
time to time registers selected trademarks in certain foreign countries.

Department
56 regards its trademarks and other proprietary rights as valuable assets and intends to maintain and renew its trademarks and their registrations and vigorously defend against
infringement. The U.S. registrations for the Company's trademarks are currently scheduled to expire or be cancelled at

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various times between 2002 and 2010, but can be maintained and renewed provided that the marks are still in use for the goods and services covered by such registrations.

Competition:

Department 56 competes generally for the disposable income of consumers and, in particular, with other producers of fine quality collectibles, specialty giftware and home
decorative accessory products. The collectibles area, in particular, is affected by changing consumer tastes and interests. The giftware industry is highly competitive, with a large number of both
large and small participants. The Company's competitors distribute their products through independent gift retailers, department stores, mass market and specialty chain stores, televised home shopping
networks, internet commerce and mail order houses, or through direct response marketing. The Company believes that the principal elements of competition in the specialty giftware industry are product
design and quality, product and brand-name loyalty, product display and price. These elements, as well as presence in large, category-leading retail chains, also apply in the home
décor marketplace. The Company believes that its competitive position is enhanced by a variety of factors, including the innovativeness, quality and enduring themes of the Company's
products, its reputation among retailers and consumers, its in-house design expertise, its sourcing and marketing capabilities and the pricing of its products. Some of the Company's
competitors, however, have greater financial resources and a wider range of products than the Company.

Restrictions on Imports:

The Company does not own or operate any manufacturing facilities and imports most of its products from manufacturers in the Pacific Rim, primarily The People's Republic of
China, Taiwan and The Philippines. The Company also imports a small percentage of its products from sources in India, and occasionally from sources in Europe (primarily Germany, England, Poland and
Czechoslovakia).

The
Company's ability to import products and thereby satisfy customer orders is affected by the availability of, and demand for, quality production capacity abroad. The Company competes with other
importers of specialty giftware products for the limited number of foreign manufacturing sources which can produce detailed, high-quality products at affordable prices. The Company is
subject to the following risks inherent in foreign manufacturing: fluctuations in currency exchange rates; economic and political instability; cost fluctuations and delays in transportation;
restrictive actions by foreign governments; nationalizations; the laws and policies of the U.S. affecting importation of goods (including duties, quotas and taxes); and foreign trade and tax laws. In
particular, the Company's costs could be adversely affected if the currencies of other countries in which the Company sources product appreciate significantly relative to the U.S. dollar.

Substantially
all of the Company's products are subject to customs duties and regulations pertaining to the importation of goods, including requirements for the marking of certain information
regarding the country of origin on the Company's products. In the ordinary course of its business, from time to time, the Company is involved in disputes with the U.S. Customs Service regarding the
amount of duty to be paid, the value of merchandise to be reported or other customs regulations with respect to certain of the Company's imports, which may result in the payment of additional duties
and/or penalties, or which may result in the refund of duties to the Company.

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The United States and the countries in which the Company's products are manufactured may, from time to time, impose new quotas, duties, tariffs or other charges or restrictions, or adjust presently
prevailing quotas, duty or tariff levels, which could adversely affect the Company's financial condition or results of operations or its ability to continue to import products at current or increased
levels. In particular, the Company's costs may increase, or the mix of countries from which it sources its products may change, in the future if countries that are currently accorded "Normal Trade
Relations" status by the United States cease to have such status or the United States imposes retaliatory duties against imports from such countries. The Company cannot predict what regulatory changes
may occur or the type or amount of any financial impact on the Company such changes may have in the future.

In
fiscal 2000, approximately 83% (as compared to approximately 76% in fiscal 1999) of the Company's imports were manufactured in The People's Republic of China, which is accorded "Normal Trade
Relations" status on a temporary basis and generally is not subject to U.S. retaliatory duties. Various commercial and legal practices widespread in The People's Republic of China, including the
handling of intellectual properties, as well as certain political and military actions taken or suggested by The People's Republic of China in relation to Taiwan, are under review by the United States
government and, accordingly, the duty treatment of goods imported from The People's Republic of China is subject to political uncertainties. To the extent The People's Republic of China may cease to
have "Normal Trade Relations" status or its exports may be subject to political retaliation, the cost of importing products from such country would increase significantly, and the Company believes
that there could be a short-term adverse effect on the Company until alternative manufacturing arrangements were obtained. If the current effort of the People's Republic of China to accede
to the World Trade Organization is successful prior to the current deadline set for June 2001, a yearly Congressional review and vote on the Normal Trade Relations status of China will no
longer take place and China will have such status on a continuing basis.

Employees:

As of February 20, 2001, the Company had 328 full-time employees in the United States, eight in Canada and one in Taiwan. Of the total workforce,
approximately 100 are engaged in wholesale sales representation throughout North America and 14 are associated with the Company's corporate-owned retail properties. The Company's 66 U.S.-based
warehouse, shipping and receiving personnel employed as of that date are represented by Local Union No. 638 of the Teamsters under a contract that expires on December 31, 2001. The
Company will begin the process of negotiating a new contract in fiscal 2001. The Company believes that its labor relations are good and has never 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. Compliance with current laws
and regulations has not had and is not expected to have a material adverse effect on the Company's financial condition.
It is possible, however, that environmental issues may arise in the future that the Company cannot now predict.

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Item 2. PROPERTIES

The Company owns or leases buildings that contain approximately 639,000 square feet of floor space. The Company's primary corporate showroom, executive offices and creative
center are located in Eden Prairie, Minnesota. During 2000, the Company entered into lease agreements for two corporate-owned stores. The office building in Eden Prairie, Minnesota is owned by the
Company and the remainder of the Company's facilities are leased. The following table identifies each of the facilities utilized by the Company's operations.

|Facility                                                          |  | Location         |  | Lease
Expiration Date  |  | Approximate Number of
Square Feet
|----------------------------------------------------------------- |  | ---------------- |  | ---------------------- |  | ---------------------------------
|
|Executive Offices, Creative Center and Primary Corporate Showroom |  | Eden Prairie, MN |  | Company-owned facility |  | 66,400                           
|Warehouse and Distribution Facility                               |  | Rogers, MN       |  | 6-30-2010              |  | 333,700                          
|Warehouse and Distribution Facility                               |  | Bloomington, MN  |  | 2-28-2002              |  | 159,000                          
|Showroom                                                          |  | Atlanta, GA      |  | 12-31-2006             |  | 12,946                           
|Showroom                                                          |  | Chicago, IL      |  | 11-30-2006             |  | 7,480                            
|Showroom                                                          |  | Dallas, TX       |  | 1-31-2007              |  | 9,143                            
|Showroom                                                          |  | Los Angeles, CA  |  | 12-31-2002             |  | 6,600                            
|Showroom                                                          |  | Minnetonka, MN   |  | 10-31-2007             |  | 5,144                            
|Showroom                                                          |  | New York, NY     |  | 12-31-2005             |  | 10,300                           
|Showroom                                                          |  | Fairfax, VA      |  | 12-31-2003             |  | 4,300                            
|Showroom                                                          |  | Bedford, MA      |  | 6-30-2004              |  | 1,800                            
|Showroom                                                          |  | Columbus, OH     |  | 5-31-2009              |  | 2,485                            
|Retail store                                                      |  | Bloomington, MN  |  | 4-30-2009              |  | 10,200                           
|Retail store                                                      |  | Las Vegas, NV    |  | 10-31-2010             |  | 3,100                            
|Retail store                                                      |  | Anaheim, CA      |  | 3-31-2012              |  | 6,250                            

Item 3. LEGAL PROCEEDINGS

The Company is involved in various legal proceedings, claims and governmental audits in the ordinary course of its business.

On
September 14, 2000, Arthur Andersen LLP filed a lawsuit against the Company in The Fourth Judicial District, State of Minnesota alleging breach of contract in connection with computer system
implementation work and seeking $0.6 million plus interest and legal costs. On March 1, 2001, the Company filed suit in The Circuit Court of Baltimore City, State of Maryland against
Andersen Worldwide Société Coopérative and W. Robert Grafton alleging fraud, conspiracy, tortuous conduct and breach of contract in connection with the
computer systems implementation work solicited and performed by Arthur Andersen LLP and seeking $1 billion in compensatory damages, plus punitive damages and legal costs.

On
March 5 and March 9, 2001 lawsuits seeking unspecified compensatory damages were filed against the Company and its Chairwoman and Chief Executive Officer Susan E. Engel, in the United
States District Court for the District of Minnesota purportedly on behalf of the class of persons who purchased Department 56 common stock during the period February 24, 1999 through
April 26, 2000. The purported class action lawsuits allege the Company and its Chairwoman violated federal securities laws by making a series of false and misleading statements concerning the
Company's financial statements. The Company intends to defend these lawsuits vigorously.

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The Company believes it has meritorious defenses to all proceedings, claims and audits. Management is unable however to predict the ultimate outcome of these proceedings, claims and audits or to
reasonably estimate the impact, if any, that the ultimate resolution of these matters will have on the Company's results of operations, financial position or cash flows.

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, 2000.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS

Department 56's common stock is currently traded on the New York Stock Exchange ("NYSE") under the symbol "DFS." The table below sets forth the high and low sales prices as
reported by the NYSE.

|            |                | High |       | Low
|----------- | -------------- | ---- | ----- | ---
|
|Fiscal 2000 |                |      |       |    
|            | First quarter  |      | 23.69 |    
|            | Second quarter |      | 15.69 |    
|            | Third quarter  |      | 14.94 |    
|            | Fourth quarter |      | 15.88 |    
|Fiscal 1999 |                |      |       |    
|            | First quarter  |      | 37.88 |    
|            | Second quarter |      | 33.31 |    
|            | Third quarter  |      | 29.00 |    
|            | Fourth quarter |      | 24.81 |    

The Company has not declared or paid dividends on its Common Stock. The Company does not anticipate paying dividends in the foreseeable future. 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.

As
of March 22, 2001, the number of holders of record of the Company's Common Stock was 854.

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Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY (In thousands, except per share amounts)
YEARS ENDED DECEMBER 30, 2000, JANUARY 1, 2000, JANUARY 2, 1999, JANUARY 3, 1998, AND DECEMBER 28, 1996

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.

|                                                |                                                            | December 30,
20001 |         | January 1,
20001 |   | January 2,
19991 |        | January 3,
19981 |         | December 28,
19961 |  
|----------------------------------------------- | ---------------------------------------------------------- | ------------------ | ------- | ---------------- | - | ---------------- | ------ | ---------------- | ------- | ------------------ | -
|
|STATEMENTS OF INCOME                            |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Net sales2                                      |                                                            | $                  | 234,058 |                  | $ | 255,528          |        | $                | 251,153 |                    | $
|Cost of sales2                                  |                                                            |                    | 109,522 |                  |   | 113,475          |        |                  | 108,570 |                    |  
|                                                |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Gross profit                                    |                                                            |                    | 124,536 |                  |   | 142,053          |        |                  | 142,583 |                    |  
|Operating expenses:                             |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|                                                | Selling, general and administrative                        |                    |         | 74,166           |   |                  | 61,542 |                  |         | 56,648             |  
|                                                | Amortization of goodwill, trademarks and other intangibles |                    |         | 5,486            |   |                  | 5,145  |                  |         | 4,926              |  
|                                                |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Total operating expenses                        |                                                            |                    | 79,652  |                  |   | 66,687           |        |                  | 61,574  |                    |  
|                                                |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Income from operations                          |                                                            |                    | 44,884  |                  |   | 75,366           |        |                  | 81,009  |                    |  
|Other expense (income):                         |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|                                                | Interest expense                                           |                    |         | 11,729           |   |                  | 6,719  |                  |         | 4,817              |  
|                                                | Gain on sale of aircraft3                                  |                    |         |                 |   |                  |       |                  |         |                   |  
|                                                | Other, net                                                 |                    |         | (382             | ) |                  | (153   | )                |         | (397               | )
|                                                |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Income before income taxes                      |                                                            |                    | 33,537  |                  |   | 68,800           |        |                  | 76,589  |                    |  
|Provision for income taxes                      |                                                            |                    | 12,744  |                  |   | 26,144           |        |                  | 30,073  |                    |  
|                                                |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Net income                                      |                                                            | $                  | 20,793  |                  | $ | 42,656           |        | $                | 46,516  |                    | $
|Net income per common share  basic             |                                                            | $                  | 1.47    |                  | $ | 2.48             |        | $                | 2.49    |                    | $
|Net income per common share  assuming dilution |                                                            | $                  | 1.47    |                  | $ | 2.45             |        | $                | 2.45    |                    | $
|BALANCE SHEET DATA                              |                                                            |                    |         |                  |   |                  |        |                  |         |                    |  
|Working capital                                 |                                                            | $                  | 65,581  |                  | $ | 32,289           |        | $                | 29,276  |                    | $
|Total assets                                    |                                                            |                    | 277,808 |                  |   | 287,108          |        |                  | 233,283 |                    |  
|Total debt                                      |                                                            |                    | 105,000 |                  |   | 102,500          |        |                  | 20,000  |                    |  
|Total stockholders' equity4                     |                                                            |                    | 140,575 |                  |   | 152,924          |        |                  | 178,735 |                    |  

9

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(In millions, except per share amounts)

The following discussion of the results of operations and financial condition should be read in conjunction with the Department 56, Inc. Consolidated
Financial Statements and related Notes thereto, included elsewhere herein.

|                                                           |  | 2000 |       | 1999 |     | 1998 |  
|---------------------------------------------------------- |  | ---- | ----- | ---- | --- | ---- | -
|
|
|Net sales1                                                 |  | $    | 234.1 |      | 100 | %    | $
|Gross profit                                               |  |      | 124.5 |      | 53  |      |  
|Selling, general and administrative expenses               |  |      | 74.2  |      | 32  |      |  
|Amortization of goodwill, trademarks and other intangibles |  |      | 5.5   |      | 2   |      |  
|Income from operations                                     |  |      | 44.9  |      | 19  |      |  
|Interest expense                                           |  |      | 11.7  |      | 5   |      |  
|Other, net                                                 |  |      | (.4   | )    |    |      |  
|Income before income taxes                                 |  |      | 33.5  |      | 14  |      |  
|Provision for income taxes                                 |  |      | 12.7  |      | 5   |      |  
|Net income                                                 |  |      | 20.8  |      | 9   |      |  
|Net income per common share assuming dilution              |  |      | 1.47  |      |     |      |  
|Operating cash flow2                                       |  |      | 55.9  |      |     |      |  

COMPARISON OF RESULTS OF OPERATIONS 2000 TO 1999

Net Sales Net sales decreased $21.4 million, or 8%, from $255.5 million in 1999 to $234.1 million in 2000. The
decrease in sales was principally due to a decrease in sales volume of approximately $12.6 million, or 5%, the impact of a customer appreciation discount that the Company offered on orders
taken during the first quarter of 2000 of approximately $6.3 million, or 2%, and an increase in the amount provided for returned product. The increase in the amount provided for returned
product was primarily the result of a $6.5 million charge taken during the first quarter of 2000. The offer of the customer appreciation discount to affirm returning customer relationships and
the $6.5 million charge taken for returned product were each a result of the problems experienced during the implementation of the Company's new enterprise-wide information system
beginning in early 1999, as previously communicated. Sales of Village Series products decreased $17.9 million, or 11%, while sales of General Giftware products decreased $3.5 million, or
4% between the two periods. Village Series products represented 65% of the Company's sales in 2000 versus 67% in 1999.

Gross Profit Gross profit as a percentage of net sales was 56% and 53% in 1999 and 2000, respectively. Excluding the impact of the
customer appreciation discount and the increase in the amount provided for returned product, gross profit as a percent of sales would have been 56% during both 1999 and 2000.

10

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Selling, General and Administrative Expenses Selling, general and administrative expenses increased $12.6 million, or 21%, between
1999 and 2000. The increase is principally due to an increase in the amount provided for bad debts, an increase in depreciation and expenses related to the Company's continued investment in
information systems and its new distribution center, an increase in expenses related to the Company's launching of its new business-to-business extranet, and an increase in
other administrative expenses. The increase in the provision for bad debts was primarily due to a $5.5 million charge taken during the first quarter of 2000 as a result of the problems
experienced during the implementation of the Company's new enterprise-wide information system beginning in early 1999, as previously communicated. These increases were principally offset
by a decrease in marketing expense, a decrease in commission expense, and a decrease in the write-off of acquisition costs. Selling, general and administrative expenses as a percentage of
sales was 24% and 32% during 1999 and 2000, respectively. Excluding the impact of the customer appreciation discount and increased provisions for returned product and bad debts, selling, general and
administrative expenses as a percentage of sales would have been 28% in 2000.

Income from Operations Income from operations decreased $30.5 million, or 40%, from 1999 to 2000 due to the factors described
above. Operating margins decreased from 29% of net sales in 1999 to 19% of net sales in 2000. Excluding the impact of the customer appreciation discount and the increased provisions for returned
product and bad debts, income from operations would have been 26% of net sales in 2000.

Interest Expense Interest expense increased $5.0 million, or 75%, between 1999 and 2000 principally due to increased borrowings
under the Company's credit facilities in 2000 and increased interest rates paid by the Company. Additional borrowings were required as a result of slower cash collections and share repurchases.

Provision for Income Taxes The effective income tax rate was 38.0% during 1999 and 2000.

COMPARISON
OF RESULTS OF OPERATIONS 1999 TO 1998

Net Sales Net sales increased $4.3 million, or 2%, from $251.2 million in 1998 to $255.5 million in 1999. The
increase in sales was principally due to an increase in sales volume, offset partially by an increase in the amount provided for returned product. Sales of Village Series products increased 5%
from 1998 to 1999, while General Giftware product sales decreased 6% during the same period. Village Series products represented 67% of the Company's sales in 1999 versus 65% in 1998.

Gross Profit Gross profit decreased $0.5 million, or less than 1%, between 1998 and 1999. Gross profit as a percentage of sales
decreased from 57% in 1998 to 56% in 1999, principally due to an increase in the amount provided for returned product.

Selling, General and Administrative Expenses Selling, general and administrative expenses increased $4.9 million, or 9%, between
1998 and 1999. The increase is principally due to a 31% increase in distribution expenses, a 12% increase in marketing expenses and a 2% increase in administrative expenses. The increase in
distribution expense was principally due to a $0.9 million charge related to the Company's consolidation of its two current distribution centers and a storage facility into one new distribution
center in 2000, and a 63% increase in temporary labor due to the shipping difficulties experienced as a result of the implementation of the Company's new integrated computer system. The increase in
administrative expenses is principally due to an increase in bad debt expense, the write-off of failed acquisition costs, an increase in showroom expense as a result of the Company's
acquisition of

11

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showrooms during 1999 and 1998, an increase in depreciation expense associated with the implementation of the integrated computer system, and expenses associated with the operation of the Company's
first retail store. These increases were principally offset by a decrease in commission expense due to the acquisition of showrooms, a decrease in bonus expense and a decrease in other administrative
expenses. Selling, general and administrative expenses as a percentage of sales was 23% and 24% during 1998 and 1999, respectively.

Income from Operations Income from operations decreased $5.6 million, or 7%, from 1998 to 1999 due to the factors described above.
Operating margins decreased from 32% of net sales in 1998 to 29% of net sales in 1999.

Interest Expense Interest expense increased $1.9 million, or 40%, between 1998 and 1999 principally due to increased borrowings
under the revolving credit agreement. Additional borrowings were required as a result of slower cash collections which were impacted by the timing and manner in which invoices, shipping documents and
statements were mailed to customers as a result of the implementation of the new integrated computer system. Additional borrowings were also required due to increased capital expenditures.

Provision for Income Taxes The effective income tax rate was 39.3% and 38.0% during 1998 and 1999, respectively.

SEASONALITY

Historically,
principally due to the timing of wholesale trade shows early in the calendar year and the limited supply of the Company's products, the Company has received the majority of its total
annual customer orders during the first quarter of each year. The Company entered 64% and 65% of its total annual customer orders during 2000 and 1999, respectively, during the first quarter of each
of those years. Cancellations of total annual customer orders were approximately 7% and 8% in 2000 and 1999, respectively.

The
Company shipped and recorded as net sales (net of returns, allowances and cash discounts), approximately 91% of its annual customer orders during both 2000 and 1999. Orders not shipped in a
particular year, net of cancellations, are carried into backlog for the following year and have historically been orders for Spring and Easter products. The Company's backlog was $4.6 million
and $5.4 million at December 30, 2000 and January 1, 2000, respectively.

The
Company receives products, pays its suppliers and ships products throughout the year, although historically the majority of shipments occur in the second and third quarters as retailers stock
merchandise in anticipation of the holiday season. As a result of this seasonal pattern, the Company generally records its highest sales during the second and third quarters of each year. As a result
of this historical pattern, the Company can experience fluctuations in quarterly sales growth 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 broader, long-term annual growth
consistent with the Company's business strategy.

12

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|                                                           |  | 2000 |       | 1999
|---------------------------------------------------------- |  | ---- | ----- | ----
|
|
|Customer orders entered1                                   |  | $    | 165.1 |     
|Net sales2                                                 |  |      | 43.0  |     
|Gross profit                                               |  |      | 21.4  |     
|Selling, general and administrative expenses               |  |      | 23.2  |     
|Amortization of goodwill, trademarks and other intangibles |  |      | 1.4   |     
|(Loss) income from operations                              |  |      | (3.1  | )   
|Net (loss) income                                          |  |      | (3.2  | )   
|Net (loss) income per common share assuming dilution3      |  |      | (0.21 | )   

LIQUIDITY AND CAPITAL RESOURCES

The
Company's credit agreement provides for a revolving credit facility and a term loan facility. The revolving credit facility provides for borrowings of up to $100 million including letters
of credit. The letters of credit are issued primarily in connection with inventory purchases. The credit agreement contains numerous financial and operating covenants, including restrictions on
incurring indebtedness and liens, selling property and paying dividends. In addition, the Company is required to satisfy consolidated net worth, interest coverage ratio and leverage ratio tests, in
each case at the end of each fiscal quarter. None of these restrictions are expected to have a material adverse effect on the Company's ability to operate in the future.

During
the first quarter of 2000, the Company borrowed an additional $90 million of term debt under its term loan facility which brought the total outstanding term debt to $150 million
as of April 1, 2000. During the second quarter of 2000, the Company prepaid $45 million of term debt which can not be re-borrowed and included the $22.5 million
payment due March 2001. During the first quarter of 2001, the Company prepaid $20 million of term debt under its current credit facility.
As of March 14, 2001, the total term debt outstanding was $85 million. The Company's remaining term debt requires annual amortization payments of $0.9 million,
$32.4 million, and $51.7 due March 2002, 2003 and 2004, respectively.

The
Company believes that its internally generated cash flow and seasonal borrowings under the revolving credit facility will be adequate to fund operations and capital expenditures for the next
12 months.

Consistent
with customary practice in the giftware industry, the Company offers extended accounts receivable terms to many of its customers. This practice has typically created significant working
capital requirements in the second and third quarters which the Company has generally financed with available

13

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cash, internally generated cash flow and seasonal borrowings. The Company's cash and cash equivalents balances peak during the first quarter of the subsequent year, following the collection of
accounts receivable with extended payment terms due in November and December.

Accounts
receivable decreased from $65.6 million at January 1, 2000 to $37.0 million at December 30, 2000. The decrease in accounts receivable was principally due to a
decrease in sales and an unusually high balance of accounts receivable open at the end of 1999. Cash collections in 1999 were lower than normal due to the problems experienced in 1999 related to the
implementation of the Company's enterprise-wide information system, as previously communicated. Accounts receivable at December 30, 2000 were approximately $10.0 million
higher than comparable periods at the end of 1997 and 1998, primarily due to slower cash collections from some of the Company's retail customers stemming from a generally weak 2000 holiday season.
Management believes there is adequate provision for any doubtful accounts receivable and sales returns that may arise.

Capital
expenditures were $7.1 million, $16.3 million, and $6.8 million for 2000, 1999 and 1998, respectively. During 2000, capital expenditures related to the Company's new
distribution facility, the Company's second retail store, and the launch of it's business-to-business extranet totaled $2.3 million, $1.1 million and
$2.0 million, respectively. Included in 1999 and 1998 capital expenditures is $7.7 million and $4.1 million, respectively, incurred in connection with the Company's implementation
of its integrated computer system. During 1999, capital expenditures related to the Company's new distribution facility and the Company's first retail store totaled $5.7 million and
$2.0 million, respectively.

During
2000, the Company completed a $4.0 million strategic minority investment in 2-Day Designs, Inc., a manufacturer and marketer of high quality accent furniture and
wooden accessories sold primarily through furniture, home furnishings, and catalog retailers principally in the United States. The transaction is accounted for under the equity method of accounting.

During
1999, the Company acquired substantially all of the assets of the independent sales representative organizations that represented the Company's products in Massachusetts and several other
eastern states, Minnesota and several other midwestern states and Texas and several surrounding southern states. The cost of these acquisitions was $4.0 million.

During
1998, the Company acquired substantially all of the assets of the independent sales representative organizations that represented the Company's products in California and several surrounding
western states and New York and several surrounding eastern states. Also during 1998, the Company acquired the inventory and certain other assets of its Canadian distributor. The cost of these
acquisitions was $4.7 million.

The
impact of these acquisitions on the Company's results of operations are not considered significant.

In
April 1999, the Company executed a lease for a new distribution center in Minnesota. The lease provides for a 10-year term, with options to renew the lease, as well as to expand
and/or acquire the facility. During 2000, the Company consolidated its two current distribution centers and storage facility into the new distribution center. Estimated costs of $0.9 million
were recorded in 1999 related to noncancelable lease contracts associated with the existing rented facilities.

Operating
cash flow, defined as earnings before interest, income tax, depreciation, and amortization expenses, decreased $29.0 million, or 34%, from $84.9 million in 1999 to
$55.9 million in 2000. The decrease was principally due to the decrease in net income.

14

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The Company has a stock repurchase program. Under the program, the Company repurchased 2.4 million shares during 2000 at an average price of $14 per share. Since January 1997, the
Company has repurchased a total of 9.2 million shares at an average price of $24 per share. As of December 30, 2000, the Company had remaining authorization from the Board of Directors
to repurchase $52.4 million of its stock through 2001. The timing, prices and amounts of shares repurchased, as well as the manner of execution, will be determined at the discretion of the
Company's management and subject to continued compliance with the Company's credit facilities.

ACCOUNTING
CHANGES

To
conform with the requirements of the Emerging Issues Task Force ("EITF") Issue No. 00-10,Accounting for Shipping and Handling Fees and
Costs, the Company reclassified freight expenses for products shipped to customers into cost of products sold. Such expenses were formerly classified as a reduction of net
sales. This change has no impact on previously reported gross profit amounts or net earnings.

In
December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,Revenue Recognition in Financial
Statements. SAB No. 101 summarized the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. Adoption of SAB
No. 101 did not have a material effect on the Company's consolidated financial position or results of operations for 2000.

On
December 31, 2000 (fiscal year 2001), the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 133,Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized
as either assets or liabilities and that those financial instruments be measured at fair value. The accounting for changes in the fair value of derivatives depends on their intended use and
designation. Management has reviewed the requirements of SFAS No. 133 and has determined that they have no free-standing or embedded derivatives. All contracts that contain provisions meeting the
definition of a derivative also meet the requirements of, and have been designated as, normal purchases or sales.

FOREIGN
EXCHANGE

The
dollar value of the Company's assets abroad is not significant. Substantially all of the Company's sales are denominated in U.S. dollars and, as a result, are not subject to changes in exchange
rates.

The
Company imports its product from manufacturers located in the Pacific Rim, primarily China, Taiwan (Republic of China), and The Philippines. These transactions are principally denominated in U.S.
dollars, except for imports from Taiwan which are principally denominated in New Taiwan dollars. The Company, from time to time, will enter into foreign exchange contracts or build foreign currency
deposits as a partial hedge against currency fluctuations. The Company intends to manage foreign exchange risks to the extent possible and take appropriate action where warranted. The Company's costs
could be adversely affected if the currencies of the countries in which the manufacturers operate appreciate significantly relative to the U.S. dollar.

15

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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.

FACTORS
AFFECTING FUTURE EARNINGS

On
February 22, 2001, the Company issued a press release stating in relevant part: "Retail customer orders through February 17 are down approximately 35% against the comparable period in
the prior year. Village orders are approximately 40% below the comparable period in the prior year, while General Giftware orders are down approximately 24%." The press release also noted, "We are
clearly feeling the impact of a slow December and an overall holiday selling season that was significantly below the increase for which retailers had planned. The combination of this erosion in
consumer confidence across the whole economy and our proven ability to fulfill reorders which come in after the first quarter has caused many retailers to take a wait-and-see
approach. While we cannot project how orders will come in through the remainder of the year, we may see more reorder activity than we have in the past resulting in a shift in our order patterns. Our
informal discussions with approximately seven hundred-fifty of our retailers and more in-depth discussions with a small but representative sample of this group lead us to believe that we
may experience upside order potential from our current run rate."

The
press release further stated: "The largest gap in our orders is from collectible accounts that have not yet ordered. Our informal survey through our sales force leads us to believe that over
ninety percent of these missing accounts are planning to order. Of the small number not planning to order, the vast majority have been closing stores as would be expected in a rotation of channel
entries and exits"

Ms. Engel
continued. "In light of year-to-date orders being substantially below our internal expectations, our focus during the balance of 2001 will be on identifying
and pursuing new revenue
opportunities, driving reorders and maximizing earnings and cash flow by closely managing costs and capital investments."

On
Form 8-K dated February 23, 2001, the Company stated: "The Company's orders through February 17, 2001 from retail accounts that fit the Company's definition of a
Like Account were down 21% relative to the full first quarter of 2000. Like Accounts are considered those accounts, excluding Department Store accounts, whose total orders through February 17,
2001 were greater than one third of their total orders for the full first quarter of 2000."

On
March 5 and March 9, 2001 lawsuits seeking unspecified compensatory damages were filed against the Company and its Chairwoman and Chief Executive Officer. See Item 3, Legal
Proceedings.

The
federal securities laws provide "safe harbor" status to certain statements that go beyond historical information and may provide an indication of future results. Any conclusions or expectations
expressed in, or drawn from, the statements in the press release or the Form 8-K or throughout this annual report concerning matters that are not historical corporate financial
results are "forward-looking statements" that involve risks and uncertainties.

The
Company's expectations regarding 2001 are based on the Company's expectations for sales and operating margin. The Company's sales expectations for 2001 are based on the Company's current forecast
of retailer orders and planned sales through its retail arm, and is further dependent on the

16

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timing and extent of promotional and marketing efforts undertaken by the Company as well as the timing and extent of product receipts and shipments, the efficiency of information systems developed to
collect, compile and execute customer orders, and retailer and consumer demand. Retailer orders have principally been dependent on the amount, quality and market acceptance of the new product
introductions and retailer demand, but order patterns have historically varied in number,
mix and timing, and there can be no assurance that the year-to-date order levels or trends will not deteriorate, or that they will exhibit levels or trends supportive of a shift toward greater orders
later in the year. Moreover, the Company's order forecasting model is dependent on assumptions concerning retail inventory levels, consumer demand, and retailer expectations. The Company's operating
margin may be impacted by, amongst other factors, shifts in product mix and/or gross margin, exchange rate fluctuations with countries the Company imports from, changes in freight rates and changes in
the Company's historical selling, general and administrative expense rate, including bad debts.

If
not otherwise mentioned, other factors, including consumer acceptance of new products; product development efforts; identification and retention of sculpting and other talent; completion of third
party product manufacturing; retailer reorders and order cancellations; control of operating expenses; collection of accounts receivable; corporate cash flow application, including share repurchases;
cost of debt capital; functionality of information, operating and distribution systems; identification, completion and results of acquisitions, investments, and other strategic business initiatives;
capital expenditures and depreciation, and the timing thereof; grants of stock options or other equity equivalents; actual or deemed exercises of stock options; and industry, general economic,
regulatory, transportation, and international trade and monetary conditions, can significantly impact the Company's sales, earnings and earnings per share. 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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is included in Management's Discussion and Analysis on page 10, and Note 1 to the Consolidated Financial Statements.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements on page F-1 herein.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

17

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PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item is included in the 2001 Proxy Statement in the sections captioned "Item 1  Election of Directors 
Nominees for Terms Ending at the 2002 Annual Meeting of Stockholders" and "Biographical Information Regarding Executive Officers," and such information is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

Information required by this Item is included in the 2001 Proxy Statement in the section captioned "Further Information Concerning the Board of the Directors and
Committees  Compensation Committee Interlocks and Insider Participation" and " Director Compensation" and in the section captioned "Compensation of Executive
Officers" (other than the subsection thereof captioned "Compensation Committee and Stock Incentive Committee Report on Executive Compensation" and
"Performance Graph"), and such information (other than the subsections thereof captioned "Compensation Committee Report on Executive Compensation" and "Performance Graph") is incorporated herein by
reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item is included in the 2001 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

See Note 9 to the Consolidated Financial Statements on page F-13.

18

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PART IV

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

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
|--- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ----
|
|(a) |  | 1.                                                                     |  | Financial Statements                                                        |  |     
|    |  |                                                                        |  | Independent Auditors' Report                                                |  | F-1 
|    |  |                                                                        |  | Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000     |  | F-2 
|    |  |                                                                        |  | For the years ended December 30, 2000, January 1, 2000 and January 2, 1999: |  |     
|    |  |                                                                        |  | Consolidated Statements of Income                                           |  | F-3 
|    |  |                                                                        |  | Consolidated Statements of Cash Flows                                       |  | F-4 
|    |  |                                                                        |  | Consolidated Statements of Stockholders' Equity                             |  | F-5 
|    |  |                                                                        |  | Notes to Consolidated Financial Statements                                  |  | F-6 
|    |  | 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 Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. 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 Registrant'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 3.2 of Registrant's Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of Registrant's Current Report on
Form 8-K dated February 15, 1996. SEC File No. 1-11908.)                                                                        
|4.1     |  | Specimen Form of Company's Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of Registrant'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 Registrant'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 Registrant'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
Registrant's Current Report on Form 8-K dated February 26, 1999. SEC File No. 1-11908.)                                          
|10.1    |  | Department 56, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of Registrant's Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                            
|10.2    |  | Form of Stock Option Agreement in connection with the 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1, No. 33-61514.)
                                                                                                                                         
|10.3    |  | Form of Outside Directors Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. SEC File No.
 1-11908.)                                                                                                                           

19

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|10.4  |  | 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
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                         
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  |  | 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
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                      
|10.6  |  | Credit Agreement, dated as of March 19, 1999 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and The First National Bank of Chicago, as documentation agents, U.S. Bank National Association, as
managing agent, and The Chase Manhattan Bank, as administrative agent. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908.)  
|10.7  |  | First Amendment to the Credit Agreement, dated as of January 27, 2000 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and Bank One NA, as documentation agents, U.S. Bank National Association, as
managing agent, and The Chase Manhattan Bank, as administrative agent. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)
|10.8  |  | Guarantee and Collateral Assignment, dated as of March 19, 1999, by the Company and certain of its direct or indirect subsidiaries in favor of The Chase Manhattan Bank. (Incorporated herein by reference to Exhibit
 10.8 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908.)                                                                                                                 
|10.9  |  | Form of Indemnification Agreement between the Company and its directors and executive officers. (Incorporated herein by reference to Exhibit 10.24 of Registrant's Registration Statement on Form S-1, No.
 33-61514.)                                                                                                                                                                                                                                   
|10.10 |  | Department 56, Inc. 1993 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.25 of Registrant's Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                                                                                                                                    
|10.11 |  | Department 56, Inc. 1995 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.18 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. SEC File No.
 1-11908.)                                                                                                                                                                                                                                       
|10.12 |  | Department 56, Inc. 1997 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 4.4 of Registrant's Registration Statement on Form S8, No. 33341639.)                                                                                                                                                                                                                                                                                       
|10.13 |  | Form of Executive Stock Option Agreement in connection with 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 Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                            
|10.14 |  | Form of Performance  Accelerated Vesting Stock Option Agreement in connection with Department 56, Inc. 1993, 1995 and 1997 Stock Incentive Plans.*                                                                                                                                                                                                                                                                                                     
|10.15 |  | Form of Executive Performance Share Agreement in connection with Department 56, Inc. 1993, 1995 and 1997 Stock Incentive Plans. (Incorporated herein by reference to Exhibit 10.14 of Registrant's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                                         
|10.16 |  | Department 56, Inc. Annual Cash Incentive Program. (Incorporated herein by reference to Exhibit 10.25 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. SEC File No.
 1-11908.)                                                                                                                                                                                                                                     
|21.1  |  | Subsidiaries of the Company.*                                                                                                                                                                                                                                                                                                                                                                                                                            
|23.1  |  | Independent Auditors' Consent.*                                                                                                                                                                                                                                                                                                                                                                                                                          

---

No
reports on Form 8-K were filed during the fourth quarter of the year ended December 30, 2000.

20

---



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.

|                     |  | DEPARTMENT 56, INC.
|-------------------- |  | -------------------
|Date: March 30, 2001 |  | By:                

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/SUSAN E. ENGELSusan E. Engel                   |  | Chairwoman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer) |  | March 30, 2001
|/s/PERCY C. TOMLINSON, JR.Percy C. Tomlinson, Jr. |  | Chief Financial Officer and
Executive Vice President
(Principal Financial Officer)          |  | March 30, 2001
|/s/GREGG A. PETERSGregg A. Peters                 |  | Director of Finance and
Principal Accounting Officer
(Principal Accounting Officer)         |  | March 30, 2001
|/s/PETER K. BARKERPeter K. Barker                 |  | Director                                                                                    |  | March 30, 2001
|/s/JAY CHIATJay Chiat                             |  | Director                                                                                    |  | March 30, 2001
|/s/STEWART M. KASENStewart M. Kasen               |  | Director                                                                                    |  | March 30, 2001
|/s/GARY S. MATTHEWSGary S. Matthews               |  | Director                                                                                    |  | March 30, 2001
|/s/STEVEN G. ROTHMEIERSteven G. Rothmeier         |  | Director                                                                                    |  | March 30, 2001
|/s/VIN WEBERVin Weber                             |  | Director                                                                                    |  | March 30, 2001

21

---



INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
  Department 56, Inc.:

We
have audited the consolidated balance sheets of Department 56, Inc. and subsidiaries (the Company) as of December 30, 2000 and January 1, 2000 and the related consolidated
statements of income, cash flows, and stockholders' equity for the years ended December 30, 2000, January 1, 2000, and January 2, 1999. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 as of December 30, 2000 and January 1, 2000 and the
results of its operations and its cash flows for the years ended December 30, 2000, January 1, 2000, and January 2, 1999 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.

Deloitte &
ToucheLLP

Minneapolis, Minnesota
February 22, 2001
except for Note 4 and Note 12, as to which the date is March 14, 2001

F-1

---



Department 56, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)AS OF DECEMBER 30, 2000 AND
JANUARY 1, 2000

|                                                                                                     |                                                                                                                                                                                    | 2000                       |         | 1999     |        
|---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | -------- | -------
|
|ASSETS                                                                                               |                                                                                                                                                                                    |                            |         |          |        
|CURRENT ASSETS:                                                                                      |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     | Cash and cash equivalents                                                                                                                                                          |                            | $       | 23,698   |        
|                                                                                                     | Accounts receivable, net of allowances of $19,591 and $18,287, respectively                                                                                                        |                            |         | 36,994   |        
|                                                                                                     | Inventories                                                                                                                                                                        |                            |         | 15,650   |        
|                                                                                                     | Deferred taxes                                                                                                                                                                     |                            |         | 10,104   |        
|                                                                                                     | Other current assets                                                                                                                                                               |                            |         | 3,638    |        
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     |                                                                                                                                                                                    | Total current assets       |         |          | 90,084 
|PROPERTY AND EQUIPMENT, net                                                                          |                                                                                                                                                                                    |                            | 31,796  |          |        
|GOODWILL, net of accumulated amortization of $34,402 and $30,096, respectively                       |                                                                                                                                                                                    |                            | 135,034 |          |        
|TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $5,030 and $4,009, respectively |                                                                                                                                                                                    |                            | 15,575  |          |        
|OTHER ASSETS                                                                                         |                                                                                                                                                                                    |                            | 5,319   |          |        
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     |                                                                                                                                                                                    | $                          | 277,808 |          | $      
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                 |                                                                                                                                                                                    |                            |         |          |        
|CURRENT LIABILITIES:                                                                                 |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     | Borrowings on revolving credit agreement                                                                                                                                           |                            | $       |         |        
|                                                                                                     | Accounts payable                                                                                                                                                                   |                            |         | 7,866    |        
|                                                                                                     | Commissions payable                                                                                                                                                                |                            |         | 190      |        
|                                                                                                     | Other current liabilities                                                                                                                                                          |                            |         | 16,447   |        
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     |                                                                                                                                                                                    | Total current liabilities  |         |          | 24,503 
|DEFERRED TAXES                                                                                       |                                                                                                                                                                                    |                            | 7,730   |          |        
|LONG-TERM DEBT                                                                                       |                                                                                                                                                                                    |                            | 105,000 |          |        
|COMMITMENTS AND CONTINGENCIES (Note 6)                                                               |                                                                                                                                                                                    |                            |         |          |        
|STOCKHOLDERS' EQUITY:                                                                                |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     | Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued Common stock, $.01 par value; authorized 100,000 shares; issued 21,990 and 21,964 shares, respectively |                            |         | 220      |        
|                                                                                                     | Additional paid-in capital                                                                                                                                                         |                            |         | 50,019   |        
|                                                                                                     | Treasury stock, at cost; 9,166 and 6,802 shares, respectively                                                                                                                      |                            |         | (216,636 | )      
|                                                                                                     | Retained earnings                                                                                                                                                                  |                            |         | 306,972  |        
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     |                                                                                                                                                                                    | Total stockholders' equity |         |          | 140,575
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        
|                                                                                                     |                                                                                                                                                                                    | $                          | 277,808 |          | $      
|                                                                                                     |                                                                                                                                                                                    |                            |         |          |        

See notes to consolidated financial statements.

F-2

---

Department 56, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)YEARS ENDED DECEMBER 31,
2000, JANUARY 1, 2000, AND JANUARY 2, 1999

|                                              |                                                            | 2000                     |         | 1999    |        | 1998    |        
|--------------------------------------------- | ---------------------------------------------------------- | ------------------------ | ------- | ------- | ------ | ------- | -------
|
|NET SALES                                     |                                                            | $                        | 234,058 |         | $      | 255,528 |        
|COST OF SALES                                 |                                                            |                          | 109,522 |         |        | 113,475 |        
|                                              |                                                            |                          |         |         |        |         |        
|                                              | Gross profit                                               |                          |         | 124,536 |        |         | 142,053
|OPERATING EXPENSES:                           |                                                            |                          |         |         |        |         |        
|                                              | Selling, general and administrative                        |                          |         | 74,166  |        |         | 61,542 
|                                              | Amortization of goodwill, trademarks and other intangibles |                          |         | 5,486   |        |         | 5,145  
|                                              |                                                            |                          |         |         |        |         |        
|                                              |                                                            | Total operating expenses |         |         | 79,652 |         |        
|                                              |                                                            |                          |         |         |        |         |        
|INCOME FROM OPERATIONS                        |                                                            |                          | 44,884  |         |        | 75,366  |        
|OTHER EXPENSE (INCOME):                       |                                                            |                          |         |         |        |         |        
|                                              | Interest expense                                           |                          |         | 11,729  |        |         | 6,719  
|                                              | Other, net                                                 |                          |         | (382    | )      |         | (153   
|                                              |                                                            |                          |         |         |        |         |        
|INCOME BEFORE INCOME TAXES                    |                                                            |                          | 33,537  |         |        | 68,800  |        
|PROVISION FOR INCOME TAXES                    |                                                            |                          | 12,744  |         |        | 26,144  |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME                                    |                                                            | $                        | 20,793  |         | $      | 42,656  |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME PER COMMON SHARE                   |                                                            | $                        | 1.47    |         | $      | 2.48    |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME PER COMMON SHARE ASSUMING DILUTION |                                                            | $                        | 1.47    |         | $      | 2.45    |        
|                                              |                                                            |                          |         |         |        |         |        

See notes to consolidated financial statements.

F-3

---



Department 56, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)YEARS ENDED DECEMBER 30, 2000, JANUARY 1, 2000,
JANUARY 2, 1999

|                                                     |                                                                                   | 2000                                                       |                                                     | 1999     |        | 1998    |        
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | -------- | ------ | ------- | -------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     | Net income                                                                        |                                                            | $                                                   | 20,793   |        | $       | 42,656 
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                            |                                                     |          |        |         |        
|                                                     |                                                                                   | Depreciation                                               |                                                     |          | 5,168  |         |        
|                                                     |                                                                                   | Amortization of goodwill, trademarks and other intangibles |                                                     |          | 5,486  |         |        
|                                                     |                                                                                   | Amortization of deferred financing fees                    |                                                     |          | 382    |         |        
|                                                     |                                                                                   | Deferred taxes                                             |                                                     |          | 243    |         |        
|                                                     | Changes in assets and liabilities:                                                |                                                            |                                                     |          |        |         |        
|                                                     |                                                                                   | Accounts receivable                                        |                                                     |          | 28,586 |         |        
|                                                     |                                                                                   | Inventories                                                |                                                     |          | 251    |         |        
|                                                     |                                                                                   | Other assets                                               |                                                     |          | 926    |         |        
|                                                     |                                                                                   | Accounts payable                                           |                                                     |          | (1,843 | )       |        
|                                                     |                                                                                   | Commissions payable                                        |                                                     |          | (323   | )       |        
|                                                     |                                                                                   | Other current liabilities                                  |                                                     |          | 1,926  |         |        
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     |                                                                                   |                                                            | Net cash provided by operating activities           |          |        | 61,595  |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     | Purchases of property and equipment                                               |                                                            |                                                     | (7,109   | )      |         | (16,345
|                                                     | Acquisitions                                                                      |                                                            |                                                     | (4,000   | )      |         | (3,970 
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     |                                                                                   |                                                            | Net cash used in investing activities               |          |        | (11,109 | )      
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     | Proceeds from the exercise of common stock options                                |                                                            |                                                     | 66       |        |         | 1,170  
|                                                     | Borrowings on revolving credit agreement                                          |                                                            |                                                     | 64,500   |        |         | 94,500 
|                                                     | Principal payments on revolving credit agreement                                  |                                                            |                                                     | (107,000 | )      |         | (52,000
|                                                     | Purchases of treasury stock                                                       |                                                            |                                                     | (33,316  | )      |         | (70,018
|                                                     | Proceeds from issuance of long-term debt                                          |                                                            |                                                     | 90,000   |        |         | 40,000 
|                                                     | Principal payments on long-term debt                                              |                                                            |                                                     | (45,000  | )      |         |       
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        
|                                                     |                                                                                   |                                                            | Net cash (used in) provided by financing activities |          |        | (30,750 | )      
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                   |                                                            | 19,736                                              |          |        | 1,179   |        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                   |                                                            | 3,962                                               |          |        | 2,783   |        
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                   | $                                                          | 23,698                                              |          | $      | 3,962   |        
|                                                     |                                                                                   |                                                            |                                                     |          |        |         |        

See notes to consolidated financial statements.

F-4

---

Department 56, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)YEARS ENDED DECEMBER 30, 2000, JANUARY
1, 2000, AND JANUARY 2, 1999

|                                |                                                         | Common Stock |        | Additional
Paid-in
Capital |     |   |   |        |       | Total
Stockholders'
Equity |         
|------------------------------- | ------------------------------------------------------- | ------------ | ------ | -------------------------- | --- | - | - | ------ | ----- | -------------------------- | --------
|
|
|
|BALANCE AS OF JANUARY 3, 1998   |                                                         | 19,566       |        | $                          | 218 |   | $ | 44,645 |       | $                          | (55,215 
|                                | Net income                                              |              |        |                            |     |   |   |        |       |                            |         
|                                | Shares issued upon the exercise of common stock options |              | 131    |                            |     | 1 |   |        | 3,541 |                            |         
|                                | Shares repurchased                                      |              | (1,677 | )                          |     |   |   |        |       |                            |         
|                                | Other                                                   |              | 3      |                            |     |   |   |        | 109   |                            |         
|                                |                                                         |              |        |                            |     |   |   |        |       |                            |         
|BALANCE AS OF JANUARY 2, 1999   |                                                         | 18,023       |        |                            | 219 |   |   | 48,295 |       |                            | (113,302
|                                | Net income                                              |              |        |                            |     |   |   |        |       |                            |         
|                                | Shares issued upon the exercise of common stock options |              | 60     |                            |     | 1 |   |        | 1,439 |                            |         
|                                | Shares repurchased                                      |              | (2,925 | )                          |     |   |   |        |       |                            |         
|                                | Other                                                   |              | 4      |                            |     |   |   |        | 111   |                            |         
|                                |                                                         |              |        |                            |     |   |   |        |       |                            |         
|BALANCE AS OF JANUARY 1, 2000   |                                                         | 15,162       |        |                            | 220 |   |   | 49,845 |       |                            | (183,320
|                                | Net income                                              |              |        |                            |     |   |   |        |       |                            |         
|                                | Shares issued upon the exercise of common stock options |              | 20     |                            |     |   |   |        | 81    |                            |         
|                                | Shares repurchased                                      |              | (2,364 | )                          |     |   |   |        |       |                            |         
|                                | Other                                                   |              | 6      |                            |     |   |   |        | 93    |                            |         
|                                |                                                         |              |        |                            |     |   |   |        |       |                            |         
|BALANCE AS OF DECEMBER 30, 2000 |                                                         | 12,824       |        | $                          | 220 |   | $ | 50,019 |       | $                          | (216,636
|                                |                                                         |              |        |                            |     |   |   |        |       |                            |         

See notes to consolidated financial statements.

F-5

---



Department 56, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



F-6

---

The
Company periodically evaluates the recoverability of goodwill based on an analysis of estimated future undiscounted cash flows.



F-7

---

common
share assuming dilution reflects per share amounts that would have resulted had the Company's outstanding stock options been converted to common stock. See Note 11.



2.  PROPERTY AND EQUIPMENT



2000

1999Leasehold improvements

$
6,199

$
6,519Furniture and fixtures


4,761


4,239Computer equipment


19,205


15,560Other equipment


6,179


8,735Building


7,045


6,896Land


906


90644,295


42,855Less accumulated depreciation


12,499


12,998Property and equipment, net

$
31,796

$
29,857


F-8

---

3.  OTHER CURRENT LIABILITIES



2000

1999Accrued compensation and benefits

$
6,212

$
3,581Income taxes payable


6,795


8,411Deferred revenue


662


694Accrued royalty fees


1,421


818Other


1,357


1,127$
16,447

$
14,631


4.  CREDIT AGREEMENT



2000

1999Total debt

$
105,000

$
102,500Less borrowings classified as current





42,500$
105,000

$
60,000




F-9

---

The
credit agreement also requires maintenance of minimum levels of interest coverage, net worth and maximum levels of leverage. None of these restrictions are expected to have a material adverse
effect on the Company's ability to operate in the future.



5.  INCOME TAXES



2000

1999

1998Current:Federal

$
11,423

$
25,427

$
28,188State


979


2,180


2,416Foreign


99


373


98Deferred


243


(1,836
)

(629
)$
12,744

$
26,144

$
30,073




2000

1999

1998Income taxes at federal statutory rate

$
11,738

$
24,080

$
26,806State income taxes, net of federal income tax deductions


508


1,033


1,915Goodwill amortization


1,448


1,448


1,448Other


(950
)

(417
)

(96
)Provision for income taxes

$
12,744

$
26,144

$
30,073


F-10

---



2000

1999DEFERRED TAX ASSETS:Asset valuation allowances

$
9,509

$
8,416Deferred compensation


376


286Accrued liabilities


414


730Other


1,001


564Total deferred tax assets


11,300


9,996DEFERRED TAX LIABILITIES:Trademark amortization


(5,399
)

(5,569
)Property and equipment depreciation


(3,187
)

(1,667
)Other


(340
)

(143
)Total deferred tax liabilities


(8,926
)

(7,379
)$
2,374

$
2,617




6.  COMMITMENTS AND CONTINGENCIES



2001

$
4,0562002


3,7922003


3,5262004


3,5692005


3,608Thereafter


12,994$
31,545




F-11

---

facility
into the new distribution center. Estimated costs of $931 were recorded in 1999 related to noncancelable lease contracts associated with the existing rented facilities.



7.  RETIREMENT PLAN



8.  ACQUISITIONS



F-12

---

9.  RELATED-PARTY TRANSACTIONS



10. STOCKHOLDERS' EQUITY



2000

1999

1998Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at beginning of year


2,094,311

$26.70


1,724,357

$26.80


1,983,578

$26.25Granted


693,713

12.43


458,300

25.42


97,000

31.87Exercised







(56,482
)
20.52


(129,625
)
21.90Forfeited


(254,443
)
29.81


(31,864
)
24.77


(226,596
)
26.94Outstanding at end of year


2,533,581

22.54


2,094,311

26.70


1,724,357

26.80Options exercisable at end of year


1,601,921

26.22


1,446,272

27.63


1,085,026

28.95Weighted average fair value of options granted during the year

$
5.83



$
12.33



$
14.89




F-13

---

and
net income per common share assuming dilution would have been reduced to the pro forma amounts indicated below:

2000

1999

1998Net income:As reported

$
20,793

$
42,656

$
46,516Pro forma


19,567


40,647


44,223Net income per common share 
basic:As reported

$
1.47

$
2.48

$
2.49Pro forma


1.39


2.36


2.37Net income per common share 
assuming dilution:As reported

$
1.47

$
2.45

$
2.45Pro forma


1.38


2.34


2.33




Range of
Exercise
Prices

Number
Outstanding
at December 30,
2000

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Exercisable
at December 30,
2000

Weighted
Average
Exercise
Price$
3.33

40,500

1.1 years

$
3.33

40,500

$
3.333.34-17.99

659,000

9.2


12.46




18.00-21.47

962,942

6.3


20.76

868,138


20.8821.48-37.75

871,139

5.8


33.04

693,283


34.252,533,581






1,601,921




F-14

---



11. INCOME PER COMMON SHARE



2000

1999

1998Net income

$
20,793

$
42,656

$
46,516Weighted average number of shares outstanding


14,110,000


17,214,000


18,676,000Net income per common share  basic

$
1.47

$
2.48

$
2.49Net income

$
20,793

$
42,656

$
46,516Weighted average number of shares outstanding


14,110,000


17,214,000


18,676,000Dilutive impact of options outstanding


54,000


174,000


284,000Weighted average number of shares and potential dilutive shares outstanding


14,164,000


17,388,000


18,960,000Net income per common share  assuming dilution

$
1.47

$
2.45

$
2.45


F-15

---



12. SUBSEQUENT EVENT



F-16

---



Department 56, Inc. and SubsidiariesSCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (In thousands)

|Column A                      |                                         | Column B |        | Column C |   | Column D |        | Column E
|----------------------------- | --------------------------------------- | -------- | ------ | -------- | - | -------- | ------ | --------
|
|
|Year ended December 30, 2000: |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 7,659    |   | $        | 8,476  |         
|                              | Allowance for sales returns and credits |          |        | 10,628   |   |          | 15,986 |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 18,287 |          | $ | 24,462   |        | $       
|                              |                                         |          |        |          |   |          |        |         
|Year ended January 1, 2000:   |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 5,179    |   | $        | 3,276  |         
|                              | Allowance for sales returns and credits |          |        | 7,729    |   |          | 12,737 |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 12,908 |          | $ | 16,013   |        | $       
|                              |                                         |          |        |          |   |          |        |         
|Year ended January 2, 1999:   |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 5,160    |   | $        | 888    |         
|                              | Allowance for sales returns and credits |          |        | 7,897    |   |          | 8,657  |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 13,057 |          | $ | 9,545    |        | $       
|                              |                                         |          |        |          |   |          |        |         

S-1

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