Table of Contents

---

---

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



---

FORM 10-K



---

(Mark
One)

|  |                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal
  year ended December 31, 2005
| 
|o | TRANSITION REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                         
|  | For the transition period from __________ to
  __________.                                                                         

Commission
file number 1-11908



---

LENOX GROUP 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 registered
|                                         |  |                                            
|Common 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 if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso No x

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

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

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

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

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

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

The aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant as of July 1, 2005 (the last trading day of the registrants most recently completed
second fiscal quarter) was $140,892,193 (based on the closing price of the registrants Common Stock as reported on the New
York Stock Exchange on July 1, 2005).

Number of Shares of Common Stock, par value $.01 per share,
outstanding as of March 6, 2006: 14,036,337.

---

---



DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys definitive Proxy Statement for
the 2006 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K (the 2006 Proxy Statement) are incorporated by
reference in Part III.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|           |                                                                                                                  |     
|---------- | ---------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                  | Page
|           |                                                                                                                  |     
|           |                                                                                                                  |     
|Part I     |                                                                                                                  |     
|           |                                                                                                                  |     
|Item 1.    | Business                                                                                                         | 1   
|Item 1A.   | Risk Factors                                                                                                     | 8   
|Item 1B.   | Unresolved Staff Comments                                                                                        | 9   
|Item 2.    | Properties                                                                                                       | 10  
|Item 3.    | Legal Proceedings                                                                                                | 12  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                              | 12  
|           |                                                                                                                  |     
|Part II    |                                                                                                                  |     
|           |                                                                                                                  |     
|Item 5.    | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13  
|Item 6.    | Selected Financial Data                                                                                          | 14  
|Item 7.    | Managements Discussion and Analysis of Financial Condition and Results of Operations                            | 15  
|Item 7A.   | Quantitative and Qualitative Disclosures about Market Risk                                                       | 29  
|Item 8.    | Financial Statements and
  Supplementary Data                                                                    | 29  
|Item 9.    | Changes in and
  Disagreements with Accountants on Accounting and Financial Disclosure                           | 29  
|Item 9A.   | Controls and
Procedures                                                                                          | 30  
|Item 9B.   | Other
Information                                                                                                | 30  
|           |                                                                                                                  |     
|Part III   |                                                                                                                  |     
|           |                                                                                                                  |     
|Item 10.   | Directors and Executive
  Officers of the Registrant                                                             | 31  
|Item 11.   | Executive
Compensation                                                                                           | 33  
|Item 12.   | Security Ownership of
  Certain Beneficial Owners and Management and Related Stockholder Matters                 | 33  
|Item 13.   | Certain Relationships and
  Related Transactions                                                                 | 33  
|Item 14.   | Principal Accountant Fees
  and Services                                                                         | 33  
|           |                                                                                                                  |     
|Part IV    |                                                                                                                  |     
|           |                                                                                                                  |     
|Item 15.   | Exhibits and Financial
  Statement Schedules                                                                     | 34  
|           |                                                                                                                  |     
|Signatures |                                                                                                                  | 37  

---



Table of Contents

|        |         
|------- | --------
|PART I  |         
|        |         
|        |         
|ITEM 1. | BUSINESS

General

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

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

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

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

Major Acquisition

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

Products

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

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

1

---



Table of Contents

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

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

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

Operating Segments

In connection with the Companys acquisition of Lenox, the
Company redefined its operating segments to include three reportable segments  Wholesale, Retail and Direct. Although the
product produced and sold for each segment is similar, the type of customer for the product and the method used to distribute the
product are different. As a result of the Lenox acquisition, the Company is in the process of combining and integrating the Lenox
and Department 56 business operations into these segments. The segmentation of these operations also reflects how the Company
currently reviews the results of these operations. Financial data for the last three fiscal years by segment is set forth in
detail in the Management Discussion and Analysis section of this Annual Report on Form 10-K and in Note 15 within the Notes
to Consolidated Financial Statements.

The Wholesale Segment

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

As of December 31, 2005, the Company had unfilled wholesale
orders of approximately $17.8 million compared to $3.2 million as of January 1, 2005. The increase in unfilled wholesale orders
was due to the acquisition of Lenox. Based upon historical rates, the Company expects approximately 92% of the order backlog as of
December 31, 2005 to ship in fiscal 2006 and the remainder to be cancelled.

Approximately 8% of the Wholesale segments sales are to
one customer, namely Macys Home Store, the entity that represents the combination, through a merger in 2005, of Federated
Department Stores and the May Department Stores Company.

The Retail Segment

As of February 1, 2006, the Companys Retail segment
operated 36 retail stores, including six stores operated under the Department 56 trade name and 30 stores operated under
the Lenox trade name. On September 13, 2005, the Company approved certain consolidation plans for the Lenox subsidiary,
including the closing of 31 Lenox retail stores. Such plans for consolidation were contemplated in conjunction with the
acquisition on Lenox. As of January 31, 2006, the Company completed the implementation of this store-closing plan, leaving 30
Lenox retail stores in operation.

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

2

---



Table of Contents

The Direct Segment

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

The Lenox subsidiary, acquired by the Company in September
2005, included a longstanding consumer direct business.

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

Cessation of Time to Celebrate Business

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

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

Manufacturing & Sourcing

The Company owns and operates two manufacturing facilities in
the United States. The Company manufactures its Lenox branded, fine china dinnerware at its plant located in Kinston, NC.
Sterling silver flatware under the Gorham and Kirk Stieff brand names is manufactured at the Companys Pomona,
NJ facility.

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

The Company also sources product from external manufacturers.
Of the total value of product sourced in 2005, 95% was imported from abroad, primarily from manufacturing sources located in the
Pacific Rim area including the Peoples Republic of China (China), Indonesia, Thailand and the Philippines. The Company also
imports a portion of its products from sources in India and Europe.

Distribution

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

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

3

---



Table of Contents

Seasonality

The Company records its highest wholesale sales during the
third and fourth quarters of each year as wholesale customers stock merchandise in anticipation of the holiday season. In
addition, the Company records its highest retail and consumer direct sales in the fourth quarter during the peak holiday shopping
season. However, the Company can experience fluctuations in quarterly sales and related net income compared with the prior year
due to the timing of receipt of product from suppliers and subsequent shipment of product from the Company to customers, as well
as the timing of orders placed by customers.

The extended payment terms that the Company provides to some of
its wholesale customers create a significant seasonal pattern in its accounts receivable requirements. Due to the seasonal pattern
of shipping and accounts receivable collection, the Company generally has greater working capital needs in its second and third
quarters and experiences greater cash availability in its first and fourth quarters. The Company typically finances its operations
through short-term seasonal borrowings.

Competition

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

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

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

Financial Information Relating to Geographical Areas

Approximately 3% of the Companys total revenue is derived
from customers outside the United States. All long-lived assets are located within the United States.

Trademarks and other Proprietary Rights

The Company owns 226 U.S. trademark registrations and has
pending eight U.S. trademark applications for registration. These registrations cover the Companys brand names, logos and
important product names. In addition, the Company owns trademark registrations in select foreign countries where the
Companys products are manufactured, marketed and/or sold.

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

4

---



Table of Contents

Employees

As of February 10, 2006, the Company had 1,620 full-time
employees and 680 part-time and seasonal employees in the United States, four employees in Canada, one in Hong Kong and five in
China.

Local Union No. 638 of the Teamsters Union represents 50 of the
Companys employees who work at its warehouse facility located in Rogers, MN. Local Union No. 236A of the Glass, Molders,
Pottery, Plastics and Allied Workers International Union represents 34 of the Companys employees who work at its sterling
silver manufacturing facility located in Pomona, NJ. The agreements with Local Union No. 638 and Local Union No. 236A expire on
December 31, 2007 and October 2, 2006, respectively.

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

Environmental Matters

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

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

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

As of December 31, 2005, the Company estimated, based on
engineering studies, total remediation and ongoing monitoring costs to be $4.8 million, including the effects of inflation.
Accordingly, the Company recorded a liability of approximately $3.3 million in other noncurrent liabilities, which represents the
net present value of the estimated future costs discounted at 5.25%. The estimated insurance recovery assets as of December 31,
2005 were $1.8 million and are included in other assets.

5

---



Table of Contents

Executive Officers of the Registrant

Susan E. Engel, 59, has been a Director and Chairwoman
of the Board of the Company since September 18, 1997, and a Director since February 1996. She has been Chief Executive Officer of
the Company since November 13, 1996, and was president and Chief Operating Officer from 1994 to 1996. From 1991 until joining the
Company, she was president and CEO of Champion Products, Inc., the athletic apparel division of Sara Lee Corporation. From 1977
until 1991, she was a vice president with Booz, Allen and Hamilton, heading up that companys eastern retail practice group.
Ms. Engel is a public company director of Wells Fargo & Company and SUPERVALU INC. She is Board President of the Guthrie
Theater in Minneapolis and serves on the boards of the Minnesota Womens Campaign Fund and the Board of Overseers of the
Carlson School of Management at the University of Minnesota. She is also a member of the Presidents Council of Cornell Women
at Cornell University and on the Board of Advisors of the Minneapolis League of Women Voters.

Joel D. Anderson, 41, has been President - Consumer
Direct for the Company since December 14, 2005. From June 2 until December 14, 2005, he was Executive Vice President-Consumer
Direct for the Company. He was Vice President - New Ventures for ToysRUs, Inc. beginning in 2001. From 1999 to 2001,
Mr. Anderson was employed by Toysrus.com, LLC, serving as that companys Vice President, General Manager from 2000 to 2001
and as Vice President  Merchandising from 1999 to 2000.

James G. Berwick, 45, has been Executive Vice President
- Strategic Development and Corporate Planning for the Company since September 2005. He was Senior Vice President and Chief
Financial Officer for Lenox, Incorporated from February 1, 2004 until September 2005. From August 1, 2002 until January 31, 2004,
Mr. Berwick was Senior Vice President - Supply Chain for Lenox. From July 15, 1997 through July 31, 2002, he was Vice President
Finance for the Lenox Brands Division of Lenox.

David J. Enright, 38, has been Senior Vice President -
Supply Chain for the Company since September 2005. He held the same position at Lenox, Incorporated from April 16, 2004 until
September 2005. From January 9, 1995 until April 15, 2004, Mr. Enright was Director - Forecasting and Planning at
Lenox.

Louis A. Fantin, 55, has been Senior Vice President,
General Counsel and Secretary for the Company since September 2005. He was Senior Vice President, Secretary and Lenox Counsel for
Lenox, Incorporated from May 1, 1995 to September 2005. Prior to that, Mr. Fantin held a succession of positions at Lenox,
including Vice President, Secretary and Lenox Counsel from October 1, 1994 until April 30, 1995, Vice President, First Assistant
General Counsel and Assistant Secretary from May 1, 1990 to September 30, 1994; First Assistant General Counsel and Assistant
Secretary from May 1, 1989 to April 30, 1990 and Assistant General Counsel from August 31, 1981 to April 30, 1989.

Branka Hannon, 48, has been Senior Vice President -
Human Resources for the Company since September 2005. Ms. Hannon held the same position at Lenox, Incorporated from February 1,
2004 until September 2005. From June 1, 2002 to January 31, 2004, she was Vice President - Organizational Development at Lenox,
and from November 2, 2000 until May 31, 2002, Ms. Hannon was Director - Human Resources for the Lenox Collections Division of
Lenox.

Lesa Chittenden Lim, 47, was appointed President of
Lenox Brands, one of the Companys principal business units, on March 7, 2006. From 1998 to that date, Ms. Chittenden Lim
worked as an independent consultant specializing in strategy development, mergers and acquisitions and marketing and sales
effectiveness. She was retained by the Company as a consultant from September 2005 through March 2006 to assist with the
integration of Lenox, Incorporated and D 56, Inc., the Companys two main operating subsidiaries.

Elise M. Linehan, 44, has been Executive Vice President
- Product Development for the Company since June 2, 2005. She has worked for the Company since July 1998. Ms. Linehan was
Executive Vice President - Product Development and Retail from December 16, 2003 until June 2, 2005. She was Senior Vice President
- Retail Stores from January 27, 2002 to December 16, 2003, and Vice President - Marketing from June 28, 2001 to January 27, 2002.
She was Managing Director of Product Marketing from September 10, 1999 to June 28, 2001. From July 1, 1998 until September 10,
1999, she was Director of Product Marketing.

6

---



Table of Contents

Linda J. Miller, 45, has been Acting President of
Department 56 since September 30, 2005, a position which she holds through a consultancy arrangement with the Company. In
addition, Ms. Miller has been an independent consultant to the Company since January 2001. From February 1998 until December 2000,
she was Senior Vice President, Marketing and General Manager for PSC, Inc., a company that develops retail self-checkout systems.
From January 1993 to February 1998, Ms. Miller held a succession of positions in business planning and development, marketing and
sales planning at the Champion Products division of Sara Lee Corporation.

Gregg A. Peters,40, has been Vice President - Finance
for the Company since December 14, 2005. From March 20, 2002 until December 13, 2005 he was Managing Director  Finance, and
was Director - Finance from April 8, 1999 until March 20, 2002. Mr. Peters was Controller from July 1, 1997 until April 8, 1999
and held various financial positions within the Company from April 1993 to June 30, 1997. Prior to joining the Company, Mr. Peters
worked for KPMG Peat Marwick from 1989 until 1993.

David H. Royer, 46, has been Vice President - Sales for
the Company since December 16, 2003. He was Vice President - Sales Planning and Development for the Company from February 18, 2002
until December 16, 2003. Mr. Royer was Vice President of Sales Development at Frito-Lay, Inc. from March 2001 to February 2002.
Prior to that Mr. Royer was Director of Sales for the Midwest North Region of Frito-Lay, Inc. from March 1997 to March
2001.

Louis C. Scala, 50, has been Chief Merchandising and
Brand Officer for the Company since September 2005. Prior to that date, Mr. Scala held a succession of positions at Lenox,
Incorporated, including Chief Merchandising Officer from February 1, 2005 until September 2005 and President - Brand
Management/Chief Merchandising Officer from November 1, 2002 until January 31, 2005. From July 15, 1997 through October 31, 2002,
Mr. Scala was the President of the Lenox Brands Division of Lenox.

Timothy J. Schugel, 47, has been Chief Financial Officer
and Chief Operating Officer for the Company since September 28, 2005. He was Executive Vice President and Chief Financial Officer
for the Company from April 1, 2002 until September 28, 2005. He was Senior Vice President - Sourcing Management and Production
Control from January 29, 2001 until April 1, 2002. Mr. Schugel was Vice President of the Company from April 10, 1995 until January
29, 2001.

Kathleen S. Thie, 58, has been Executive Vice President
- Wholesale for the Company since September 2005. She held the same position for Lenox, Incorporated from November 1, 2002 through
September 2005. Prior to November 1, 2002, Ms. Thie was Senior Vice President and General Manager - Dinnerware and Giftware for
the Lenox Brands Division of Lenox, a position she assumed in July 1998.

7

---



Table of Contents

|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

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

Our sales could be negatively impacted if
our key customer substantially reduces orders for our products.

With the exception of our largest account, Macys Home
Stores, our customer base is relatively dispersed. Our sales to this large
account, which was formed in 2005 as the result of a merger between Federated
Department Stores and the May Department Stores Company accounted for 8% of our
net sales for fiscal year 2005 (reflecting four months of Lenox results). If we
lose Macys Home Stores as an account, our sales and business would be
negatively impacted.

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

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

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

8

---



Table of Contents

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

In fiscal year 2005, approximately 81% of our imports
were manufactured in China, and we anticipate that such percentage will hold
constant or increase for the foreseeable future.

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

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

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

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

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

A principal market risk affecting the Company is the
exposure to changes in the interest rates on our variable rate debt. As the
Companys credit facilities bear interest at variable rates, the Companys
results of operations and cash flows will be exposed to changes in interest
rates. Based on debt outstanding at December 31, 2005, a 1% increase or
decrease in current market interest rates would have an impact of approximately
$1.1 million on an annual basis. The Company monitors this risk carefully.

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

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

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

None.

9

---



Table of Contents

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

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

Owned
Facilities

Office Facilities

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

Manufacturing Facilities

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

Mixed Use Facilities

A manufacturing/office/retail facility (416,000-sq.
ft.) servicing the Wholesale, Retail and Consumer Direct segments located in
Pomona, NJ (the Pomona Facility).

|                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                    | The Pomona Facility is currently utilized for
  sterling silver flatware production, as well as certain technical services,
  customer service and retail store operations. On September 13, 2005, the
  Company approved certain consolidation plans for its Lenox subsidiary,
  including the cessation of fine china production at the Pomona Facility and
  transfer of those operations to the Kinston Facility, commencing on November
  14, 2005. Such plans for consolidation were contemplated in conjunction with
  the acquisition of Lenox.                                                                                                                                                                                                   
|                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|An office/warehousing/distribution/retail facility
  (220,000-sq. ft.) servicing the Consumer Direct segment located in Langhorne,
  PA (the Langhorne Facility).
|                                                                                                                                                                   
|                                                                                                                                                                    | On December 30, 2005, the Companys Lenox subsidiary
  entered into an Agreement of Sale (the Sale Agreement) with PREI Wheeler
  Way Associates, LP (the Buyer) for the sale of the Langhorne Facility.
  Pursuant to the Sale Agreement, the Company agreed to lease back from the
  Buyer space in the Langhorne Facility for an initial term of two years, subject
  to earlier termination or renewal for an additional one-year term. The
  Company anticipates leasing back at least 140,000-sq. ft. for warehousing,
  distribution and retail store operations for the Consumer Direct segment. The
  sale (and partial leaseback) of the Langhorne Facility, as described above,
  is anticipated to close during the third quarter of 2006.

Warehouse and
Distribution Facilities

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

Leased
Facilities

Office Facilities

An office facility (91,380-sq. ft.) servicing the
Wholesale segment and corporate function located in Lawrenceville, NJ (the
Lawrenceville Facility).

On December 30, 2005, the Companys Lenox subsidiary,
as tenant, entered into an Agreement of Lease (the Lease Agreement) with
Island View TCI, L.P., as landlord, relating to an office complex located in
Bristol, PA. Pursuant to the Lease Agreement, the Company will lease
126,000-sq. ft. in the building located in Bristol, PA commonly known as
Island View Crossing (the Bristol Office Facility) for a term of 12 years.

| |                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the third quarter of fiscal 2006, the Company
  intends to vacate the Lawrenceville Facility and to consolidate all
  operations of the Lawrenceville Facility and the office operations of the
  Langhorne Facility into the Bristol Office Facility.

10

---



Table of Contents

Warehouse and/or
Distribution Facilities

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

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

Mixed
Use Facilities

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

Retail Stores

As of February 1, 2006, the Companys Retail segment
operated 36 retail stores located in 19 states, including six stores operated
under the Department
56 trade name and 30 stores operated under the Lenox trade name (including
the four retail store operations noted above). The retail stores range from
3,100 to 15,000 sq. ft., excluding the retail space in the Cranbury Facility,
which is approximately 48,000 sq. ft.

On September 13, 2005, the Company approved certain
consolidation plans for the Lenox subsidiary, including the closing of 31 Lenox
retail stores. Such plans for consolidation were contemplated in conjunction
with the acquisition of Lenox. As of January 31, 2006, the Company completed
the implementation of this store-closing plan, leaving 30 Lenox retail stores in
operation.

Showrooms

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

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

11

---



Table of Contents

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

In August 2004, plaintiffs purporting to represent a
class of consumers who purchased tableware sold in the United States filed suit
against Federated Department Stores, the May Department Stores Company,
Waterford Wedgwood U.S.A., and Lenox, Incorporated in United States District
Court for the Northern District of California. In November 2004, plaintiffs
filed a consolidated amended complaint alleging that for the period beginning
at least as early as May 1, 2001 through the filing of the amended complaint on
November 12, 2004, defendants violated Section 1 of the Sherman Act by
conspiring to fix prices and to boycott sales to Bed, Bath & Beyond.
Plaintiffs seek to recover an undisclosed amount of damages, trebled in
accordance with antitrust laws, as well as costs, attorneys fees and injunctive
relief. This matter is currently in the pre-trial discovery phase. The cut-off
dates for fact discovery and expert discovery are March 31, 2006 and June 12,
2006, respectively. The court has set August 24, 2006 as the date for filling
defendants motions for summary judgment and plaintiffs motion for class
certification. The trial date is scheduled for October 30, 2006.

On May 26, 2004, Ashley Seaberg filed a product
liability suit against Department 56, Inc. and Time to Celebrate in United
States District Court for the District of Oregon, claiming that a strand of
lights from defendant Time to Celebrate started a house fire. On May 16, 2005,
the court granted plaintiffs motion to amend the complaint to add a claim for
$10 million in punitive damages. On January 9, 2006, the court denied the
Companys motion for summary judgment on plaintiffs punitive damages claim and
granted plaintiffs motion for summary judgment on its negligence per se
claim. Trial is set for May 2006.

The Company denies the allegations and claims of the
cases above and intends to defend the cases vigorously. It is not possible at
this time to estimate possible losses or a range of losses, if any, in these
lawsuits. However, an adverse result in either of these lawsuits could have a
material adverse effect on the Companys financial position, results of
operations and/or cash flows.

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

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

No matters were submitted to a vote of the Companys
security holders during the last quarter of the year ended December 31, 2005.

12

---



Table of Contents

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

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

|               |  |      |       |     |   |       | 
|-------------- |  | ---- | ----- | --- | - | ----- | 
|               |  | High |       | Low |  
|               |  |      |       |     |   |       | 
|              
|Fiscal
  2005  |  |      |       |     |   |       | 
|First quarter  |  | $    | 17.46 |     | $ | 15.83 | 
|Second quarter |  |      | 17.79 |     |   | 9.93  | 
|Third quarter  |  |      | 14.78 |     |   | 10.28 | 
|Fourth quarter |  |      | 13.46 |     |   | 10.44 | 
|               |  |      |       |     |   |       | 
|Fiscal
  2004  |  |      |       |     |   |       | 
|First quarter  |  | $    | 16.20 |     | $ | 12.55 | 
|Second quarter |  |      | 17.31 |     |   | 14.05 | 
|Third quarter  |  |      | 16.69 |     |   | 14.60 | 
|Fourth quarter |  |      | 17.34 |     |   | 14.88 | 

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

As of March 6, 2006, the number of holders of record
of the Companys common stock was 788.

13

---



Table of Contents

|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

|                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FIVE-YEAR SUMMARY (In thousands, except per share amounts)
 YEARS ENDED DECEMBER 31, 2005, JANUARY 1, 2005, JANUARY 3, 2004, DECEMBER 28, 2002, AND DECEMBER 29, 2001                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|The following selected consolidated financial data should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations, and the
Consolidated Financial Statements and related Notes thereto, included elsewhere herein. Fiscal year 2005, 2004, 2003, 2002, and
2001 results reflect the reclassification of Geppeddos and Time to Celebrates financial results as discontinued
operations.

|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------------ | - | ------------------ | - | -------------------- | ------- | -------------------- | - | ------- | - | - | ------- | -
|                                                                                               |  | December 31,
  20051,2 |         | January 1,
  20051 |   | January 3,
  20041 |   | December 28,
  20021 |         | December 29,
  20011 |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|STATEMENTS OF
INCOME                                                                           |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Net sales                                                                                      |  | $                      | 330,915 |                    | $ | 162,908            |   | $                    | 174,957 |                      | $ | 190,348 |   | $ | 188,477 |  
|Cost of sales                                                                                  |  |                        | 174,985 |                    |   | 76,617             |   |                      | 81,069  |                      |   | 84,237  |   |   | 85,975  |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Gross profit                                                                                   |  |                        | 155,930 |                    |   | 86,291             |   |                      | 93,888  |                      |   | 106,111 |   |   | 102,502 |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Operating expenses:                                                                            |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Selling,
general and administrative                                                            |  |                        | 123,441 |                    |   | 51,175             |   |                      | 52,695  |                      |   | 60,079  |   |   | 67,587  |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Operating income from
continuing operations                                                    |  |                        | 32,489  |                    |   | 35,116             |   |                      | 41,193  |                      |   | 46,032  |   |   | 34,915  |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Other expense
(income):                                                                        |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Interest
expense                                                                               |  |                        | 5,735   |                    |   | 493                |   |                      | 1,901   |                      |   | 3,425   |   |   | 6,998   |  
|Litigation
settlement3                                                                         |  |                        |        |                    |   | (6,871             | ) |                      |        |                      |   | (5,388  | ) |   |        |  
|Impairment and
equity in losses of minority investment4                                        |  |                        |        |                    |   |                   |   |                      |        |                      |   |        |   |   | 3,304   |  
|Other,
net                                                                                     |  |                        | (744    | )                  |   | (414               | ) |                      | (906    | )                    |   | (349    | ) |   | (659    | )
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Income from continuing
operations before income taxes                                          |  |                        | 27,498  |                    |   | 41,908             |   |                      | 40,198  |                      |   | 48,344  |   |   | 25,272  |  
|Provision for income
taxes                                                                     |  |                        | 10,146  |                    |   | 15,088             |   |                      | 14,529  |                      |   | 13,581  |   |   | 10,472  |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Income from continuing
operations before cumulative effect of change
  in accounting principle |  |                        | 17,352  |                    |   | 26,820             |   |                      | 25,669  |                      |   | 34,763  |   |   | 14,800  |  
|(Loss) income from discontinued
operations, net of tax5                                        |  |                        | (2,182  | )                  |   | (3,036             | ) |                      | (9,261  | )                    |   | (2,922  | ) |   | 1,162   |  
|Cumulative effect of change in
accounting Principle6                                           |  |                        |        |                    |   |                   |   |                      |        |                      |   | (93,654 | ) |   |        |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Net income (loss)                                                                              |  | $                      | 15,170  |                    | $ | 23,784             |   | $                    | 16,408  |                      | $ | (61,813 | ) | $ | 15,962  |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Income per share from
continuing operations:                                                   |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Basic                                                                                          |  | $                      | 1.27    |                    | $ | 2.01               |   | $                    | 1.96    |                      | $ | 2.67    |   | $ | 1.15    |  
|Diluted                                                                                        |  | $                      | 1.26    |                    | $ | 1.98               |   | $                    | 1.94    |                      | $ | 2.65    |   | $ | 1.15    |  
|                                                                                               |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|BALANCE SHEET
DATA                                                                             |  |                        |         |                    |   |                    |   |                      |         |                      |   |         |   |   |         |  
|Working capital                                                                                |  | $                      | 79,326  |                    | $ | 82,294             |   | $                    | 49,424  |                      | $ | 60,864  |   | $ | 57,153  |  
|Total assets                                                                                   |  |                        | 469,928 |                    |   | 167,388            |   |                      | 142,304 |                      |   | 157,184 |   |   | 258,932 |  
|Total debt                                                                                     |  |                        | 110,718 |                    |   |                   |   |                      |        |                      |   | 54,000  |   |   | 85,000  |  
|Total stockholders
equity7                                                                    |  |                        | 161,749 |                    |   | 143,757            |   |                      | 114,296 |                      |   | 88,607  |   |   | 145,855 |  

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The year ended January 3, 2004 is a 53-week fiscal
year whereas all other fiscal years presented are 52-week periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|2 | Effective September 1, 2005, the Company completed the
acquisition of Lenox from Brown-Forman.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3 | During 2002, the Company received net
proceeds (before income taxes) of $11.0 million in settlement of the Companys litigation against a third party related to
the implementation of its information systems. This recovery resulted in other income of $5.4 million and a $5.6 million reduction
in net depreciable assets. During 2004, the Company received net proceeds (before income taxes) of $6.9 million in settlement of
the Companys litigation against a third party related to the implementation of its information systems. This recovery was
recorded in other income.
|4 | During 2001, the Company recognized a
$3.0 million impairment of the Companys minority investment in 2-Day Designs, Inc. The impairment charge taken reduced the
carrying value of the Companys minority investment to zero.                                                                                                                                                                                                                                                                                                                                                           
|5 | In December 2005, the Company ceased
operations of its Time to Celebrate business. Additionally, during the first quarter of 2004, the Company ceased operations of its
Geppeddo seasonal kiosk business. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reclassified the results of these ceased operations into discontinued operations for all periods
presented.                                                                                                                                                       
|6 | During 2002, the Company adopted SFAS
No. 142, Goodwill and Other Intangible Assets. Upon adoption of SFAS No. 142, the Company performed impairment testing and
concluded that the goodwill related to the leveraged buy-out of the Company in 1992 was impaired. As a result, the Company
recognized a $93.7 million charge to write-down its goodwill.                                                                                                                                                                                                                                
|7 | The Company has not
declared or paid dividends on its common stock. As a holding company, the ability of the Company to pay cash dividends will depend
upon the receipt of dividends or other payments from its subsidiaries.                                                                                                                                                                                                                                                                                                                                                            

14

---



Table of Contents

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

STRATEGIC OVERVIEW

Excluding the
acquisition of Lenox, the Companys financial results for 2005 as well as the
two prior years were significantly impacted by fundamental changes occurring in
the Gift and Specialty account base.  In
2005, the Company continued to see substantial attrition of the Gift and
Specialty channel, which accounted for over 80% of the Companys wholesale
sales.  In addition to this account attrition,
on-going accounts have cut back on ordering the Companys Village product.  Due to both account attrition and reduced
Village sales with on-going Gift and Specialty dealers, Village product revenue
decreased 21% in 2005, which was consistent with the longer term trend.

In response to
the changing nature of the Gift and Specialty channel, the Company implemented
two strategies designed not only to offset the decline of the Village business
but to grow revenues long term.  These
strategies were 1) expanding the Companys channels of distribution outside its
traditional Gift and Specialty channel, and 2) expanding the Companys product
offering to include year-round gift products.
These strategies were pursued both organically, by building upon the Companys
strengths in design and product development to enter new channels and
categories, and through acquisition.
These strategies are explained in more detail below.

Expanding Channels of Distribution

Wholesale Channels

The Company
has adopted a multi-channel wholesale approach to better expose its products
and make them more accessible to a broader range of new consumers.  New, simpler and less costly Villages, as
well as giftware lines were sold to select merchandise chains including Sears
and Lowes.

Retail Stores

The Company
operated six Department 56 retail stores in 2005 to showcase the breadth of its
home decorative and celebratory products. These stores are situated in high
traffic locations where there is no significant wholesale distribution. The
Company plans to open three additional stores in 2006, although appropriate
sites have not yet been identified.

Expand Product Offering to Include Year-Round
Gift Products

This strategy
is to expand the Companys product offering and reposition the Company from a
strong, yet highly seasonal Christmas collectibles business to a Company
providing premier home decorative products to celebrate lifes extraordinary
moments throughout the year.

This is
accomplished through new product offerings, which includes licensed product and
well-known artists.  Although this has
not yet yielded sales growth due to continued channel consolidation, this
strategy has begun to reduce the Companys dependence on Christmas.

15

---



Table of Contents

Acquisition Growth

In addition to internal growth, another means of expanded
product offering and channels of distribution is through acquisition. Accordingly, the Company looks to acquire businesses that
complement its strategy to develop year-round gift products, accelerate its penetration into new markets and new channels as well
as leverage its existing channel reach.

On September 1, 2005, the Company acquired Lenox, Incorporated
from Brown-Forman Corporation. The Company believes this was a transformational event for the Company not only in terms of
executing its dual strategy of expanded distribution and product offering, but also in providing strong brands as a foundation for
future growth.

This transaction repositions the Company as an industry leader
and a year-round provider of tabletop, gift and collectibles and home décor products. This acquisition has substantially
expanded the Companys product offering to include:

| |   |                                          
| | - | -----------------------------------------
| |  | Fine and casual dinnerware, and serveware
| |  | Glassware and crystal stemware           
| |  | Stainless and sterling flatware          

In addition, this acquisition augmented the Companys
existing channels of distribution as well as added new channels to include:

| |                           |                 
| | ------------------------- | ----------------
| | Augment Existing Channels | New Channels    
| | -  Department Stores      | -  Catalog      
| | -  National
  Chains      | -  Internet     
| | -  Specialty
  Retailers  | -  Direct
  Mail
| | -  Club
  Accounts        |                 
| | -  Retail
  Stores        |                 

The Company is currently in the process of integrating the two
businesses to leverage the strengths of each while eliminating redundant costs.

The Company believes that acquisitions will continue to be a
means of growth for the Company as it seeks to meet consumers needs for tabletop, gift, and collectible and home décor
product.

16

---



Table of Contents

SUMMARY OF 2005 RESULTS OF OPERATIONS

            On
September 1, 2005, the Company completed the acquisition (the Acquisition) of all of the capital stock of Lenox,
Incorporated (Lenox) from Brown Forman, Inc. (Brown-Forman). The acquisition of Lenox, which sells products under the Lenox,
Dansk, and Gorham brand names, added strong, market-leading brands and complementary product lines and distribution channels to
the Companys portfolio.

            Income
from continuing operations was $17.4 million in 2005 compared to $26.8 million in 2004. Income from continuing operations in 2005
includes the results of operations of Lenox from the acquisition date of September 1, 2005. Income from continuing operations in
2004 included the recovery of $6.9 million in net proceeds (before income taxes) from the settlement of the Companys
litigation against a third party related to the implementation of its information systems in 1999.

            Excluding
the impact of the Lenox acquisition from 2005 results and the recovery from the litigation settlement from 2004 results, income
from continuing operations decreased $12.9 million from $22.4 million in 2004 to $9.5 million in 2005, as shown in the table
below. The decrease in net income from continuing operations was principally due to an 18% decrease in wholesale sales and a 600
basis point decrease in wholesale gross profit as a percentage of sales. The decrease in wholesale sales was principally due to a
reduction in product shipments as a result of the continued contraction experienced in the Gift and Specialty channel. The
decrease in wholesale gross profit percentage was primarily due to the Companys more aggressive pricing of many of its new
items and its decision not to pass on cost increases on some of its existing items.

Reconciliation of Non-GAAP Financial Measure
(In millions)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---- | -------------------------------- | - | ---- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Year
  Ended
  December 31,
  2005 |      | Year
  Ended
  January 1,
  2005 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |  
|Income from continuing
operations, net of
  tax (GAAP measure)                                                                                                                                                                                                                                                                                                                                                                                                                   |  | $                                  | 17.4 |                                  | $ | 26.8 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|Income from continuing
operations 
  acquisition, net of tax                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                    | (7.9 | )                                |   |     |  
|Litigation settlement                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |                                    |     |                                  |   | (6.9 | )
|Income tax effect of litigation
settlement                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                    |     |                                  |   | 2.5  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|Income from continuing
operations  excluding the impact of the acquisition and litigation settlement (non-GAAP measure)                                                                                                                                                                                                                                                                                                                                                         |  | $                                  | 9.5  |                                  | $ | 22.4 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                    |      |                                  |   |      |  
|Management believes the non-GAAP measure above provides useful
information to investors regarding the Companys results from continuing operations because it provides a meaningful
comparison, on a consistent basis year-over-year, and understanding of the Companys operating performance for the past two
annual periods. This non-GAAP measure should not be considered an alternative to income from continuing operations, which is
determined in accordance with GAAP.

|                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          In
October 2005, the Company committed to a plan to cease operations of its Time to Celebrate business. Time to Celebrate ceased
operations in December 2005, and in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company has reclassified Time to Celebrates results into discontinued operations for all periods presented.

17

---



Table of Contents

|                                                                
|----------------------------------------------------------------
|COMPARISON OF RESULTS OF CONTINUING OPERATIONS FOR 2005 AND 2004
|                                                                
|(In millions, except per share amounts)                         
|                                                                

In connection
with the Companys acquisition of Lenox from Brown-Forman, the Company has
redefined its operating segments in accordance with SFAS No. 131 to include
three reportable segments  Wholesale, Retail, and Direct. Net sales, gross
profit, and specifically identified selling costs are measured for each
segment. Expenses not allocated to specific operating segments are reflected in
the Corporate category and represent general and administrative costs. Other
components of the statement of operations which are classified below income
from operations (i.e. interest expense, provision for income taxes, etc.) are
not allocated by segment and are discussed separately.  In addition, the Company does not account
for or report assets, capital expenditures, or certain depreciation and
amortization by segment.

|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|----------------------------------------------- |  | -------------------------------------------- | - | --------------- | - | --------------------------------- |  | --------------------------- | ----- | -------------------------- |  |  | - | ----- | - |  |  | - | ----- | - |  |  | - | ----- | - | 
|                                                |  | Reconciliation of Non-GAAP Financial Matters |  
|                                                |  | 2005                                         |   | 2004            |   | 2003                              | 
|                                                |  |                                              |   |                 |   |                                   | 
|                                                |  | Consolidated(GAAP measure)                   |   | Lenoxadjustment |   | Department
  56(non-GAAP measure) |  | Consolidated1(GAAP measure) |       | Consolidated1(GAAPmeasure) | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|WHOLESALE:                                      |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Net sales                                       |  |                                              | $ | 217.0           |   |                                   |  | $                           | 92.1  |                            |  |  | $ | 124.9 |   |  |  | $ | 153.1 |   |  |  | $ | 166.9 |   | 
|Gross profit                                    |  |                                              |   | 87.6            |   |                                   |  |                             | 30.5  |                            |  |  |   | 57.1  |   |  |  |   | 79.1  |   |  |  |   | 88.1  |   | 
|Gross
profit as a % of net sales                |  |                                              |   | 40              | % |                                   |  |                             | 33    | %                          |  |  |   | 46    | % |  |  |   | 52    | % |  |  |   | 53    | % | 
|Selling expenses                                |  |                                              |   | 24.1            |   |                                   |  |                             | 9.6   |                            |  |  |   | 14.5  |   |  |  |   | 15.5  |   |  |  |   | 15.9  |   | 
|Selling
expenses as a % of net sales            |  |                                              |   | 11              | % |                                   |  |                             | 10    | %                          |  |  |   | 12    | % |  |  |   | 10    | % |  |  |   | 10    | % | 
|Income from
operations                          |  |                                              |   | 63.5            |   |                                   |  |                             | 20.9  |                            |  |  |   | 42.6  |   |  |  |   | 63.6  |   |  |  |   | 72.2  |   | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|RETAIL:                                         |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Net sales                                       |  |                                              | $ | 72.8            |   |                                   |  | $                           | 61.8  |                            |  |  | $ | 11.0  |   |  |  | $ | 9.8   |   |  |  | $ | 8.0   |   | 
|Gross profit                                    |  |                                              |   | 42.7            |   |                                   |  |                             | 35.2  |                            |  |  |   | 7.5   |   |  |  |   | 7.2   |   |  |  |   | 5.8   |   | 
|Gross
profit as a % of net sales                |  |                                              |   | 59              | % |                                   |  |                             | 57    | %                          |  |  |   | 69    | % |  |  |   | 74    | % |  |  |   | 71    | % | 
|Selling expenses                                |  |                                              |   | 23.5            |   |                                   |  |                             | 17.0  |                            |  |  |   | 6.5   |   |  |  |   | 6.5   |   |  |  |   | 5.4   |   | 
|Selling
expenses as a % of net sales            |  |                                              |   | 32              | % |                                   |  |                             | 28    | %                          |  |  |   | 59    | % |  |  |   | 66    | % |  |  |   | 67    | % | 
|Income from
operations                          |  |                                              |   | 19.3            |   |                                   |  |                             | 18.2  |                            |  |  |   | 1.1   |   |  |  |   | 0.7   |   |  |  |   | 0.3   |   | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|DIRECT:                                         |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Net sales                                       |  |                                              | $ | 41.1            |   |                                   |  |                             | 41.1  |                            |  |  |   |      |   |  |  |   |      |   |  |  |   |      |   | 
|Gross profit                                    |  |                                              |   | 25.6            |   |                                   |  |                             | 25.6  |                            |  |  |   |      |   |  |  |   |      |   |  |  |   |      |   | 
|Gross
profit as a % of net sales                |  |                                              |   | 62              | % |                                   |  |                             | 62    | %                          |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Selling expenses                                |  |                                              |   | 17.0            |   |                                   |  |                             | 17.0  |                            |  |  |   |      |   |  |  |   |      |   |  |  |   |      |   | 
|Selling
expenses as a % of net sales            |  |                                              |   | 41              | % |                                   |  |                             | 41    | %                          |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Income from
operations                          |  |                                              |   | 8.6             |   |                                   |  |                             | 8.6   |                            |  |  |   |      |   |  |  |   |      |   |  |  |   |      |   | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|CORPORATE -                                     |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Unallocated general and
administrative expenses |  |                                              | $ | 58.9            |   |                                   |  | $                           | 29.1  |                            |  |  | $ | 29.8  |   |  |  | $ | 29.2  |   |  |  | $ | 31.3  |   | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|CONSOLIDATED:                                   |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Net sales                                       |  |                                              | $ | 330.9           |   |                                   |  | $                           | 195.1 |                            |  |  | $ | 135.8 |   |  |  | $ | 162.9 |   |  |  | $ | 174.9 |   | 
|Operating income from
continuing operations     |  |                                              |   | 32.5            |   |                                   |  |                             | 18.6  |                            |  |  |   | 13.8  |   |  |  |   | 35.1  |   |  |  |   | 41.2  |   | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Other Expense
(Income):                         |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Interest
expense                                |  |                                              |   | 5.7             |   |                                   |  |                             | 5.5   |                            |  |  |   | 0.2   |   |  |  |   | 0.5   |   |  |  |   | 1.9   |   | 
|Litigation
settlement                           |  |                                              |   |                |   |                                   |  |                             |      |                            |  |  |   |      |   |  |  |   | (6.9  | ) |  |  |   |      |   | 
|Other,
net                                      |  |                                              |   | (0.7            | ) |                                   |  |                             | (0.0  | )                          |  |  |   | (0.7  | ) |  |  |   | (0.4  | ) |  |  |   | (0.9  | ) | 
|                                                |  |                                              |   |                 |   |                                   |  |                             |       |                            |  |  |   |       |   |  |  |   |       |   |  |  |   |       |   | 
|Income tax expense                              |  |                                              |   | 10.1            |   |                                   |  |                             | 5.3   |                            |  |  |   | 4.9   |   |  |  |   | 15.1  |   |  |  |   | 14.5  |   | 
|Income from continuing
operations               |  |                                              | $ | 17.4            |   |                                   |  | $                           | 7.9   |                            |  |  | $ | 9.5   |   |  |  | $ | 26.8  |   |  |  | $ | 25.7  |   | 

Management believes the non-GAAP measure above provides useful
information to investors regarding the Companys results from continuing operations because it provides a meaningful
comparison and understanding of the Companys operating performance over the periods presented. This non-GAAP measure should
not be considered an alternative to income from continuing operations, which is determined in accordance with GAAP.

|  |                                                                                                                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Effective September 1, 2005, the Company
completed the acquisition of Lenox from Brown-Forman. Therefore, fiscal years 2003, 2004 and the first eight months of fiscal year
2005 do not contain the results of operations of the acquired entity.

18

---



Table of Contents

Wholesale

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

The gross profit percentage
was 40% compared to 52% in the prior year reflecting the impact of the
Acquisition. The gross profit percentage for the Lenox wholesale business for
the year was negatively impacted by an $8.7 million purchase accounting fair
market value adjustment related to the write-up of inventory to its estimated selling
price less cost of disposal under the purchase method of accounting on the
opening balance sheet date. Excluding the impact of the Acquisition, the
Companys gross profit percentage was 46% compared to 52% in 2004.  This decrease was primarily due to the
Companys more aggressive pricing of many of its new items and its decision not
to pass on cost increases on some of its existing items.

Selling expenses were $24.1 million, or 11% of sales, compared to
$15.5 million, or 10% of sales, in the prior year reflecting the impact of the
Acquisition.  Excluding the impact of
the Acquisition, selling expenses were $14.5 million, or 12% of sales compared
to $15.5 million, or 10% of sales in the prior year.  The increase in selling expense as a percentage of sales was due
to certain fixed selling expenses that did not decrease proportionally with the
sales decrease.

Operating income from continuing operations decreased $0.1
million to $63.5 million in 2005 from $63.6 million in 2004 reflecting the
impact of the Acquisition.  Excluding
the impact of the Acquisition, operating income from continuing operations
decreased $21.0 to $42.6 million in 2005 from $63.6 million in 2004.  The decrease in operating income was
principally due to the sales decrease in the Gift and Specialty channel and the
decline in the gross profit percentage as explained above.

Retail

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

The gross profit percentage
was 59% compared to 74% in the prior year reflecting the impact of the
Acquisition. Subsequent to the acquisition date of September 1, 2005, the Lenox
retail business was liquidating excess product acquired as part of the
Acquisition.  The impact of liquidating
this excess product normally would have resulted in lower gross margins for the
Lenox retail business.  However, this
impact was offset by the requirement to value Lenox inventory at its estimated
selling price less cost of disposal under purchase accounting on the opening
balance sheet date.  The
impact of this purchase accounting adjustment was approximately $5.8
million.  Excluding the impact of the
Acquisition, the gross margin percentage was 69% compared to 74% in the prior
year.  The decrease in the gross profit
percentage was principally due to higher markdowns and the Companys more
aggressive pricing of many of its new items as discussed under the Wholesale
segment above.

Selling expenses were $23.5 million, or 32% of sales, compared
to $6.5 million, or 66% of sales in the prior year reflecting the impact of the
Acquisition.  Excluding the impact of
the Acquisition, selling expenses were $6.5 million, or 59% of sales in 2005
compared to $6.5 million, or 66% of sales during 2004.   The decrease in selling expense as a
percentage of sales was primarily due the relocation of one of the Companys
retail stores and the resulting gain in connection with the buyout of the
previous lease.

Operating income from
continuing operations increased $18.6 million to $19.3 million in 2005 from
$0.7 million in 2004 reflecting the impact of the Acquisition.  Excluding the impact of the Acquisition,
operating income from continuing operations increased $0.4 million to $1.1
million in 2005 from $0.7 million in 2004.

19

---



Table of Contents

The increase in operating income was due to the
increase in net sales described above.

Direct

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

Corporate

General and administrative
expense was $58.9 million in 2005 reflecting the impact of the Acquisition.
Excluding the Acquisition, unallocated general and administrative expense was
$29.8 million compared to $29.2 million in 2004.

Interest Expense

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

Litigation Settlement

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

Provision
for Income Taxes

The effective income tax
rate was 37% in 2005 compared to 36% in 2004. Excluding the impact of the
Acquisition on the effective tax rate, the effective income tax rate was 34% in
2005, reflecting a $0.3 million adjustment for the reversal of prior year tax
accruals that were no longer necessary. The Company expects its effective
income tax rate to be approximately 38% in 2006.

Discontinued Operations

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

COMPARISON
OF RESULTS OF CONTINUING OPERATIONS 2004 TO 2003

Wholesale

Net sales decreased $13.8 million, or 8%, to $153.1
million in 2004 from $166.9 million in 2003. The decrease was due to a decrease
in product shipments as a result of the continued contraction experienced in
the Gift and Specialty channel.

Gross profit decreased $9.0
million, or 10%, to $79.1 million in 2004 from $88.1 million in 2003. Gross
profit as a percentage of sales decreased to 52% in 2004 from 53% in 2003. The
decrease in gross profit dollars was principally due to the decrease in
wholesale net sales. The decrease in gross profit as a percentage of sales was
due to a change in the mix of wholesale product shipments from higher margin
Village product to lower margin Giftware product, partially offset by lower
provisions for both excess product and sales returns and credits.

20

---



Table of Contents

Selling expenses decreased
$0.4 million, or 3%, to $15.5 million in 2004 from $15.9 million in 2003.
Selling expenses as a percentage of wholesale net sales were 10% in both 2004
and 2003. The decrease in selling expenses in dollars was due to the decrease
in wholesale net sales.

Operating income from continuing operations decreased
$8.6 million, or 12%, to $63.6 million in 2004 from $72.2 million in 2003. The
decrease in operating income was principally due to the decrease in wholesale
net sales as explained above.

Retail

Net sales increased $1.8 million, or 23%, to $9.8
million in 2004 from $8.0 million in 2003. Same store sales increased 3% in
2004. In 2004, there were five stores included in our same-store sales base and
two of these stores were included for less than a year.

Gross profit increased $1.4
million, or 24%, to $7.2 million in 2004 from $5.8 million in 2003. Gross
profit as a percentage of sales increased to 74% in 2004 from 73% in 2003. The
increase in gross profit dollars was primarily due to the increase in retail
segment sales. The increase in gross profit as a percentage of sales was
principally due to the mix of product sales and lower markdowns.

Selling expenses increased
$1.1 million, or 20%, to $6.5 million in 2004 from $5.4 million in 2003.
Selling expenses as a percentage of retail net sales decreased to 66% in 2004
from 68% in 2003. The increase in selling expenses was due to the addition of
two new stores in the fall of 2003 (which were open for a full year in 2004)
and the addition of a new store in the summer of 2004.

Operating income from continuing operations increased
$0.4 million to $0.7 million in 2004 from $0.3 million in 2003. The increase in
income from operations was due to the increase in retail segment sales.

Corporate

General and administrative
expenses decreased $2.1 million, or 7%, to $29.2 million in 2004 from $31.3
million in 2003. The decrease in general and administrative expenses was
principally due to decreases in depreciation and marketing expenses of $0.9
million and $0.6 million, respectively, partially offset by the $0.7 million
charge for severance costs related to staff reductions in the third quarter of
2004.

Interest Expense

Interest expense decreased $1.4 million, or 74%,
between 2004 and 2003. The decrease in interest expense was principally due to
lower average debt outstanding.

Litigation Settlement

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

Provision
for Income Taxes

The effective income tax
rate was 36% in both 2004 and 2003.

Discontinued Operations

The Company completed the
closing of its Time to Celebrate business during the fourth quarter of 2005 and
its Geppeddo seasonal kiosk business during the first quarter of 2004. Results
for these businesses have been reclassified as discontinued operations for all
periods presented.

21

---



Table of Contents

ACQUISITION
OF LENOX

As discussed earlier, on
September, 1, 2005, the Company completed the acquisition of all of the capital
stock of Lenox from Brown-Forman for $204.0 million, which included transaction
costs of $7.6 million. The Company funded the payment of the purchase price and
related transaction costs of the Acquisition with a $275 million senior secured
credit facility consisting of a $175 million revolving credit facility and a
$100 million term loan.

The initial purchase price
allocation, based on managements estimates which included the use of independent
appraisals which were updated during the fourth quarter of 2005, was as
follows:

|                                       |  |                        |         | 
|-------------------------------------- |  | ---------------------- | ------- | 
|                                       |  | Estimated
  Fair Value |        
|                                       |  |                        |        
|Accounts receivable                    |  | $                      | 39,105  | 
|Inventories                            |  |                        | 115,989 | 
|Current deferred taxes                 |  |                        | 5,109   | 
|Other current assets                   |  |                        | 7,080   | 
|Property, plant and
  equipment        |  |                        | 78,046  | 
|Goodwill                               |  |                        | 16,695  | 
|Trademarks                             |  |                        | 108,210 | 
|Other intangible assets                |  |                        | 17,842  | 
|Noncurrent deferred taxes              |  |                        | 5,555   | 
|Other noncurrent assets                |  |                        | 4,059   | 
|                                       |  |                        |         | 
|Total assets acquired                  |  | $                      | 397,690 | 
|                                       |  |                        |         | 
|                                       |  |                        |         | 
|Severance and restructuring
  reserves |  | $                      | 14,020  | 
|Other current liabilities              |  |                        | 57,967  | 
|Pension obligations                    |  |                        | 89,414  | 
|Postretirement obligations             |  |                        | 28,075  | 
|Long-term debt                         |  |                        | 250     | 
|Other noncurrent
  liabilities         |  |                        | 3,928   | 
|                                       |  |                        |         | 
|Total liabilities assumed              |  | $                      | 193,654 | 
|                                       |  |                        |         | 
|                                       |  |                        |         | 
|Net assets acquired                    |  | $                      | 204,036 | 
|                                       |  |                        |         | 

22

---



Table of Contents

SEASONALITY

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

|                                                                       |  |          |       |          |   |           |  |           |      |       |   |          |  |          |       |          |   |          |   |       |      |  |   |      |  |   |      |  |   |       | 
|---------------------------------------------------------------------- |  | -------- | ----- | -------- | - | --------- |  | --------- | ---- | ----- | - | -------- |  | -------- | ----- | -------- | - | -------- | - | ----- | ---- |  | - | ---- |  | - | ---- |  | - | ----- | 
|(In
  millions, except per share amounts)                              |  |          |       |          |   |           |  |           |      |       |   |          |  |          |       |          |  
|                                                                       |  |          |       |          |   |           |  |           |      |       |   |          |  |          |       |          |   |          |   |       |      |  |   |      |  |   |      |  |   |       | 
|                                                                       |  | 2005     |       | 2004    
|                                                                       |  |          |       |         
|                                                                       |  | 1st Qtr. |       | 2nd Qtr. |   | 3rd Qtr.1 |  | 4th Qtr.1 |      | Total |   | 1st Qtr. |  | 2nd Qtr. |       | 3rd Qtr. |   | 4th Qtr. |   | Total |     
|                                                                       |  |          |       |          |   |           |  |           |      |       |   |          |  |          |       |          |   |          |   |       |     
|Net sales                                                              |  | $        | 19.6  |          | $ | 36.4      |  | $         | 99.5 |       | $ | 175.5    |  | $        | 330.9 |          | $ | 19.8     |   | $     | 48.7 |  | $ | 52.7 |  | $ | 41.6 |  | $ | 162.9 | 
|Gross profit                                                           |  |          | 8.9   |          |   | 17.5      |  |           | 48.1 |       |   | 81.4     |  |          | 155.9 |          |   | 10.4     |   |       | 26.5 |  |   | 28.6 |  |   | 20.8 |  |   | 86.3  | 
|Income (loss)
  from continuing operations                             |  |          | (2.2  | )        |   | 4.5       |  |           | 11.6 |       |   | 3.6      |  |          | 17.4  |          |   | (1.3     | ) |       | 13.8 |  |   | 9.8  |  |   | 4.5  |  |   | 26.8  | 
|Net income
  (loss)                                                    |  |          | (2.6  | )        |   | 4.1       |  |           | 11.1 |       |   | 2.6      |  |          | 15.2  |          |   | (3.0     | ) |       | 13.4 |  |   | 9.2  |  |   | 4.1  |  |   | 23.8  | 
|Income (loss)
  from continuing operations per share assuming dilution |  |          | (0.16 | )        |   | 0.32      |  |           | 0.84 |       |   | 0.26     |  |          | 1.26  |          |   | (0.10    | ) |       | 1.02 |  |   | 0.72 |  |   | 0.33 |  |   | 1.98  | 
|Net income
  (loss) per common share assuming dilution                 |  |          | (0.19 | )        |   | 0.30      |  |           | 0.81 |       |   | 0.19     |  |          | 1.10  |          |   | (0.22    | ) |       | 0.99 |  |   | 0.68 |  |   | 0.30 |  |   | 1.76  | 

|  |                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | Effective
September 1, 2005 the Company completed the acquisition of Lenox from
Brown-Forman. Therefore, the third and fourth quarters of 2005 contain
the results of operations of the acquired entity.

LIQUIDITY
AND CAPITAL RESOURCES

The Companys primary source
of cash is the funds generated from operations and its credit facility which is
available for working capital and investment needs. Based on current levels of
operations, the Company believes its funds generated from operations and its
revolving credit facility will be sufficient to finance any working capital
needs, capital expenditures, or contractual obligations.

The Companys cash and cash
equivalents declined from $33.7 million at January 1, 2005 to $1.3 million at
December 31, 2005 due primarily to financing the Acquisition on September 1,
2005.

Consistent with customary
practice in the giftware industry, the Company offers extended payment terms to
some of its Wholesale customers. This practice has typically created
significant working capital requirements in the second and third quarters that
the Company has generally financed with its cash balances and/or seasonal
borrowings under its revolving credit facility. The Companys cash and cash
equivalents and short-term investments balances have historically peaked early
in the first quarter of the subsequent year, following the collection of
Wholesale customer accounts receivable with extended payment terms and cash
receipts from the Companys Retail and Direct operations.

Cash
Flows from Operations

Net cash provided by operating activities increased
$35.5 million from $24.9 million in 2004 to $60.4 million in 2005. The increase
consisted of net cash provided by the operating activities of Lenox of $39.2
million, with the remaining net cash usage of $3.7 million primarily driven by
net cash used in the operating activities of discontinued operations.

23

---



Table of Contents

Cash
Flows from Investing Activities

On September 1, 2005, the Company completed the
acquisition of all of the capital stock of Lenox from Brown-Forman for $204.0
million, which included transaction costs of $7.6 million. During 2005, the
Company obtained cash of $11.2 million from the sale of available-for-sale
securities, which the Company used for working capital purposes and to
partially fund the Acquisition.

Capital expenditures in 2005, 2004 and 2003 were $2.2
million (of which $1.9 million was paid and $0.3 million was accrued as of December
31,2005), $2.2 million, and $2.5 million, respectively. We anticipate capital
expenditures for 2006 to be approximately $10 to $15 million, primarily for
addition of the planned retail stores, capital costs associated with the
consolidation of certain of the Companys office and manufacturing operations,
and general maintenance capital.

Cash
Flows from Financing Activities

To finance the Acquisition,
the Company entered into a new revolving credit facility and a term loan
facility. The credit facilities are available to finance the purchase of Lenox,
to payoff existing indebtedness under the Companys old revolving credit
facility, and to finance working capital needs. In connection with the new
credit facilities, the Company recorded $10.1 million in deferred financing
fees, which is included in other assets on the Consolidated Balance Sheets and
is being amortized over the lives of the credit facilities. The revolving
credit facility expires on September 1, 2010 and the term loan facility expires
on September 1, 2011.

The credit facilities
contain customary financial conditions and covenants, including restrictions on
additional indebtedness, liens, investments, capital expenditures, issuances of
capital stock and dividends. The credit facilities also require maintenance of
minimum levels of interest coverage and maximum levels of leverage, in each
case at the end of each fiscal quarter. The minimum interest coverage ratio (as
defined within the credit facility agreements) requires the Company to maintain
a minimum ratio of earnings before interest, income taxes, depreciation and
amortization (EBITDA) to interest expense over a 12-month period ending on each
fiscal quarter. The minimum ratio to be maintained at each quarter-end over the
term of the facilities is defined within the credit facility agreements, and
ranges from 2.35:1.0 to 3.75:1.0. The maximum leverage ratio (as defined within
the credit facility agreements) requires the Company to maintain a maximum
ratio of debt (as measured at the end of each fiscal quarter) to EBITDA over a
12-month period ending on each fiscal quarter. The maximum leverage ratio to be
maintained at each quarter-end over the term of the facilities is defined
within the credit facility agreements, and ranges from 2.0:1.0 to 4.0:1.0. As
of December 31, 2005, the Company was in compliance with all material
conditions and covenants under the credit facilities.

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

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

Borrowings under the
revolving credit facility are subject to certain borrowing base limitations.
The Companys borrowing capacity under the revolving credit facility as of
December 31, 2005, was $147.0 million and fluctuates based on accounts
receivable and inventory levels. The revolving credit facility provides for
commitment fees of 0.375% per annum on the daily average of the unused
commitment.

24

---



Table of Contents

The term loan facility
provides for term loans in the aggregate principal amount of up to $100.0
million. The term loan facility allows the Company to choose between two
interest rate options in connection with its revolving credit loans. The
interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin is
2.5% for Alternate Base Rate loans and 3.5% for Adjusted LIBOR Rate loans.

The contractual debt
maturity of the long-term debt outstanding on December 31, 2005 is shown in the
Contractual Obligations table below. Under the term loan facility, the Company
is also obligated to make mandatory prepayments if certain events occur in the
future such as asset sales, additional debt issuances, common and preferred
stock issuances, and excess cash flow generation.

In conjunction with entering
into the new credit facilities, the Company terminated its $75 million revolving
credit facility originally entered into in November 2003. Related to this
termination, the Company wrote off $0.1 million in unamortized deferred
financing fees which were recorded in interest expense in the Companys
Consolidated Statements of Income.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet
arrangements.

CONTRACTUAL OBLIGATIONS

As of December 31, 2005, the Company is obligated to
make cash payments in connection with its debt obligations, operating leases,
purchase obligations, and royalty guarantees in the amounts listed below. The
Company has no off-balance sheet debt or other unrecorded obligations other
than the items noted in the following table:

|                             |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 
|---------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------ |  | - | ------- | 
|Payments Due (in thousands)  | 
|                             |  |      |       
|                             |  | 2006 |        | 2007 |   | 2008   |  | 2009 |        | 2010 |   | Thereafter |  | Total |       
|                             |  |      |        |      |   |        |  |      |        |      |   |            |  |       |       
|                            
|Revolving Credit Facility1,2 |  |      |       |      |   |       |  |      |       |      |   |           |  | $     | 10,468 |  |   |       |  | $ | 10,468  | 
|Long-term Debt2              |  | $    | 10,000 |      | $ | 10,000 |  | $    | 10,000 |      | $ | 10,000     |  |       | 10,000 |  | $ | 50,000 |  |   | 100,000 | 
|Operating Leases             |  |      | 12,956 |      |   | 10,433 |  |      | 8,505  |      |   | 7,254      |  |       | 4,952  |  |   | 3,872  |  |   | 47,972  | 
|Purchase Commitments3        |  |      | 11,050 |      |   |       |  |      |       |      |   |           |  |       |       |  |   |       |  |   | 11,050  | 
|Royalty Guarantees4          |  |      | 1,040  |      |   | 415    |  |      | 25     |      |   |           |  |       |       |  |   |       |  |   | 1,480   | 
|                             |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 
|Total                        |  | $    | 35,046 |      | $ | 20,848 |  | $    | 18,530 |      | $ | 17,254     |  | $     | 25,420 |  | $ | 53,872 |  | $ | 170,970 | 
|                             |  |      |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The Companys borrowings under the revolving credit
facility are classified as current liabilities on the Consolidated Balance Sheets in accordance with Emerging Issues Task Force
Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a
Subjective Acceleration Clause and a Lock-Box Arrangement.                       
|2 | In addition to the principal payments on debt included in the
summary of significant contractual obligations, the Company will incur interest expense on outstanding variable rate debt. All
amounts outstanding under the revolving and term loan credit facilities are variable interest rate debt with weighted average
interest rates as of December 31, 2005 of 6.67% and 7.89%, respectively.
|3 | The Company is committed to pay suppliers of product under the
terms of open purchase orders issued in the normal course of business.                                                                                                                                                                                                                                                              
|4 | The Company is committed to pay licensors under the terms of
license agreements entered into in the normal course of business.                                                                                                                                                                                                                                                                     

Total contractual obligations do not include the
following:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payments made to the Companys deferred compensation plan
 Under this plan, employees may elect to defer a portion of their eligible compensation into the plan. The Company, at its
discretion, may also contribute amounts into the plan on behalf of the employees. The Company cannot predict when contributions to
and withdrawals from the plan will occur. See Note 12 to the Consolidated Financial Statements.

25

---



Table of Contents

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pension and postretirement obligations  As of December
31, 2005, the Company had accrued pension and postretirement benefit obligations of $115.6 million. Because the specific periods
in which those obligations will be funded are not known at this time, no amounts related to these obligations are reflected in the
above table. The Company expects to contribute approximately $16 million to its pension plans and approximately $2 million to its
postretirement plans in 2006. See Note 10 to the Consolidated Financial Statements.                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Other noncurrent
  liabilities which principally consist of environmental remediation costs 
  The Company is responsible for the cleanup and/or monitoring of two
  environmental sites located in New Jersey. As of December 31, 2005, the
  Company recorded a liability of approximately $3.3 million in other
  noncurrent liabilities which represents the net present value of the estimated
  future costs discounted at 5.25%. Because the liability recorded is based
  upon managements estimate and the timing and amount of payments are
  uncertain no amounts related to these obligations are reflected in the above
  table. See Note 18 to the Consolidated Financial Statements.

CRITICAL
ACCOUNTING POLICIES AND ESTIMATES

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

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

Sales Returns and Credits  An allowance is
established for credits related to possible returned or damaged product,
markdowns and pricing and shipping discrepancies. The amount of the allowance
is based on historical ratios of credits to sales, the historical average
length of time between the sale and the credit, and other factors. Changes in
customers behavior versus historical experience, changes in product damage or
defect rates, or changes in the Companys return policies are among the factors
that would result in materially different amounts for this item. Based on 2005
sales and returns and credits (including such returns and credits from the
Acquisition from its effective date thru December 31, 2005), a 10% increase or
decrease in sales returns and credits would have had an impact of approximately
$0.9 million.

Inventory Valuation  Inventory is valued
at the lower of cost or net realizable value. The amount is determined by
analyzing historical and projected sales information, plans for discontinued
products and other factors. The Company procures product based on forecasted
sales volume. If actual sales were significantly lower than forecasted sales
due to unexpected economic or competitive conditions, it could result in
materially higher surplus and discontinued inventories. Based on 2005 inventory
write-downs (including such write-downs from the Acquisition from its effective
date thru December 31, 2005), a 10% increase or decrease in inventory
write-downs would have had an impact of less than $0.4 million.

26

---



Table of Contents

Allowance for Doubtful Accounts  The Company records an allowance
for
estimated uncollectible accounts receivable based on an evaluation of its
accounts receivable balance. This evaluation includes a number of factors
including the age of the receivable, the financial condition of the customer,
the current business environment, and the historical collection experience for
customers and consumers of similar background and nature. Additionally, since many of the Companys
wholesale sales have dating terms which come due in November and December, the
Company does not have visibility into overdue balances for most of its
wholesale customers until the fourth quarter of its fiscal year. Due to the
seasonality of the Companys business, the extended dating terms provided to
wholesale customers and the relative size of accounts receivable balances at
yearend, it is not uncommon for the Company to experience fluctuations in the
provision for bad debt expense from quarter to quarter as the Company refines
its estimate. Unexpected changes in the aforementioned factors would result in
materially different amounts for this item. In addition, results could be
materially different if economic conditions worsened for the Companys
customers. Based on 2005 bad debt write-offs (including such write-offs from
the Acquisition from its effective date thru December 31, 2005), a 10% increase
or decrease in bad debt write-offs would have had an impact of less than $0.4
million.

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

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

Pension and Postretirement
Benefits The Company sponsors various defined benefit pension plans as well as
postretirement plans providing retiree health care and retiree life insurance
benefits. Benefits are based on such factors as years of service and
compensation level during employment. The benefits expected to be paid are
expensed over the employees expected service. To determine the expected
benefits to be paid, the Company has to make assumptions regarding interest
rates, return on plan assets, the rate of salary increases, and expected health
care trend rates. Actual experience different from these assumptions could
result in materially different benefit payments.

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

SUBSEQUENT
EVENT

On
March 3, 2006, the Company entered into an asset purchase agreement with
Willitts Designs International, Inc. (Willitts) to acquire certain assets and
assume certain liabilities of Willitts. The purchase price will be equal to the
historical cost of the assets acquired less the obligations assumed as of the
closing date. The net purchase price is estimated to be approximately $3.5
million. In addition to the purchase price, the Company may be required to make
additional payments contingent on performance through 2009.

27

---



Table of Contents

RECENT
ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Consolidated Financial Statements
regarding discussion of new accounting standards.

EFFECT OF INFLATION

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

FORWARD-LOOKING
STATEMENTS AND FACTORS AFFECTING FUTURE EARNINGS

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

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

Such factors include, among other things, the
following: consumer acceptance of new products; changing public and consumer
taste; product development efforts; identification and retention of sculpting
and other talent; shift in product mix; completion of third-party product
manufacturing; customer reorders and order cancellations; the volume, number,
mix and timing of customer orders, reseller inventory policies, and the
Companys ability to forecast and fulfill changes in anticipated product
demand; control of operating expenses; collection of accounts receivable;
management of inventory; changes in the cost and availability of cargo
transportation, dockage and materials handling with respect to both the
importation of inventory and the shipment of product to the Companys
customers; the effect of regulations and operating protocols affecting the
importation of goods into the United States, including security measures
adopted by U.S. Customs in light of heightened terrorism; changes in foreign
exchange rates; 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,
Company-owned retail expansion, 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; industry, general economic, regulatory, transportation, labor, and
international trade and monetary conditions; adverse weather conditions,
natural disasters (such as hurricanes and epidemics), terrorist activities and
international political/military developments which may, among other things,
impair performance at the retail stores of the Company and its customers; and
actions of competitors. 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.

28

---



Table of Contents

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

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

The Companys market risks relate primarily to changes
in interest rates and currency exchange rates. The Companys interest rate risk
relates to its debt outstanding. The Companys credit facilities bear interest
at variable rates. As a result of this variable interest rate debt, the
Companys results of operations and cash flows will be exposed to changes in
interest rates. Based on debt outstanding at December 31, 2005, a 1% increase
or decrease in current market interest rates would have an impact of
approximately $1.1 million on an annual basis.

Less than 2% of the Companys wholesale sales and less
than 2% of the Companys sourced product purchases in fiscal year 2005 were
denominated in a foreign currency. Based on these sales and product purchases,
a 10% increase or decrease in the foreign currency exchange rates would have an
impact of less than $1.0 million. At this time, the Company does not use
derivative instruments to manage the exchange rate risk.

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

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

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

None.

29

---



Table of Contents

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

Evaluation of Disclosure Controls and
Procedures

As of the end
of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon
and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that those disclosure controls and procedures
were effective.

Managements Report on Internal Control over
Financial Reporting

Managements
Report on Internal Control over Financial Reporting on Page F-1 of this 2005
Annual Report on Form 10-K is incorporated herein by reference.

Report of Independent Registered Public
Accounting Firm

The Report of
Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting on page F-2 of this 2005 Annual Report on Form 10-K is
incorporated herein by reference.

Changes in Internal Control over Financial
Reporting

During the
fourth quarter, there has been no change in the Companys internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.

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

None.

30

---



Table of Contents

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

|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

SUSAN E. ENGEL
serves as Chairwoman of the Board and also as Chief Executive Officer of the
Company. Ms. Engels biographical information is set forth under Executive
Officers of the Registrant in Item 1 of this Annual Report on Form 10-K.

JAMES E.
BLOOM, 63, has been our director since November 2001. Mr. Bloom is a private
investor and was a business consultant with Bloom Consulting, Inc. from July
2001 to December 2005. From January 1995 to June 2001, he was Vice President -
Sales & Marketing with Charter Systems LLC, a software developer of
business communications solutions for the telecommunications industry. Mr.
Bloom has held a number of sales, marketing and managerial positions in the
business technology area with various companies, starting his career with IBM
Corporation in 1967.

CHARLES N.
HAYSSEN, 55, has been our director since March 2004. Mr. Hayssen has been Chief
Operating Officer of AllOver Media, Inc., an out-of-home media company, since
August 2004. Mr. Hayssen was a private investor from April 2004 to August 2004,
and Chief Financial Officer of ThinkEquity Partners LLC, an equity capital
markets firm, from September 2002 to April 2004. Prior to September 2002, Mr.
Hayssen was a private investor from November 2001 to September 2002, and Chief
Financial Officer of Access Cash International L.L.C. from February 2000 to
November 2001. Previously, Mr. Hayssen held a number of positions over a
nineteen-year career with Piper Jaffray Companies Inc., including three years
as Chief Information Officer, two years as Chief Operating Officer of Piper
Capital Management and eight years as Chief Financial Officer.

STEWART M.
KASEN, 66, has been our director since December 2000. Mr. Kasen has been
President of S&K Famous Brands, Inc., a retailer of menswear, since April
2002. He was President of Schwarzschild Jewelers, a retail jewelry chain, from
September 2001 to April 2002. From October 1999 until September 2001, Mr. Kasen
was a consultant to the retail industry and a private investor. He was
Chairman, President and Chief Executive Officer of Factory Card Outlet Corp., a
specialty retailer, from May 1998 until October 1999. Mr. Kasen is a public
company director of S&K Famous Brands, Inc., K2, Inc., Markel Corp., and
Retail Holdings N.V.

REATHA CLARK
KING, 67, has been our director since May 2002. Dr. King was President and
Executive Director of General Mills Foundation from November 1988 until May
2002, and served as Chairperson of the Foundations Board of Trustees from May
2002 until June 2003. She performs consulting work in organizational governance
and philanthropic programs. Currently, Dr. King is a Senior Advisor for the
Council on Foundations in Washington, D.C. Prior to joining General Mills
Foundation, Dr. King held a variety of scientific and educational positions.
She is a public company director of Exxon Mobil Corporation and Wells Fargo
& Company.

JOHN VINCENT
(VIN) WEBER, 53, has been our director since February 1993. Mr. Weber served in
the United States House of Representatives from 1981 to 1993, representing
Minnesotas 2nd Congressional District. Since 1994, Mr. Weber has been a
Partner of Clark & Weinstock, Inc., providing strategic advice to
institutions interested in issues before the legislative and executive branches
of the federal government. Mr. Weber is Chairman of the National Endowment for
Democracy, a private, nonprofit organization created in 1983 to strengthen
democratic institutions around the world through non-governmental efforts. He
was co-director of the Domestic Policy Project of the Aspen Institute and
currently serves as a full Trustee for the Institute. He also is a fellow at
the Humphrey Institute at the University of Minnesota, where he is a
co-director of the Policy Forum (formerly the Mondale Forum).

31

---



Table of Contents

Executive Officers

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

Compliance with Section 16(a) of the Exchange
Act

Information
required by this Item will be included in the 2006 Proxy Statement under the
heading Section 16(a) Beneficial Ownership Reporting Compliance, and such information
is incorporated herein by reference.

Audit Committee Members and Audit Committee
Financial Expert

Information
required by this Item will be included in the 2006 Proxy Statement under the
headings Corporate Structure and Audit Committee and such information is
incorporated herein by reference.

Code of Ethics and Business Conduct

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

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

Certifications

The
certifications of the Chief Executive Officer and the Chief Financial Officer
under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of
the Companys disclosure in this Annual Report on Form 10-K, have been filed as
exhibits 31.1 and 31.2 to this Annual Report on Form 10-K. The Companys Annual
CEO Certification as required by NYSE Rule 303A.12(a) has been submitted to the
New York Stock Exchange.

32

---



Table of Contents

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

Information
required by this Item will be included in the 2006 Proxy Statement Director
Compensation, Executive Compensation and Compensation Committee Interlocks
and Insider Participation and such information is incorporated herein by
reference.

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

Information
required by this Item will be included in the 2006 Proxy Statement in the
section captioned Equity Compensation Plan Information and Security
Ownership of Certain Beneficial Owners and Management, and such information is
incorporated herein by reference.

|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item will be included in the 2006
Proxy Statement in the section captioned Certain Relationships and Related Transactions and such information is
incorporated herein by reference.

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

Information
required by this Item will be included in the 2006 Proxy Statement in the
section captioned Principal Accountant Fees and Services and such information
is incorporated herein by reference.

33

---



Table of Contents

|       
|-------
|PART IV
|       

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

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

|   |  |                                                                                                       |    
|-- |  | ----------------------------------------------------------------------------------------------------- | ---
|   |  | Page                                                                                                 
|   |  |                                                                                                      
|1. |  | Financial
  Statements                                                                                |    
|   |  | Managements Report on
  Internal Control over Financial Reporting                                    | F-1
|   |  | Report of Independent
  Registered Public Accounting Firm  Internal Control over Financial Reporting | F-2
|   |  | Report of Independent
  Registered Public Accounting Firm  Consolidated Financial Statements         | F-4
|   |  | Consolidated Balance Sheets
  as of December 31, 2005 and January 1, 2005                             | F-5
|   |  | For the years ended
  December 31, 2005, January 1, 2005, and January 3, 2004:                        |    
|   |  | Consolidated Statements of Income                                                                     | F-6
|   |  | Consolidated Statements of Cash Flows                                                                 | F-7
|   |  | Consolidated Statements of Stockholders Equity                                                       | F-8
|   |  | Notes to Consolidated
  Financial Statements                                                          | F-9
|2. |  | Financial
  Statement Schedule                                                                        |    
|   |  | II. Valuation and
  Qualifying Accounts                                                               | S-1
|   |  | All other
schedules have been omitted because they are not applicable.                                |    
|3. |  | Exhibits                                                                                              |    
|   |  | Exhibits
required in connection with this Annual Report on Form 10-K
  are listed below.              |    

|        |             |                                                                                                                                                                                                                                                                                                                                                        
|------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit | Description
|        |            
|        | 3.1         | Restated Certificate of
  Incorporation of the Company. *                                                                                                                                                                                                                                                                                              
|        | 3.2         | Certificate of Designation,
  Preferences and Rights of Series A Junior Participating Preferred Stock of
  the Company. (Incorporated herein by reference to Exhibit 1.1 of the
  Companys Amendment No. 1, dated May 12, 1997, to Registration Statement on
  Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                                 
|        | 3.3         | Restated By-Laws of the
  Company. *                                                                                                                                                                                                                                                                                                                   
|        | 4.1         | Specimen Form of Companys
  Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of
  the Companys Annual Report on Form 10-K for the fiscal year ended December
  31, 1994. SEC File No. 1-11908.)                                                                                                                            
|        | 4.2         | Rights Agreement (including
  Exhibits A, B and C thereto) dated as of April 23, 1997, between the Company
  and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated
  herein by reference to Exhibit 1 of the Companys Registration Statement on
  Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                       
|        | 4.3         | First Amendment dated as of
  March 13, 1998, to Rights Agreement between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 1 to the Companys Amendment No. 2, dated March 16,
  1998, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File
  No. 1-11908.)
|        | 4.4         | Amendment No. 2 to Rights
  Agreement, dated as of February 25, 1999, between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 99.2 of the Companys Current Report on Form 8-K dated
  February 26, 1999. SEC File No. 1-11908.)                                           
|        | 4.5         | Letter Agreement Adopting
  the Rights Agreement, dated as of March 14, 2005, between the Company and
  Wells Fargo Shareholder Services, as Rights Agent. (Incorporated herein by
  reference Exhibit 4.5 of the Companys Report on Form 10-K dated March 17,
  2005. SEC File No. 1-11908.)                                                         
|        | 10.1        | Lease Agreement dated April
  14, 1999 between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
  Rogers warehouse and distribution facility. (Incorporated herein by reference
  to Exhibit 10.4 of the Companys Annual Report on Form 10-K for the fiscal
  year ended January 1, 2000. SEC File No. 1-11908.)                              
|        | 10.2        | Guaranty of Lease dated
  April 14, 1999 between the Company and Ryan Companies US, Inc. pertaining to
  the Rogers warehouse and distribution facility. (Incorporated herein by
  reference to Exhibit 10.5 of the Companys Annual Report on Form 10-K for the
  fiscal year ended January 1, 2000. SEC File No. 1-11908.)                           
|        | 10.3        | First Amendment to Lease
  Agreement between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
  Rogers warehouse and distribution facility, dated April 28, 2000.
  (Incorporated herein by reference to Exhibit 10.3 of the Companys Report on
  Form 10-K dated March 17, 2005. SEC File No. 1-11908.)                                      
|        | 10.4        | Second Amendment to Lease
  Agreement between D 56, Inc. and Ryan Companies US, Inc. pertaining to the
  Rogers warehouse and distribution facility, dated January 23, 2003.
  (Incorporated herein by reference to Exhibit 10.4 of the Companys Report on
  Form 10-K dated March 17, 2005. SEC File No. 1-11908.)                                   
|        | 10.5        | Credit Agreement, dated as
  of November 25, 2003 among the Company, the Bank parties thereto and Bank One
  NA as LC Issuer, Swing Line Lender and as Administrative Agent. (Incorporated
  herein by reference to Exhibit 10.1 of the Companys 8-K filed on December 1,
  2003. SEC File No. 1-11908.)                                              

34

---



Table of Contents

| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.6  | Guarantee and Collateral
  Assignment, dated as of November 25, 2003, by the Company and certain of its
  direct or indirect subsidiaries in favor of Bank One, NA (Incorporated herein
  by reference to Exhibit 10.2 of the Companys 8-K filed on December 1, 2003.
  SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 10.7  | Form of Indemnification
  Agreement between the Company and its directors and executive officers.
  (Incorporated herein by reference to Exhibit 10.24 of the Companys
  Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.8  | Department 56, Inc. 1992
  Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of the
  Companys Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10.9  | Department 56, Inc. 1993
  Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.10 of
  the Companys Annual Report on Form 10-K for the fiscal year ended December
  29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 10.10 | Department 56, Inc. 1995 Stock
  Incentive Plan. (Incorporated herein by reference to Exhibit 10.11 of the
  Companys Annual Report on Form 10-K for the fiscal year ended December 29,
  2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 10.11 | Department 56, Inc. 1997
  Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.12 of
  the Companys Annual Report on Form 10-K for the fiscal year ended December
  29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 10.12 | Department 56, Inc. 2004
  Cash Incentive Plan. (Incorporated herein by reference to Exhibit 10.10 of
  the Companys Annual Report on Form 10-K for the fiscal year ended January 3,
  2004. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10.13 | Department 56, Inc. 2004
  Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.11 of
  the Companys Annual Report on Form 10-K for the fiscal year ended January 3,
  2004. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10.14 | Form of Executive Stock
  Option Agreement in connection with Department 56, Inc. 1992 Stock Option
  Plan, Department 56, Inc. 1993 Stock Incentive Plan, Department 56, Inc. 1995
  Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.13 of the Companys Annual
  Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                         
| | 10.15 | Form of Performance 
  Accelerated Vesting Stock Option Agreement in connection with Department 56,
  Inc. 1993, 1995 and 1997 Stock Incentive Plans. (Incorporated herein by
  reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for
  the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.16 | Forms of Letter Agreement
  between the Company and its executive officers. (Incorporated herein by
  reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for
  the fiscal year ended December 28, 2002. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10.17 | Form of Department 56, Inc.
  Restricted Stock Agreement. (Incorporated herein by reference to Exhibit
  10.16 of the Companys Annual Report on Form 10-K for the fiscal year ended
  December 29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 10.18 | Form of Department 56, Inc.
  2001 Non-Officer Stock Option Plan. (Incorporated herein by reference to
  Exhibit 10.17 of the Companys Annual Report on Form 10-K for the fiscal year
  ended December 29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 10.19 | Asset Purchase Agreement By
  and Among Department 56, Inc., Axis Holdings Corporation, Axis Corporation,
  All Shareholders of Axis Corporation, and Kirk Willey in the Capacity of
  Shareholders Representative. (Incorporated herein by reference to Exhibit
  10.19 of the Companys Annual Report on Form 10-K for the fiscal year ended
  December 29, 2001. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.20 | Letter Agreement between
  Department 56, Inc. and David Dewey, dated December 15, 2003. (Incorporated
  herein by reference to Exhibit 10.18 of the Companys Annual Report on Form
  10-K for the fiscal year ended January 3, 2004. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10.21 | Separation Agreement and
  General Release between Department 56, Inc. and David Weiser, dated November
  9, 2004. (Incorporated herein by reference to Exhibit
  10.21 of the Companys Report on Form 10-K dated March 17, 2005. SEC File No.
  1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.22 | Form of Stock Option
  Agreement for Officers under the Department 56, Inc. 2004 Stock Incentive
  Plan. (Incorporated herein by reference to Exhibit 10.1 of the Companys Form
  8-K filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 10.23 | Form of Performance Share
  Agreement under the Department 56, Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.2 of the Companys Form 8-K
  filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.24 | Form of Stock Option
  Agreement for Directors under the Department 56, Inc. 2004 Stock Incentive
  Plan. (Incorporated herein by reference to Exhibit 10.3 of the Companys Form
  8-K filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10.25 | Form of Restricted Stock
  Agreement under the Department 56, Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.4 of the Companys Form 8-K
  filed March 14, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 10.26 | Department 56, Inc.
  Executive Nonqualified Excess Plan Adoption Agreement, dated February 17,
  2005, and Plan Document. (Incorporated herein by reference to Exhibit 10.26
  of the Companys Report on Form 10-K dated March 17, 2005. SEC File No. 1-11908)
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 10.27 | Stock Purchase Agreement,
  dated as of July 21, 2005, by and between Department 56, Inc. and
  Brown-Forman Corporation. (Incorporated herein by reference to Exhibit 10.1
  of the Companys Report on Form 8-K, filed on July 25, 2005. SEC File No. 1-11908.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 10.28 | Revolving Credit Agreement
  dated as of September 1, 2005, among D 56, Inc., Department 56 Retail, Inc.,
  Time to Celebrate Inc. and Lenox, Incorporated, as Borrowers, Department 56,
  Inc. and the other Guarantors party thereto, as Guarantors, the Lenders party
  thereto, UBS Securities LLC, as Arranger and Co-Syndication Agent, UBS AG,
  Stamford Branch, as Issuing Bank and Administrative Agent, UBS Loan Finance
  LLC, as Swingline Lender, JP Morgan Chase Bank, N.A., as Collateral Agent and
  Co-Syndication Agent, and Wells Fargo Foothill, LLC and Bank of America, N.A.
  as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.1
  of the Companys Report on Form 8-K, filed on September 6, 2005, SEC File No.
  1-11908.)
| | 10.29 | Term Loan Credit Agreement
  dated as of September 1, 2005, among D 56, Inc., Department 56 Retail, Inc.,
  Time to Celebrate, Inc. and Lenox, Incorporated, as Borrowers, Department 56,
  Inc. and the other Guarantors party thereto, as Guarantors, the Lenders party
  thereto, UBS Securities LLC, as Sole Arranger and Syndication Agent, UBS
  AG,Stamford Branch, as Administrative Agent and Collateral Agent, and Wells
  Fargo Foothill, LLC, as Documentation Agent. (Incorporated herein
  by reference to Exhibit 10.2 of the Companys Report on Form 8-K, filed on
  September 6, 2005, SEC File No. 1-11908.)                                                                                                                                                

35

---



Table of Contents

| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.30 | Security Agreement by D 56,
  Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc., and the other Guarantors party
  thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative Agent,
  dated as of September 1, 2005. (Incorporated herein by reference to Exhibit
  10.3 of the Companys Report on Form 8-K, filed on September 6, 2005, SEC
  File No. 1-11908.)
| | 10.31 | Security Agreement by D 56,
  Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox,
  Incorporated, as Borrowers, Department 56, Inc., and the other Guarantors
  party thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative
  Agent, dated as of September 1, 2005. (Incorporated herein by reference to
  Exhibit 10.4 of the Companys Report on Form 8-K, filed on September 6, 2005,
  SEC File No. 1-11908.)
| | 10.32 | Letter Agreement, dated
  September 26, 2005, between Linda Jones Miller and Department 56, Inc.
  (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
  Form 8-K, filed on September 28, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                  
| | 10.33 | Form of Retention Agreement
  between Lenox, Inc. and certain executive officers. (Incorporated herein by
  reference to Exhibit 10.1 of the Companys Report on Form 8-K, filed on
  November 2, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                                   
| | 10.34 | Form of Letter Agreement
  between Department 56, Inc. and certain executive officers. (Incorporated
  herein by reference to Exhibit 10.2 of the Companys Report on Form 8-K,
  filed on November 2, 2005, SEC File No. 1-11908.)                                                                                                                                                                                                              
| | 10.35 | Form of Restricted Stock
  Agreement for certain executive officers under the Department 56 2004 Stock
  Incentive Plan. (Incorporated herein by reference to Exhibit 10.3 of the
  Companys Report on Form 8-K, filed on November 2, 2005, SEC File No.
  1-11908.)                                                                                                                                                                            
| | 10.36 | 2005 Form of Stock Option
  Agreement for Officers under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.1 of the Companys Report on
  Form 8-K, filed on December 14, 2005, SEC File No. 1-11908.)                                                                                                                                                                                           
| | 10.37 | 2005 Form of Stock Option
  Agreement for Directors under the Lenox Group Inc. 2004 Stock Incentive Plan.
  (Incorporated herein by reference to Exhibit 10.2 of the Companys Report on
  Form 8-K, filed on December 14, 2005, SEC File No. 1-11908.)                                                                                                                                                                                          
| | 10.38 | Agreement of Lease, dated
  as of December 30, 2005, by and between Island View TCI, L.P. and Lenox,
  Incorporated. (Incorporated herein by reference to Exhibit 10.1 of the
  Companys Report on Form 8-K, filed on December 30, 2005, SEC File No.
  1-11908.)                                                                                                                                                                                
| | 10.39 | Agreement of Sale, dated as
  of December 30, 2005, by and between PREI Wheeler Way Associates, LP and
  Lenox, Incorporated. (Incorporated herein by reference to Exhibit 10.2 of the
  Companys Report on Form 8-K, filed on December 30, 2005, SEC File No.
  1-11908.)                                                                                                                                                                       
| | 21.1  | Subsidiaries of the
  Company. *                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 23.1  | Consent of Independent
  Registered Public Accounting Firm. *                                                                                                                                                                                                                                                                                                                                                                                     
| | 31.1  | Certification of Chief
  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  *                                                                                                                                                                                                                                                                                                                                         
| | 31.2  | Certification of Chief
  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  *                                                                                                                                                                                                                                                                                                                                         
| | 32.1  | Officer Certification
  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
  1350. *                                                                                                                                                                                                                                                                                                                                    

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

36

---



Table of Contents

SIGNATURES

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

|                     |                  |                            
|-------------------- | ---------------- | ---------------------------
|                     | LENOX GROUP INC.
|                     |                  |                            
|Date: March 16, 2006 | By:              | /s/
  SUSAN E. ENGEL       
|                     |                  |                            
|                     |                  | Susan
  E. Engel           
|                     |                  | Chairwoman of the Board    
|                     |                  | and Chief Executive Officer
|                     |                  |                            

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

|                            |  |                                  |  |               
|--------------------------- |  | -------------------------------- |  | --------------
|Signature                   |  | Capacity in which signed         |  | Date          
|                            |  |                                  |  |               
|                           
|/s/
  SUSAN E. ENGEL        |  | Chairwoman of the Board
  and    |  | March 16, 2006
|                            |  | Chief Executive Officer          |  |               
|Susan
  E. Engel            |  | (Principal Executive
  Officer)  |  |               
|                            |  |                                  |  |               
|/s/
  TIMOTHY J. SCHUGEL    |  | Chief Financial Officer
  and    |  | March 16, 2006
|                            |  | Chief Operating Officer          |  |               
|Timothy
  J. Schugel        |  | (Principal Financial
  Officer)  |  |               
|                            |  |                                  |  |               
|/s/
  GREGG A. PETERS       |  | Vice President of Finance
  and  |  | March 16, 2006
|                            |  | Principal Accounting
  Officer   |  |               
|Gregg
  A. Peters           |  | (Principal Accounting
  Officer) |  |               
|                            |  |                                  |  |               
|/s/
  JAMES E. BLOOM        |  | Director                         |  | March 16, 2006
|                            |  |                                  |  |               
|James
  E. Bloom            |  |                                  |  |               
|                            |  |                                  |  |               
|/s/
  STEWART M. KASEN      |  | Director                         |  | March 16, 2006
|                            |  |                                  |  |               
|Stewart
  M. Kasen          |  |                                  |  |               
|                            |  |                                  |  |               
|/s/
  DR. REATHA CLARK KING |  | Director                         |  | March 16, 2006
|                            |  |                                  |  |               
|Dr.
  Reatha Clark King     |  |                                  |  |               
|                            |  |                                  |  |               
|/s/
  CHARLES N. HAYSSEN    |  | Director                         |  | March 16, 2006
|                            |  |                                  |  |               
|Charles
  N. Hayssen        |  |                                  |  |               
|                            |  |                                  |  |               
|/s/
  JOHN V. WEBER         |  | Director                         |  | March 16, 2006
|                            |  |                                  |  |               
|John
  V. Weber             |  |                                  |  |               

37

---



Table of Contents

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Management
assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2005. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
ControlIntegrated Framework.

Based on this
assessment and those criteria, management believes the Companys internal
control over financial reporting was effective as of December 31, 2005.
Management has excluded from its assessment the internal control over financial
reporting at Lenox, Inc. which was acquired on September 1, 2005 and whose
financial statements reflect total assets and total revenues constituting 75
percent and 59 percent, respectively, of the related consolidated financial
statement amounts of the Company as of and for the year ended December 31,
2005. The Companys independent auditors have issued an attestation report on
managements assessment of the Companys internal control over financial
reporting. This report appears on the following page.

F-1

---



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Internal
Control over Financial Reporting

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

We have
audited managements assessment, included in the accompanying Managements
Report on Internal Controls over Financial Reporting, that Lenox Group Inc. and
subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO Framework). As described in Managements Report on Internal
Controls over Financial Reporting, management excluded from their assessment
the internal control over financial reporting at the Lenox, Inc. business
acquired on September 1, 2005 and whose financial statements reflect total
assets and revenues constituting 75 percent and 59 percent, respectively, of
the related Consolidated financial statement amount as of and for the year
ended December 31, 2005. Accordingly, our audit did not include the internal
control over financial reporting at the Lenox, Inc. business. The Companys
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.

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

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

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

F-2

---



Table of Contents

In our
opinion, managements assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated, in
all material respects, based on the criteria established in the COSO Framework.
Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on the criteria established in the COSO Framework.

We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31, 2005, of
the Company and our report dated March 16, 2006, expressed an unqualified
opinion on those financial statements and financial statement schedule.

(DELOITTE & TOUCHE LLP)

Minneapolis,
Minnesota 
March 16, 2006

F-3

---



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

Consolidated Financial Statements

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

We have audited the accompanying consolidated balance sheets of
Lenox Group Inc. and subsidiaries (the Company) (formerly Department 56, Inc.) as of December 31, 2005 and January 1,
2005 and the related consolidated statements of income, cash flows, and stockholders equity for the years ended December 31,
2005, January 1, 2005, and January 3, 2004. Our audits also included the financial statement schedule listed in the Index at Item
15. These financial statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2005 and
January 1, 2005, and the results of their operations and their cash flows for
the years ended December 31, 2005, January 1, 2005 and January 3, 2004, 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.

We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 16, 2006 expressed an
unqualified opinion on managements assessment of the effectiveness of the
Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial
reporting.

(DELOITTE & TOUCHE LLP)

Minneapolis, Minnesota
March 16, 2006

F-4

---



Table of Contents

|                                             
|---------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES            
|                                             
|CONSOLIDATED
  BALANCE SHEETS                
|(In
  thousands, except per share amounts)   
|AS OF
  DECEMBER 31, 2005 AND JANUARY 1, 2005
|                                             

|                                                                                                         |  |      |          |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- | - | -------- | -
|                                                                                                         |  | 2005 |          | 2004 |  
|ASSETS                                                                                                   |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Current assets:                                                                                          |  |      |          |      |   |          |  
|Cash and cash
equivalents                                                                                |  | $    | 1,279    |      | $ | 33,743   |  
|Short-term
investments                                                                                   |  |      |         |      |   | 11,150   |  
|Accounts receivable, net of
allowances of $13,534 and $6,403,
  respectively                             |  |      | 55,563   |      |   | 28,488   |  
|Inventories                                                                                              |  |      | 94,346   |      |   | 13,581   |  
|Deferred taxes                                                                                           |  |      | 13,380   |      |   | 4,304    |  
|Other current assets                                                                                     |  |      | 8,411    |      |   | 3,045    |  
|Current assets of discontinued
operations                                                                |  |      |         |      |   | 2,430    |  
|                                                                                                         |  |      |          |      |   |          |  
|Total current assets                                                                                     |  |      | 172,979  |      |   | 96,741   |  
|                                                                                                         |  |      |          |      |   |          |  
|Property and equipment, net                                                                              |  |      | 71,428   |      |   | 15,708   |  
|Assets held for sale                                                                                     |  |      | 17,018   |      |   |         |  
|Goodwill, net of
  accumulated amortization of $38,708                                                   |  |      | 53,769   |      |   | 37,074   |  
|Trademarks, net of
  accumulated amortization of $4,139                                                  |  |      | 121,971  |      |   | 13,761   |  
|Other intangibles, net of
  accumulated amortization of $3,510 and $2,049, respectively                  |  |      | 17,037   |      |   | 656      |  
|Marketable securities                                                                                    |  |      | 2,449    |      |   | 2,930    |  
|Other assets                                                                                             |  |      | 13,277   |      |   | 293      |  
|Noncurrent assets of
  discontinued operations                                                           |  |      |         |      |   | 225      |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  | $    | 469,928  |      | $ | 167,388  |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY                                                                   |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Current liabilities:                                                                                     |  |      |          |      |   |          |  
|Current portion of long-term
debt                                                                        |  | $    | 10,000   |      |   |          |  
|Borrowings on revolving credit
facility                                                                  |  |      | 10,468   |      |   |          |  
|Accounts payable                                                                                         |  |      | 31,270   |      | $ | 6,028    |  
|Accrued compensation and
benefits payable                                                                |  |      | 16,538   |      |   | 5,303    |  
|Income taxes payable                                                                                     |  |      | 6,590    |      |   | 1,547    |  
|Severance and restructuring
reserves                                                                     |  |      | 12,201   |      |   |         |  
|Other current
liabilities                                                                                |  |      | 6,554    |      |   | 1,516    |  
|Current liabilities of
discontinued operations                                                           |  |      | 32       |      |   | 53       |  
|                                                                                                         |  |      |          |      |   |          |  
|Total current
liabilities                                                                                |  |      | 93,653   |      |   | 14,447   |  
|                                                                                                         |  |      |          |      |   |          |  
|Deferred compensation
  obligation                                                                       |  |      | 2,489    |      |   | 2,929    |  
|Pension obligations                                                                                      |  |      | 87,014   |      |   |         |  
|Postretirement obligations                                                                               |  |      | 28,560   |      |   |         |  
|Deferred taxes                                                                                           |  |      | 1,424    |      |   | 5,425    |  
|Long-term debt                                                                                           |  |      | 90,250   |      |   |         |  
|Other noncurrent
  liabilities                                                                           |  |      | 4,789    |      |   | 830      |  
|                                                                                                         |  |      |          |      |   |          |  
|Commitments and
  contingencies (Note 14)                                                                |  |      |          |      |   |          |  
|                                                                                                         |  |      |          |      |   |          |  
|Stockholders equity:                                                                                    |  |      |          |      |   |          |  
|Preferred stock, $.01 par
value; authorized 20,000 shares; no shares
  issued                            |  |      |          |      |   |          |  
|Common stock, $.01 par value;
authorized 100,000 shares; issued 23,244
  and 22,769 shares, respectively |  |      | 232      |      |   | 228      |  
|Additional paid-in
capital                                                                               |  |      | 65,691   |      |   | 59,558   |  
|Unearned compensation 
restricted shares                                                                |  |      | (3,469   | )    |   | (233     | )
|Treasury stock, at cost; 9,214
and 9,204 shares, respectively                                            |  |      | (217,188 | )    |   | (217,109 | )
|Retained earnings                                                                                        |  |      | 316,483  |      |   | 301,313  |  
|                                                                                                         |  |      |          |      |   |          |  
|Total stockholders
equity                                                                               |  |      | 161,749  |      |   | 143,757  |  
|                                                                                                         |  |      |          |      |   |          |  
|                                                                                                         |  | $    | 469,928  |      | $ | 167,388  |  
|                                                                                                         |  |      |          |      |   |          |  

See notes to consolidated financial
statements.

F-5

---



Table of Contents

|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|CONSOLIDATED
  STATEMENTS OF INCOME                                 
|(In
  thousands, except per share amounts)                          
|YEARS
  ENDED DECEMBER 31, 2005, JANUARY 1, 2005 AND JANUARY 3, 2004
|                                                                    

|                                                        |  |   | 2005    |   |   | 2004    |   |   | 2003    |  
|------------------------------------------------------- |  | - | ------- | - | - | ------- | - | - | ------- | -
|                                                        |  |   |         |   |   |         |   |   |         |  
|NET SALES                                               |  | $ | 330,915 |   | $ | 162,908 |   | $ | 174,957 |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|COST OF SALES                                           |  |   | 174,985 |   |   | 76,617  |   |   | 81,069  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|Gross
profit                                            |  |   | 155,930 |   |   | 86,291  |   |   | 93,888  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|OPERATING EXPENSES -                                    |  |   |         |   |   |         |   |   |         |  
|Selling,
general and administrative                     |  |   | 123,441 |   |   | 51,175  |   |   | 52,695  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|OPERATING INCOME FROM
  CONTINUING OPERATIONS           |  |   | 32,489  |   |   | 35,116  |   |   | 41,193  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|OTHER EXPENSE (INCOME):                                 |  |   |         |   |   |         |   |   |         |  
|Interest
expense                                        |  |   | 5,735   |   |   | 493     |   |   | 1,901   |  
|Litigation
settlement                                   |  |   |        |   |   | (6,871  | ) |   |        |  
|Other,
net                                              |  |   | (744    | ) |   | (414    | ) |   | (906    | )
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME FROM CONTINUING
  OPERATIONS BEFORE INCOME TAXES |  |   | 27,498  |   |   | 41,908  |   |   | 40,198  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|PROVISION FOR INCOME TAXES                              |  |   | 10,146  |   |   | 15,088  |   |   | 14,529  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME FROM CONTINUING
  OPERATIONS                     |  |   | 17,352  |   |   | 26,820  |   |   | 25,669  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|LOSS FROM DISCONTINUED
  OPERATIONS, NET OF TAX         |  |   | (2,182  | ) |   | (3,036  | ) |   | (9,261  | )
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|NET INCOME                                              |  | $ | 15,170  |   | $ | 23,784  |   | $ | 16,408  |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME PER
  SHARE  BASIC:                             |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME FROM CONTINUING
  OPERATIONS                     |  | $ | 1.27    |   | $ | 2.01    |   | $ | 1.96    |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|LOSS FROM DISCONTINUED
  OPERATIONS                     |  |   | (0.16   | ) |   | (0.23   | ) |   | (0.71   | )
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|NET INCOME PER SHARE 
  BASIC                          |  | $ | 1.11    |   | $ | 1.78    |   | $ | 1.25    |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME PER
  SHARE  DILUTED:                           |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|INCOME FROM CONTINUING
  OPERATIONS                     |  | $ | 1.26    |   | $ | 1.98    |   | $ | 1.94    |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|LOSS FROM DISCONTINUED
  OPERATIONS                     |  |   | (0.16   | ) |   | (0.22   | ) |   | (0.70   | )
|                                                        |  |   |         |   |   |         |   |   |         |  
|                                                        |  |   |         |   |   |         |   |   |         |  
|NET INCOME PER SHARE 
  DILUTED                        |  | $ | 1.10    |   | $ | 1.76    |   | $ | 1.24    |  
|                                                        |  |   |         |   |   |         |   |   |         |  

See notes to consolidated
financial statements.

F-6

---



Table of Contents

|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|REVISED
  CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|(In
  thousands)                                                    
|YEARS
  ENDED DECEMBER 31, 2005, JANUARY 1, 2005 AND JANUARY 3, 2004
|                                                                    

|                                                                                    |  |   |          |   |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | - | -------- | - | - | ------- | - | - | ------- | -
|                                                                                    |  |   | 2005     |   |   | 2004    |   |   | 2003    |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|CASH FLOWS FROM OPERATING
  ACTIVITIES:                                             |  |   |          |   |   |         |   |   |         |  
|Net
income                                                                          |  | $ | 15,170   |   | $ | 23,784  |   | $ | 16,408  |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|Adjustments to
reconcile net income to net cash provided by operating
  activities: |  |   |          |   |   |         |   |   |         |  
|Loss from
discontinued operations                                                   |  |   | 2,182    |   |   | 3,036   |   |   | 9,261   |  
|Depreciation                                                                        |  |   | 6,872    |   |   | 3,609   |   |   | 4,331   |  
|Loss on
disposal of assets                                                          |  |   | 674      |   |   | 184     |   |   | 37      |  
|Amortization
of other intangibles                                                   |  |   | 1,460    |   |   | 140     |   |   | 144     |  
|Amortization
of deferred financing fees                                             |  |   | 796      |   |   | 75      |   |   | 474     |  
|Compensation
expense  restricted shares                                            |  |   | 766      |   |   | 262     |   |   | 240     |  
|Deferred
taxes                                                                      |  |   | (2,413   | ) |   | 1,311   |   |   | (89     | )
|Tax benefit
related to stock options exercised                                      |  |   | 272      |   |   | 519     |   |   | 162     |  
|Changes in assets and
  liabilities:                                                |  |   |          |   |   |         |   |   |         |  
|Accounts
receivable                                                                 |  |   | 12,030   |   |   | (7,489  | ) |   | 11,621  |  
|Inventories                                                                         |  |   | 36,442   |   |   | (2,281  | ) |   | (1,896  | )
|Other
assets                                                                        |  |   | 2,600    |   |   | (667    | ) |   | (2,396  | )
|Accounts
payable                                                                    |  |   | (15,425  | ) |   | 536     |   |   | (553    | )
|Accrued
compensation and benefits payable                                           |  |   | (146     | ) |   | (46     | ) |   | (3,908  | )
|Income taxes
payable                                                                |  |   | 2,275    |   |   | (1,966  | ) |   | 261     |  
|Pension &
postretirement obligations                                                |  |   | (1,915   | ) |   |        |   |   |        |  
|Other
liabilities                                                                   |  |   | (414     | ) |   | 623     |   |   | 1,241   |  
|Net cash (used
in) provided by operating activities from discontinued
  operations  |  |   | (803     | ) |   | 3,303   |   |   | 3,677   |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|Net cash
provided by operating activities                                           |  |   | 60,423   |   |   | 24,933  |   |   | 39,015  |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|CASH FLOWS FROM INVESTING
  ACTIVITIES:                                             |  |   |          |   |   |         |   |   |         |  
|Purchases of
property and equipment                                                 |  |   | (1,905   | ) |   | (2,184  | ) |   | (2,451  | )
|Acquisition of
Lenox                                                                |  |   | (204,036 | ) |   |        |   |   |        |  
|Net sale
(purchase) of available-for-sale securities                                |  |   | 11,150   |   |   | (1,150  | ) |   | (1,175  | )
|Net cash used
in investing activities from discontinued operations                  |  |   |         |   |   | (29     | ) |   | (59     | )
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|Net cash used
in investing activities                                               |  |   | (194,791 | ) |   | (3,363  | ) |   | (3,685  | )
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|CASH FLOWS FROM FINANCING
  ACTIVITIES:                                             |  |   |          |   |   |         |   |   |         |  
|Proceeds from
the exercise of common stock options                                  |  |   | 1,640    |   |   | 4,862   |   |   | 909     |  
|Payments of
deferred financing fees                                                 |  |   | (10,125  | ) |   |        |   |   | (225    | )
|Borrowings on
revolving credit agreement                                            |  |   | 121,500  |   |   | 15,000  |   |   | 42,000  |  
|Principal
payments on revolving credit agreement                                    |  |   | (111,032 | ) |   | (15,000 | ) |   | (42,000 | )
|Purchases of
treasury stock                                                         |  |   | (79      | ) |   | (146    | ) |   | (221    | )
|Borrowings
(payments) on long-term debt                                             |  |   | 100,000  |   |   |        |   |   | (54,000 | )
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|Net cash
provided by (used in) financing activities                                 |  |   | 101,904  |   |   | 4,716   |   |   | (53,537 | )
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|NET (DECREASE) INCREASE IN
  CASH AND CASH EQUIVALENTS                              |  |   | (32,464  | ) |   | 26,286  |   |   | (18,207 | )
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                                  |  |   | 33,743   |   |   | 7,457   |   |   | 25,664  |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  
|CASH AND CASH EQUIVALENTS
  AT END OF PERIOD                                        |  | $ | 1,279    |   | $ | 33,743  |   | $ | 7,457   |  
|                                                                                    |  |   |          |   |   |         |   |   |         |  

See notes to consolidated
financial statements.

F-7

---



Table of Contents

|                                                                    
|--------------------------------------------------------------------
|LENOX GROUP INC. AND SUBSIDIARIES                                   
|                                                                    
|CONSOLIDATED
  STATEMENTS OF STOCKHOLDERS EQUITY                   
|(In
  thousands)                                                    
|YEARS
  ENDED DECEMBER 31, 2005, JANUARY 1, 2005 AND JANUARY 3, 2004
|                                                                    

|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|--------------------------------------------------------- |  | --------------- | ------ | ----------------------------- |  | ------ | --------------------------------------------- | ------------------------------ | --- |  | ---------------- | ------ | ------------------- | - | ------------------------------ | - | - | -------- | - | - | ------- |  | - | ------- | -
|                                                          |  | Common Stock    |        |                               |  |        | Unearned
  Compensation
  Restricted
  Shares |                                |     |  |                  |        |                     |   |                                |   |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |  
|                                                          |  | Shares
  Issued |        | Treasury
  Shares
  Purchased |  | Amount |                                               | Additional
  Paid-in
  Capital |     |  | Treasury
  Stock |        | Retained
  Earnings |   | Total
  Stockholders
  Equity |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |  
|BALANCE AS OF
  DECEMBER 28, 2002                         |  |                 | 22,259 |                               |  | (9,178 | )                                             | $                              | 223 |  | $                | 52,900 |                     | $ | (754                           | ) | $ | (216,742 | ) | $ | 261,121 |  | $ | 96,748  |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|Net
income                                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   | 16,408  |  |   | 16,408  |  
|Shares issued
  upon the exercise of common stock options |  |                 | 100    |                               |  |        |                                               |                                | 1   |  |                  | 908    |                     |   |                                |   |   |          |   |   |         |  |   | 909     |  
|Tax benefit
  related to stock options exercised          |  |                 |        |                               |  |        |                                               |                                |     |  |                  | 162    |                     |   |                                |   |   |          |   |   |         |  |   | 162     |  
|Restricted
shares
  surrendered                           |  |                 |        |                               |  | (17    | )                                             |                                |     |  |                  |        |                     |   |                                |   |   | (221     | ) |   |         |  |   | (221    | )
|Restricted
shares
  vested                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   | 240                            |   |   |          |   |   |         |  |   | 240     |  
|Other                                                     |  |                 | 4      |                               |  |        |                                               |                                |     |  |                  | 50     |                     |   |                                |   |   |          |   |   |         |  |   | 50      |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|BALANCE AS OF
  JANUARY 3, 2004                           |  |                 | 22,363 |                               |  | (9,195 | )                                             |                                | 224 |  |                  | 54,020 |                     |   | (514                           | ) |   | (216,963 | ) |   | 277,529 |  |   | 114,296 |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|Net
income                                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   | 23,784  |  |   | 23,784  |  
|Shares issued
  upon the exercise of common stock options |  |                 | 398    |                               |  |        |                                               |                                | 4   |  |                  | 4,858  |                     |   |                                |   |   |          |   |   |         |  |   | 4,862   |  
|Tax benefit
  related to stock options exercised          |  |                 |        |                               |  |        |                                               |                                |     |  |                  | 519    |                     |   |                                |   |   |          |   |   |         |  |   | 519     |  
|Restricted
shares
  surrendered                           |  |                 |        |                               |  | (9     | )                                             |                                |     |  |                  |        |                     |   | 53                             |   |   | (146     | ) |   |         |  |   | (93     | )
|Restricted
shares
  vested                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  | 34     |                     |   | 228                            |   |   |          |   |   |         |  |   | 262     |  
|Other                                                     |  |                 | 8      |                               |  |        |                                               |                                |     |  |                  | 127    |                     |   |                                |   |   |          |   |   |         |  |   | 127     |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|BALANCE AS OF
  JANUARY 1, 2005                           |  |                 | 22,769 |                               |  | (9,204 | )                                             |                                | 228 |  |                  | 59,558 |                     |   | (233                           | ) |   | (217,109 | ) |   | 301,313 |  |   | 143,757 |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|Net
income                                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   | 15,170  |  |   | 15,170  |  
|Shares issued
  upon the exercise of common stock options |  |                 | 148    |                               |  |        |                                               |                                | 1   |  |                  | 1,639  |                     |   |                                |   |   |          |   |   |         |  |   | 1,640   |  
|Tax benefit
  related to stock options exercised          |  |                 |        |                               |  |        |                                               |                                |     |  |                  | 272    |                     |   |                                |   |   |          |   |   |         |  |   | 272     |  
|Restricted
shares
  surrendered                           |  |                 |        |                               |  | (10    | )                                             |                                |     |  |                  | (67    | )                   |   | 67                             |   |   | (79      | ) |   |         |  |   | (79     | )
|Restricted
shares
  vested                                |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   | 766                            |   |   |          |   |   |         |  |   | 766     |  
|Restricted
shares
  issued                                |  |                 | 309    |                               |  |        |                                               |                                | 3   |  |                  | 4,066  |                     |   | (4,069                         | ) |   |          |   |   |         |  |   | 0       |  
|Other                                                     |  |                 | 18     |                               |  |        |                                               |                                |     |  |                  | 223    |                     |   |                                |   |   |          |   |   |         |  |   | 223     |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  
|BALANCE AS OF
  DECEMBER 31, 2005                         |  |                 | 23,244 |                               |  | (9,214 | )                                             | $                              | 232 |  | $                | 65,691 |                     | $ | (3,469                         | ) | $ | (217,188 | ) | $ | 316,483 |  | $ | 161,749 |  
|                                                          |  |                 |        |                               |  |        |                                               |                                |     |  |                  |        |                     |   |                                |   |   |          |   |   |         |  |   |         |  

See notes to consolidated
financial statements.

F-8

---



Table of Contents

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

|   |                                             
|-- | --------------------------------------------
|1. | SUMMARY OF
  SIGNIFICANT ACCOUNTING POLICIES

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Business Lenox Group Inc. and its subsidiaries (the Company) is a
  leading designer, distributor, wholesaler and retailer of fine quality
  tabletop, collectibles and other giftware products. The Company sells its
  product through gift, specialty retailers, department stores, and general
  merchandise chains, as well as through the Companys own retail stores and
  consumer-direct channels of distribution, including Internet, catalog and
  mail order. The Company markets its products principally under the Department
  56, Lenox, Dansk and Gorham brand names. The majority of the Companys
  products are developed and designed by the Companys in-house creative team
  and are manufactured for the Company by independently owned foreign
  manufacturers located primarily in the Peoples Republic of China. The
  Company also owns and operates two domestic manufacturing facilities that
  produce certain of its products. Approximately 3% of total revenue is derived
  from customers outside the United States and all long-lived assets are
  located within the United States.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Principles of Consolidation The
  consolidated financial statements of the Company include the accounts of the
  Company and its subsidiaries. All significant intercompany accounts and
  transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Effective September 1,
  2005, the Company completed the acquisition of Lenox, Inc. (Lenox). These
  financial statements and footnotes reflect the Lenox assets acquired,
  liabilities assumed, and results of operations of Lenox from the acquisition
  date of September 1, 2005. See Note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Fiscal Year End  The Companys policy is to
  end its fiscal year on the Saturday closest to December 31. The year
  ended January 3, 2004 includes 53 weeks and the years ended December 31, 2005
  and January 1, 2005 include 52 weeks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Management Estimates The preparation of
  financial statements in conformity with accounting principles generally
  accepted in the United States of America requires management to make
  estimates and assumptions that affect the reported amounts of assets and
  liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting period. Actual results could differ from those
  estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Cash Equivalents All highly liquid debt instruments
  with original maturities of three months or less are considered to be cash
  equivalents. These investments are carried at cost, which approximates market
  value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Short-Term
  Investments  The
  Companys short-term investments consist of Auction Rate Securities which
  represent funds available for current operations. In accordance with SFAS No.
  115, Accounting for Certain Investments in
  Debt and Equity Securities, these short-term investments are
  classified as available-for-sale and are carried at cost, or par value which
  approximates the fair market value. These securities have stated maturities
  beyond three months but are priced and traded as short-term instruments due
  to the liquidity provided through the interest rate mechanism of 28 to 49 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-9

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marketable
  Securities The
  Company classifies the marketable securities designated to fund its deferred
  compensation plan as trading securities under SFAS No. 115. In accordance
  with the provisions of this statement, the investment balance is stated at
  fair market value, based on quoted market prices. Realized and unrealized
  gains and losses are reflected in earnings. As the assets designated to fund
  the deferred compensation plan reflect amounts due to employees (but
  available for general creditors of the Company in the event the Company
  becomes insolvent), the Company has recorded the investment balance as a
  non-current asset and has established a corresponding other long-term
  liability entitled Deferred compensation obligation on the Consolidated
  Balance Sheets.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Allowance
  for Sales Returns and Credits The Company records an allowance for credits related to possible
  returned or damaged product, markdowns and pricing and shipping
  discrepancies. The allowance is based on historical ratios of credit to
  sales, the historical average length of time between the sale and the credit,
  and other factors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Allowance
  for Doubtful Accounts
  The Company records an allowance for estimated uncollectible accounts
  receivable based on an evaluation of its accounts receivable balance. This
  evaluation includes a number of factors including the age of the receivable,
  the financial condition of the customer, the current business environment,
  and the historical collection experience for customers of similar background
  and nature.                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Inventories Inventories consist of raw materials,
work-in-process and finished
  goods and are stated at the lower of average cost, which approximates
  first-in, first-out cost, or net realizable value. For product sourced from
  independent manufacturers, the Company records inventory at the date of
  taking title, which typically occurs when product is delivered to a foreign
  port. As a result, at certain times during the year, the Company has
  significant in-transit quantities, as inventory is sourced primarily from the
  Peoples Republic of China and other Pacific Rim countries. Each period, the
  Company adjusts identified excess and slow-moving inventory to its net
  realizable value.                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Property
  and Equipment
  Property and equipment are stated at cost. Depreciation is computed on a
  straight-line method over the estimated useful lives of the assets (or in the
  case of leasehold improvements, the shorter of the estimated useful lives or
  lease terms). Estimated useful lives of the Companys property and equipment
  are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Major improvements and
  replacements of property are capitalized. Maintenance, repairs, and minor
  improvements are expensed. Assets held for sale are stated at the lower of
  their carrying amount or fair value, less costs to sell.                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Long-Lived
  Assets  The
  Companys principal long-lived assets are its property and equipment which
  consists of its corporate headquarter buildings, its manufacturing
  facilities, its distribution centers, and the computer equipment, furniture
  and fixtures, machinery, and leasehold improvements at its corporate
  headquarter buildings, distribution centers, showrooms and retail stores. The
  Company annually reviews its long-lived assets for impairment.

F-10

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill,
  Trademarks, and Other Intangible Assets Goodwill represents the excess of the
  cost of acquired businesses over the fair value of identifiable tangible net
  assets and identifiable intangible assets purchased. The Companys recorded
  goodwill results primarily from the 1992 purchase of the Company by Forstmann
  Little and the 2005 acquisition of Lenox by the Company. Goodwill is tested
  for impairment on an annual basis. During the fourth quarter of 2005, the
  Company completed its annual impairment test of goodwill and determined there
  was no impairment.                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The primary identifiable
  intangible assets of the Company include trademarks, customer relationships,
  favorable lease interests and non-compete agreements. Under the provisions of
  SFAS No. 142, identifiable intangibles with finite lives are amortized and those
  identifiable intangibles with indefinite lives are not amortized.
  Identifiable intangible assets that are subject to amortization are evaluated
  for impairment whenever events or changes in circumstances indicate that the
  carrying amount may not be recoverable. Identifiable intangible assets not
  subject to amortization are tested for impairment annually or more frequently
  if events warrant. The impairment test consists of a comparison of the fair
  value of the intangible asset with its carrying amount. During the fourth
  quarter of 2005, the Company completed its annual impairment test for those
  identifiable assets not subject to amortization and determined there was no
  impairment.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Deferred
  Financing Fees
  The Company amortizes deferred financing fees over the life of the related
  debt agreement. Deferred financing fee amortization is included in interest
  expense in the Companys Consolidated Statements of Income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Revenue
  Recognition  The
  Company sells its products through wholesale channels, through Company-owned
  retail stores, and directly to consumers. Revenue from sales to wholesale
  customers and from sales direct to the consumer is recognized when product is
  shipped, while revenue from sales of merchandise to retail customers is
  recognized at the time of sale. The Company believes that these are the times
  when persuasive evidence of an arrangement exists, delivery has occurred, the
  Companys price is fixed and collectibility is reasonably assured. Revenue is
  recognized net of any applicable discounts and allowances. Customers, whether
  wholesale, retail or direct, do have the right to return product in certain
  limited situations. Such rights of return have not precluded revenue
  recognition because the Company has a long history with such returns on which
  it constructs a reserve.                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Cost of
  Sales  The
  Companys cost of sales principally includes the cost of product purchased
  from manufacturers, cost of manufactured product, inbound and outbound
  freight cost, duties, royalties, provisions for excess and obsolete product,
  and certain costs to develop new product samples, sculpt product, purchase
  and receive product, inspect product and warehouse product.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Selling,
  General and Administrative Expense The Companys selling, general and administrative expenses
  principally consist of expenses associated with the companys wholesale sales
  force and retail stores, corporate compensation and benefit expense,
  facilities expense, bad debt expense, marketing and advertising expense, and
  other general and administrative expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Advertising
  Expense  The
  Company records advertising expense in accordance with Statement of Position
  No. 93-7. Advertising expense is principally expensed when incurred. Certain
  direct response advertising costs are capitalized and amortized over periods
  not exceeding one year. Capitalized direct response advertising costs
  included on the Companys Consolidated Balance Sheets in other current assets
  for December 31, 2005 and January 1, 2005 were $2,061 and $0, respectively.
  Advertising expense (including amortization of direct response advertising
  costs and Payments to Customers described below) for 2005, 2004, and 2003
  was $19,561, $1,476, $2,487, respectively. The significant increase in
  advertising expense for 2005 compared to 2004 and 2003 was due to the
  acquisition of Lenox. These amounts are included in selling, general and
  administrative expense within the Companys Consolidated Statements of
  Income.                      

F-11

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Payments
  to Customers The
  Company reimburses certain customers for cooperative advertising based on
  pre-negotiated amounts or up to a pre-determined percentage of the amount of
  product shipped to the customer. Cooperative advertising costs under these
  programs are expensed when product is shipped to the customer. Cooperative
  advertising expense for 2005, 2004, and 2003 was $4,711, $1,203, and $986,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Product
  Development Expense
   The Companys product development costs consist principally of salaries for
  internal creative talent, royalties paid to outside artists, and costs
  incurred in developing product samples. The Company expenses as incurred the
  salaries of creative talent and records it in selling, general and
  administrative expense. The Company capitalizes into inventory the cost of royalties
  paid to outside artists and records it in cost of sales as the product is
  sold. The cost to develop product samples is expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Freight
Expense Freight
expenses for products shipped to customers (freight-out) are included in the
cost of products sold, in accordance with Emerging Issues Task Force Issue
No. 00-10, Accounting for Shipping and Handling Fees and Costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Pre-Opening
  Costs Non-capital
  expenditures associated with opening new Company-operated retail stores are
  expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Income
  Taxes  Deferred
  income taxes are recognized for the tax consequences in future years of
  differences between the tax bases of assets and liabilities and their
  financial reporting amounts at each year-end based on enacted tax laws and
  statutory tax rates applicable to the periods in which the differences are
  expected to affect taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Foreign
  Currency Exchange Rate Gains and Losses  The Company imports most of its products
  and, while the majority of these purchases are denominated in United States
  dollars, some of the purchases are denominated in foreign currency. In
  addition, the Companys sales to Canadian customers are denominated in
  Canadian dollars. Foreign exchange rate gains and losses are included in other
  expense (income) within the accompanying Consolidated Statements of Income.
  During 2005, 2004, and 2003 the Company benefited from the appreciation of
  the Canadian dollar relative to the United States dollar and recognized gains
  in foreign currency of $181, $303 and $677, respectively. The Company may
  periodically enter into foreign exchange contracts or build foreign currency
  deposits as a partial hedge against currency fluctuations. The Company has
  not entered into any foreign exchange contracts during 2005, 2004 or 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Pension and Postretirement Benefits  The Company
  sponsors various defined benefit pension plans as well as postretirement
  plans providing retiree health care and retiree life insurance benefits.
  Benefits are based on such factors as years of service and compensation level
  during employment. The benefits expected to be paid are expensed over the
  employees expected service. To determine the expected benefits to be paid,
  the Company has to make assumptions regarding interest rates, return on plan
  assets, the rate of salary increases, and expected health care trend rates.
  Actual experience different from these assumptions could result in materially
  different benefit payments.                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Fair
  Value of Financial Instruments  The Companys financial instruments are cash, short-term
  investments, marketable securities, accounts receivable, accounts payable,
  borrowings on revolving credit facility and long-term debt. The recorded
  amounts of cash, marketable securities, accounts receivable, accounts payable
  and borrowings on revolving credit facility approximate their fair value
  based on their short term nature. The recorded value of long term-debt
  approximates its fair market value as the Companys interest rates are
  variable and approximate market rates.                                                                                                                                                                                                                                                                                                                                                               

F-12

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock-Based Compensation  The Companys
  stock-based compensation plans consist of fixed stock options and restricted
  stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company
applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for options granted. Had compensation
cost been determined based on the fair value of the 2005, 2004, and 2003
stock option grants consistent with the method of SFAS No. 123, Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, the Companys net income and net income
per common share assuming dilution would have been reduced to the pro forma
amounts indicated below:

| |                                                    |  |      |        |      |   |        |  |   |        | 
| | -------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
| |                                                    |  | 2005 |        | 2004 |   | 2003   | 
| | Net income:                                        |  |      |        |      |   |        |  |   |        | 
| | As
reported                                        |  | $    | 15,170 |      | $ | 23,784 |  | $ | 16,408 | 
| | Pro
forma                                          |  |      | 12,782 |      |   | 22,197 |  |   | 14,518 | 
|
| | Net income per common share
 basic:               |  |      |        |      |   |        |  |   |        | 
| | As
reported                                        |  | $    | 1.11   |      | $ | 1.78   |  | $ | 1.25   | 
| | Pro
forma                                          |  |      | 0.94   |      |   | 1.66   |  |   | 1.11   | 
|
| | Net income per common share
 assuming
  dilution: |  |      |        |      |   |        |  |   |        | 
| | As
reported                                        |  | $    | 1.10   |      | $ | 1.76   |  | $ | 1.24   | 
| | Pro
forma                                          |  |      | 0.93   |      |   | 1.64   |  |   | 1.10   | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In determining the preceding pro forma amounts under SFAS No.
148, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2005, 2004, and 2003, respectively: risk-free interest rates of 4.1
percent, 3.8 percent, and 3.3 percent; expected volatility of 32, 50, and 50 percent; expected lives of six years; and no expected
dividends. The effects of applying SFAS No. 148 in this pro forma disclosure are not indicative of future compensation costs;
additional awards are anticipated.                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | For issuances of restricted stock, the Company records unearned
compensation expense on the grant date based on the fair market value of the Companys stock and amortizes the balance over
the vesting period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Net Income (Loss) per Common Share Net income per
common share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Net
income per common share assuming dilution reflects per share amounts that would have resulted had the Companys dilutive
outstanding stock options been converted to common stock. Restricted stock is considered outstanding on the date the stock becomes
vested when computing net income per common share  basic. Restricted stock, to the extent it is probable that the stock will
become vested, is considered outstanding on the grant date when computing net income per common share  assuming dilution.
See Note 17.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Reclassifications Certain previous year amounts
have been reclassified to conform to current year presentation. These reclassifications had no impact on consolidated net income
or retained earnings as previously reported.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Auction rate securities, previously classified as cash and cash
equivalents, are now classified as short-term investments for all periods presented. The Company classifies these short-term
investments as available-for-sale securities under SFAS No. 115. As of December 31, 2005 and January 1, 2005 auction
rate securities were $0 and $11,150, respectively.                                                                                                                                                                                                                                                                                                                                            

F-13

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2005, the Company has separately disclosed the operating and
investing portion of the cash flows attributable to its discontinued operations, which in prior periods were reported on a
combined basis as a single amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | New Accounting Standards In December 2004, the
Financial Accounting Standards Board (FASB) issued SFAS No. 123R (revised 2004), Share-Based Payment, which replaces SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. On April 14, 2005, the SEC announced a deferral of the effective date of SFAS 123(R) which will require the
Companys adoption in the first quarter of 2006. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition.
Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods
include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods
may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method
requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first
quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options
and restricted stock beginning with the first period restated. The Company has determined that it will adopt the modified
prospective transition method. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of
SFAS No. 123R will have a material impact on its consolidated results of operations and earnings per share.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | In November 2004, the FASB issued SFAS No. 151, Inventory
Costs - an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other things, the new rule requires that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current period charges regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by the Company on January 1, 2006. The Company is currently evaluating
the effect that the adoption of SFAS No. 151 will have on its consolidated results of operations and financial condition but does
not expect SFAS No. 151 to have a material impact.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-14

---



Table of Contents

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

| |                                              |  |         |        |                        |      |         |  |                        |        |         |      |                        |  |   |        |   |      |   | 
| | -------------------------------------------- |  | ------- | ------ | ---------------------- | ---- | ------- |  | ---------------------- | ------ | ------- | ---- | ---------------------- |  | - | ------ | - | ---- | - | 
| |                                              |  | 2005    |        | 2004                   |      | 2003    | 
| |                                              |  |         |        |                        |      |         | 
| |                                              |  | Dollars |        | Percent of
  Net Sales |      | Dollars |  | Percent of
  Net Sales |        | Dollars |      | Percent of
  Net Sales | 
| |                                              |  |         |        |                        |      |         |  |                        |        |         |      |                        | 
|
| | Net sales                                    |  | $       | 2,038  |                        | 100  | %       |  | $                      | 1,807  |         | 100  | %                      |  | $ | 879    |   | 100  | % | 
| | Gross profit                                 |  |         | (215   | )                      | (11  | )       |  |                        | 176    |         | 10   |                        |  |   | (187   | ) | (21  | ) | 
| | Selling, general and
administrative expenses |  |         | 3,054  |                        | 150  |         |  |                        | 2,689  |         | 149  |                        |  |   | 1,219  |   | 139  |   | 
| | Loss from operations                         |  |         | (3,269 | )                      | (160 | )       |  |                        | (2,513 | )       | (139 | )                      |  |   | (1,406 | ) | (160 | ) | 
| | Other expense                                |  |         | 140    |                        | 7    |         |  |                        | 87     |         | 5    |                        |  |   | 37     |   | 4    |   | 
| | Loss before income
taxes                     |  |         | (3,409 | )                      | (167 | )       |  |                        | (2,600 | )       | (144 | )                      |  |   | (1,443 | ) | (164 | ) | 
| | Income tax benefit                           |  |         | 1,227  |                        | 60   |         |  |                        | 936    |         | 52   |                        |  |   | 520    |   | 59   |   | 
| | Net loss                                     |  |         | (2,182 | )                      | (107 | )       |  |                        | (1,664 | )       | (92  | )                      |  |   | (923   | ) | (105 | ) | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December
  2003, the Company committed to a plan to cease operations of its Geppeddo
  seasonal kiosk business. Geppeddo ceased operations during the first quarter
  of 2004, and in accordance with SFAS No. 144, the Company has reclassified
  Geppeddos results into discontinued operations for all periods presented.
  Prior to being classified as discontinued operations, Geppeddos operating
  results had been presented in the retail reportable segment.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | As a result
  of the decision to cease Geppeddos operations, the Company recognized $9,140
  in asset impairment charges in 2003. The charges included an $8,193 charge
  related to the full write-off of goodwill, trademarks, and other intangible
  assets, and a $947 charge related to the impairment of long-lived assets. In
  addition, the Company recognized a $607 charge within cost of sales to
  write-down inventory to its net realizable value.          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The results
  from Geppeddos operations are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                              |  |         |        |                        |     |         |  |                        |         |   |     |   | 
| | -------------------------------------------- |  | ------- | ------ | ---------------------- | --- | ------- |  | ---------------------- | ------- | - | --- | - | 
| |                                              |  | 2004    |        | 2003                   |    
| |                                              |  |         |        |                        |    
| |                                              |  | Dollars |        | Percent of
  Net Sales |     | Dollars |  | Percent of
  Net Sales |        
| |                                              |  |         |        |                        |     |         |  |                        |        
|
| | Net sales                                    |  | $       | 3,396  |                        | 100 | %       |  | $                      | 15,877  |   | 100 | % | 
| | Gross profit                                 |  |         | 855    |                        | 25  |         |  |                        | 8,960   |   | 56  |   | 
| | Selling, general and
administrative expenses |  |         | 3,147  |                        | 93  |         |  |                        | 12,861  |   | 81  |   | 
| | Impairment of assets                         |  |         |       |                        |    |         |  |                        | 9,140   |   | 58  |   | 
| | Amortization of other
intangibles            |  |         |       |                        |    |         |  |                        | 92      |   | 1   |   | 
| | Loss from operations                         |  |         | (2,292 | )                      | (67 | )       |  |                        | (13,133 | ) | (83 | ) | 
| | Other income                                 |  |         | (147   | )                      | 4   |         |  |                        | (14     | ) |    |   | 
| | Loss before income
taxes                     |  |         | (2,145 | )                      | (63 | )       |  |                        | (13,119 | ) | (83 | ) | 
| | Income tax benefit                           |  |         | 773    |                        | 23  |         |  |                        | 4,781   |   | 30  |   | 
| | Net loss                                     |  |         | (1,372 | )                      | (40 | )       |  |                        | (8,338  | ) | (53 | ) | 

F-15

---



Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Effective
  September 1, 2005, the Company completed the acquisition of all of the
  capital stock of Lenox from Brown-Forman, Inc. (Brown-Forman) for $204.0
  million, which included transaction costs of $7.6 million. The acquisition of
  Lenox, which sells products under the Lenox, Dansk, and Gorham brand names,
  added strong, market-leading brands and complementary product lines and
  distribution channels to the Companys portfolio. The Company funded the
  payment of the purchase price and related transaction costs of the Lenox
  acquisition with a $275 million senior secured credit facility consisting of
  a $175 million revolving credit facility and a $100 million term loan.                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Goodwill
  recorded as part of the initial purchase price allocation in the third
  quarter of 2005 was $21.1 million. During the fourth quarter ended December
  31, 2005, goodwill recorded as part of the initial purchase price allocation
  was adjusted to $16.7 million. The $4.4 million decrease in goodwill was
  primarily due to further evaluation of the preliminary valuations of the
  acquired intangible assets, inventories and assumed liabilities. No
  adjustment was made to goodwill as a result of finalizing the estimated
  working capital adjustment, as defined in the purchase agreement, in the
  Companys fourth quarter. We will continue to evaluate the purchase price
  allocation for the Lenox acquisition, principally relating to the closure of
  the Pomona manufacturing facility and the sale of the Langhorne office
  facility.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The initial
  purchase price allocation, based on managements estimates which included the
  use of independent appraisals which were updated during the fourth quarter of
  2005 as described above, is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                        |  |                        |         | 
| | -------------------------------------- |  | ---------------------- | ------- | 
| |                                        |  | Estimated
  Fair Value |        
| |                                        |  |                        |        
| | Accounts
  receivable                  |  | $                      | 39,105  | 
| | Inventories                            |  |                        | 115,989 | 
| | Current
  deferred taxes               |  |                        | 5,109   | 
| | Other
  current assets                 |  |                        | 7,080   | 
| | Property,
  plant and equipment        |  |                        | 78,046  | 
| | Goodwill                               |  |                        | 16,695  | 
| | Trademarks                             |  |                        | 108,210 | 
| | Other
  intangible assets              |  |                        | 17,842  | 
| | Noncurrent
  deferred taxes            |  |                        | 5,555   | 
| | Other
  noncurrent assets              |  |                        | 4,059   | 
| |                                        |  |                        |         | 
| | Total assets
  acquired                |  | $                      | 397,690 | 
| |                                        |  |                        |         | 
| |                                        |  |                        |         | 
| | Severance
  and restructuring reserves |  | $                      | 14,020  | 
| | Other
  current liabilities            |  |                        | 57,967  | 
| | Pension
  obligations                  |  |                        | 89,414  | 
| | Postretirement
  obligations           |  |                        | 28,075  | 
| | Long-term
  debt                       |  |                        | 250     | 
| | Other
  noncurrent liabilities         |  |                        | 3,928   | 
| |                                        |  |                        |         | 
| | Total
  liabilities assumed            |  | $                      | 193,654 | 
| |                                        |  |                        |         | 
| |                                        |  |                        |         | 
| | Net assets
  acquired                  |  | $                      | 204,036 | 
| |                                        |  |                        |         | 

F-16

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A valuation of the acquired intangible assets was performed by
a third party valuation specialist to assist the Company in determining the fair value of each identifiable intangible asset.
Standard valuation procedures were utilized in determining the fair value of the acquired intangible assets. The following table
summarizes the identified intangible asset categories and their weighted average amortization period:

| |                                   |  |  |                                          |  |            |         |  
| | --------------------------------- |  |  | ---------------------------------------- |  | ---------- | ------- | -
| |                                   |  |  | Weighted Average
  Amortization
  Period |  | Fair Value |        
| |                                   |  |  |                                          |  |            |        
| | Finite-life intangible
assets     |  |  |                                          |  |            |         |  
| | Customer
relationships            |  |  | 9.9 Years                                |  | $          | 15,300  |  
| | Favorable lease
interests         |  |  | 2.0 Years                                |  |            | 2,542   |  
| |                                   |  |  |                                          |  |            |         |  
| |                                   |  |  |                                          |  | $          | 17,842  |  
| |                                   |  |  |                                          |  |            |         |  
| |                                   |  |  |                                          |  |            |         |  
| | Indefinite-life intangible
assets |  |  |                                          |  |            |         |  
| | Trademarks and trade
names        |  |  | N/A                                      |  | $          | 108,210 |  
| | Goodwill                          |  |  | N/A                                      |  |            | 16,695  | *
| |                                   |  |  |                                          |  |            |         |  
| | * There is no tax
goodwill.       |  |  |                                          |  | $          | 124,905 |  
| |                                   |  |  |                                          |  |            |         |  

| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following pro forma condensed consolidated financial
results of operations for the years ended December 31, 2005 and January 1, 2005 are presented as if the acquisition described
above had been completed at the beginning of each period presented.

| |                                                         |  |      |         |      |   |         | 
| | ------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | 
| |                                                         |  | 2005 |         | 2004 |  
| |                                                         |  |      |         |      |  
|
| | Pro forma net sales                                     |  | $    | 561,682 |      | $ | 650,168 | 
| | Pro forma income from
continuing operations             |  |      | 1,321   |      |   | 17,271  | 
| | Pro forma net income                                    |  |      | (861    | )    |   | 14,234  | 
| |                                                         |  |      |         |      |   |         | 
| | Pro forma income per share
from continuing
  operations |  |      |         |      |   |         | 
| | Basic                                                   |  | $    | 0.10    |      | $ | 1.29    | 
| | Assuming dilution                                       |  |      | 0.10    |      |   | 1.28    | 
| |                                                         |  |      |         |      |   |         | 
| | Weighted average shares
outstanding                     |  |      |         |      |   |         | 
| | Basic                                                   |  |      | 13,669  |      |   | 13,342  | 
| | Assuming dilution                                       |  |      | 13,752  |      |   | 13,530  | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | These pro forma condensed consolidated financial results have
been prepared for comparative purposes only and include certain adjustments, such as increased interest expense on acquisition
debt. They do not reflect the effect of synergies that would have been expected to result from the integration of these
acquisitions. The pro forma information does not purport to be indicative of the results of operations that actually would have
resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated
entities.

F-17

---



Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. | ASSETS HELD
  FOR SALE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In September 2005, the Company approved certain consolidation
plans for it Lenox subsidiary, including cessation of fine china production at its facility in Pomona, NJ. Fine ivory china
dinnerware production at Pomona had been declining over the past ten years as consumer trends have shifted from ivory to bone and
from formal to upscale casual dinnerware. The plant had been operating at a very low percentage of its capacity during the past
several years, and the assets associated with this production were deemed to be incompatible with the future direction of the
business. Production of fine china at this plant ceased in the fourth quarter of 2005 and these assets, including land, building,
machinery and equipment have been listed for sale and we are actively attempting to sell them. As these assets were recently
purchased as part of the acquisition of Lenox, no gain or loss has been recognized and the assets are listed on the balance sheet
as held for sale at their carrying amount less expected selling costs in the cumulative amount of $6,749.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | During the fourth quarter of 2005, as part of the consolidation
plans indicated above, the Company also began seeking office facilities to consolidate certain office operations located at its
leased facility in Lawrenceville, NJ and owned facility in Langhorne, PA. In December 2005, the Company entered into an agreement
for the sale of the Langhorne facility, and the sale is anticipated to close during the third quarter of 2006. As these assets,
including land and building, were recently purchased as part of the acquisition of Lenox, no gain or loss has been recognized and
the assets are listed on the balance sheet as held for sale at their carrying amount less expected selling costs in the cumulative
amount of $10,269.                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|5. | SEVERANCE AND RESTRUCTURING COSTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In connection with the acquisition of Lenox, the Company
assumed severance reserves of $0.2 million related to plant closings, retail store closings and general restructurings that took
place prior to the Companys acquisition of Lenox. At September 1, 2005, the acquisition date, the Company accrued an
additional $13.8 million related to an additional plant closing, retail store closings, and general restructurings that were
planned as part of the acquisition. This additional charge increased goodwill recorded from the acquisition of Lenox.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The severance and restructuring reserves recorded at the
acquisition date were based on preliminary estimates and may be revised as the plans are finalized. The Company expects to
substantially complete the plant closing, retail store closings, and general restructuring by the end of the second quarter of
fiscal 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The table below shows a reconciliation of the severance and
restructuring reserve activity as of December 31, 2005:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  
| | ------------------------------------------------------ |  | ---------------- | ------ | ----------------------------------- | - | ----------------------------------- | - | ---------------- | ----- | - | - | ----- | - | - | ------ | -
| |                                                        |  | Plant
  Closings |        | Retail Store
  Closings
  Severance |   | General
  Restructuring
  Severance |   | Total
  Reserves |      
| |                                                        |  |                  |        |                                     |   |                                    
| |                                                        |  | Severance        |        | Other                               |   |                                     |   |                 
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |  
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |  
| | Assumed at acquisition
date                            |  |                  |       |                                     |   |                                    |   | $                | 115   |   | $ | 87    |   | $ | 202    |  
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  
| | Recorded at acquisition date
And charged to
  goodwill |  | $                | 4,804  |                                     | $ | 2,790                               |   |                  | 1,822 |   |   | 4,402 |   |   | 13,818 |  
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  
| | Incurred                                               |  |                  | (1,110 | )                                   |   | (181                                | ) |                  | (144  | ) |   | (384  | ) |   | (1,819 | )
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  
| | Balance, December 31,
2005                             |  | $                | 3,694  |                                     | $ | 2,609                               |   | $                | 1,793 |   | $ | 4,105 |   | $ | 12,201 |  
| |                                                        |  |                  |        |                                     |   |                                     |   |                  |       |   |   |       |   |   |        |  

F-18

---



Table of Contents

|   |                                                            
|-- | -----------------------------------------------------------
|6. | INVENTORIES                                                
|   |                                                            
|   | Inventories
  from continuing operations were comprised of:

| |                     |  |                     |        |                   |   |        | 
| | ------------------- |  | ------------------- | ------ | ----------------- | - | ------ | 
| |                     |  | December 31,
  2005 |        | January 1,
  2005 |  
| |                     |  |                     |        |                   |  
|
| | Raw
  materials     |  | $                   | 4,038  |                   |   |       | 
| | Work-in-process     |  |                     | 6,442  |                   |   |       | 
| | Finished
  goods    |  |                     | 83,866 |                   | $ | 13,581 | 
| |                     |  |                     |        |                   |   |        | 
| | Total
  inventories |  | $                   | 94,346 |                   | $ | 13,581 | 
| |                     |  |                     |        |                   |   |        | 

|   |                                                                                               
|-- | ----------------------------------------------------------------------------------------------
|7. | PROPERTY AND
  EQUIPMENT                                                                      
|   |                                                                                               
|   | Property and equipment at December 31, 2005 and January 1, 2005
is comprised of the following:

| |                                |  |      |        |      |   |        | 
| | ------------------------------ |  | ---- | ------ | ---- | - | ------ | 
| |                                |  | 2005 |        | 2004 |  
| |                                |  |      |        |      |  
| | Land                           |  | $    | 3,186  |      | $ | 906    | 
| | Leasehold
improvements         |  |      | 10,118 |      |   | 7,395  | 
| | Furniture and
fixtures         |  |      | 8,100  |      |   | 4,741  | 
| | Computer hardware and
software |  |      | 17,503 |      |   | 8,658  | 
| | Tooling                        |  |      | 931    |      |   |       | 
| | Other equipment                |  |      | 21,847 |      |   | 6,127  | 
| | Building and
improvements      |  |      | 33,696 |      |   | 7,304  | 
| | Construction in
process        |  |      | 1,580  |      |   | 81     | 
| |                                |  |      |        |      |   |        | 
| |                                |  |      | 96,961 |      |   | 35,212 | 
| | Less accumulated
depreciation  |  |      | 25,533 |      |   | 19,504 | 
| |                                |  |      |        |      |   |        | 
| | Property and equipment,
net    |  | $    | 71,428 |      | $ | 15,708 | 
| |                                |  |      |        |      |   |        | 

F-19

---



Table of Contents

|   |                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------
|8. | GOODWILL AND
  OTHER INTANGIBLE ASSETS                                                                         
|   |                                                                                                                
|   | Changes in
  the carrying amount of goodwill for the year ended December 31, 2005 by
  segment were as follows:

| |                                |  |           |        |        |  |        |  |        |   |              |   |        |  |   |        | 
| | ------------------------------ |  | --------- | ------ | ------ |  | ------ |  | ------ | - | ------------ | - | ------ |  | - | ------ | 
| |                                |  | Wholesale |        | Retail |  | Direct |  | Other* |   | Consolidated |  
| |                                |  |           |        |        |  |        |  |        |   |              |  
| |                                |  |           |        |        |  |        |  |        |   |              |  
| | Balance at
  January 1, 2005   |  | $         | 37,074 |        |  |       |  |        |  |              |   |       |  | $ | 37,074 | 
| |                                |  |           |        |        |  |        |  |        |   |              |   |        |  |   |        | 
| | Acquired                       |  |           |       |        |  |       |  |        |  |              | $ | 16,695 |  |   | 16,695 | 
| |                                |  |           |        |        |  |        |  |        |   |              |   |        |  |   |        | 
| | Balance at
  December 31, 2005 |  | $         | 37,074 |        |  |       |  |        |  |              | $ | 16,695 |  | $ | 53,769 | 

| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * The acquired goodwill listed above was from the Companys
acquisition of Lenox. The Company has not yet allocated the acquired goodwill to a reporting segment as it continues to evaluate
the purchase allocation. See Note 3.
| |                                                                                                                                                                                                                                  
| | Intangible assets, other than goodwill, are comprised of the
following:                                                                                                                                                          

| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | --------------------------------- |  | ------------------------- | ------- | -------------------------- | - | ------ | - | ------------------------- | ------- | -------------------------- | - | ------ |  | - | ------ | - | - | ------ | 
| |                                   |  | December 31, 2005         |         | January 1, 2005            |  
| |                                   |  |                           |         |                            |  
| |                                   |  | Gross
  carrying
  amount |         | Accumulated
  amortization |   | Net    |   | Gross
  carrying
  amount |         | Accumulated
  amortization |   | Net    | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        | 
| | Finite-life intangible
assets     |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Customer
relationships            |  | $                         | 15,300  |                            | $ | (551   | ) | $                         | 14,749  |                            |   |       |  |   |       |   |   |       | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Favorable lease
interests         |  |                           | 2,542   |                            |   | (770   | ) |                           | 1,772   |                            |   |       |  |   |       |   |   |       | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Non-compete
agreements            |  |                           | 2,705   |                            |   | (2,189 | ) |                           | 516     |                            | $ | 2,705  |  | $ | (2,049 | ) | $ | 656    | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Indefinite-life intangible
assets |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Trademarks                        |  |                           | 126,110 |                            |   | (4,139 | ) |                           | 121,971 |                            |   | 17,900 |  |   | (4,139 | ) |   | 13,761 | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 
| | Total
Intangibles                 |  | $                         | 146,657 |                            | $ | (7,649 | ) | $                         | 139,008 |                            | $ | 20,605 |  | $ | (6,188 | ) | $ | 14,417 | 
| |                                   |  |                           |         |                            |   |        |   |                           |         |                            |   |        |  |   |        |   |   |        | 

F-20

---



Table of Contents

| |                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Intangible asset amortization expense for the years ended
December 31, 2005, January 1, 2005 and January 3, 2004 was $1,460, $140 and $144, respectively. The increase in amortization
expense for the year ended December 31, 2005 was the result of the Lenox acquisition. Expected future amortization expense for
finite-lived intangible assets is as follows:

| |            |  |   |        | 
| | ---------- |  | - | ------ | 
| | 2006       |  | $ | 2,905  | 
| | 2007       |  |   | 2,149  | 
| | 2008       |  |   | 1,938  | 
| | 2009       |  |   | 1,846  | 
| | 2010       |  |   | 1,560  | 
| | Thereafter |  |   | 6,639  | 
| |            |  |   |        | 
| |            |  | $ | 17,037 | 
| |            |  |   |        | 

|   |                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The above amortization expense forecast is an estimate. Actual
amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment of
intangible assets, accelerated amortization of intangible assets, purchase price reallocations and other events.
|   |                                                                                                                                                                                                                                                                                                                 
|9. | DEBT                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                 
|   | Debt is comprised of the following:                                                                                                                                                                                                                                                                             

| |                                                                          |  |                                         |   |                     |   |                   |  |  |   | 
| | ------------------------------------------------------------------------ |  | --------------------------------------- | - | ------------------- | - | ----------------- |  |  | - | 
| |                                                                          |  | Average Interest rate December 31,
2005 |   | December 31,
  2005 |   | January 1,
  2005 | 
| |                                                                          |  |                                         |   |                     |   |                   | 
| | Note payable to Maryland
Department of Business and Economic Development |  | 3                                       | % |                     | $ | 150               |  |  |  | 
| | Note payable to the County
Commissioners of Washington County, Maryland  |  | 0                                       | % |                     |   | 100               |  |  |  | 
| | Term loan facility*                                                      |  | 7.89                                    | % |                     |   | 100,000           |  |  |  | 
| |                                                                          |  |                                         |   |                     |   |                   |  |  |   | 
| | Long-term debt                                                           |  |                                         |   |                     |   | 100,250           |  |  |  | 
| | Revolving credit
facility                                                |  | 6.67                                    | % |                     |   | 10,468            |  |  |  | 
| |                                                                          |  |                                         |   |                     |   |                   |  |  |   | 
| | Total debt                                                               |  |                                         |   |                     | $ | 110,718           |  |  |  | 
| |                                                                          |  |                                         |   |                     |   |                   |  |  |   | 
| | * Includes current
portion of long-term debt of $10.0 million.           |  |                                         |   |                     |   |                   |  |  |   | 

| | The note payable to the Maryland Department of
Business and Economic Development is a conditional promissory note that accrues interest at 3% per year. The principal and
interest payments are deferred until December 31, 2006 and thereafter are subject to multiple maturity dates determined by the
Companys employment levels at the Hagerstown, Maryland distribution facility. If the Company meets certain employment levels
at December 31, 2006, 2007, and 2008 as defined by the terms of the agreement, the note may be fully or partially forgiven. As of
December 31, 2005, the Company had not achieved levels required to qualify for full or partial debt forgiveness.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---



Table of Contents

The note payable to the County Commissioners of Washington
County, Maryland is a conditional grant agreement that bears no interest charges. The principal payments are deferred until
December 31, 2006 and thereafter are subject to multiple maturity dates determined by the Companys employment levels at the
Hagerstown, Maryland distribution facility. If the Company meets certain employment levels at December 31, 2006, 2007, and 2008 as
defined by the terms of the agreement, the note may be fully or partially forgiven. As of December 31, 2005, the Company had not
achieved levels required to qualify for full or partial debt forgiveness.

On September 1, 2005, the Company completed the acquisition of
Lenox. To finance the acquisition, the Company entered into a new revolving credit facility and a term loan facility. The credit
facilities are available to finance the purchase of Lenox, to payoff existing indebtedness under the Companys old revolving
credit facility, and to finance working capital needs. In connection with the new credit facilities, the Company recorded $10.1
million in deferred financing fees, which is included in other assets on the Consolidated Balance Sheets and is being amortized
over the lives of the credit facilities. The revolving credit facility expires on September 1, 2010 and the term loan facility
expires on September 1, 2011.

The credit facilities contain customary financial conditions
and covenants, including restrictions on additional indebtedness, liens, investments, capital expenditures, issuances of capital
stock and dividends. The credit facilities also require maintenance of minimum levels of interest coverage and maximum levels of
leverage, in each case at the end of each fiscal quarter. The minimum interest coverage ratio (as defined within the credit
facility agreements) requires the Company to maintain a minimum ratio of earnings before interest, income taxes, depreciation and
amortization (EBITDA) to interest expense over a 12-month period ending on each fiscal quarter. The minimum ratio to be maintained
at each quarter-end over the term of the facilities is defined within the credit facility agreements, and ranges from 2.35:1.0 to
3.75:1.0. The maximum leverage ratio (as defined within the credit facility agreements) requires the Company to maintain a maximum
ratio of debt (as measured at the end of each fiscal quarter) to EBITDA over a 12-month period ending on each fiscal quarter. The
maximum leverage ratio to be maintained at each quarter-end over the term of the facilities is defined within the credit facility
agreements, and ranges from 2.0:1.0 to 4.0:1.0. As of December 31, 2005, the Company was in compliance with all material
conditions and covenants under the credit facilities.

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

F-22

---



Table of Contents

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

Borrowings under the revolving credit facility are subject to
certain borrowing base limitations. The Companys borrowing capacity under the revolving credit facility as of December 31,
2005, was $147.0 million and fluctuates based on accounts receivable and inventory levels. The revolving credit facility provides
for commitment fees of 0.375% per annum on the daily average of the unused commitment.

The term loan facility provides for term loans in the aggregate
principal amount of up to $100.0 million. The term loan facility allows the Company to choose between two interest rate options in
connection with its revolving credit loans. The interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin is 2.5% for Alternate Base Rate loans and 3.5% for
Adjusted LIBOR Rate loans.

The contractual debt maturity of the long-term debt outstanding
on December 31, 2005 is as follows:

| |      |  |  |             |   |        |  | 
| | ---- |  |  | ----------- | - | ------ |  | 
| |      |  |  | Contractual |  
| | Year |  |  | Maturities  |  
| |      |  |  |             |  
| | 2006 |  |  |             | $ | 10,000 |  | 
| | 2007 |  |  |             |   | 10,000 |  | 
| | 2008 |  |  |             |   | 10,000 |  | 
| | 2009 |  |  |             |   | 10,000 |  | 
| | 2010 |  |  |             |   | 10,000 |  | 
| | 2011 |  |  |             |   | 50,000 |  | 

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

In conjunction with entering into the new credit facilities,
the Company terminated its $75 million revolving credit facility originally entered into in November 2003. Related to this
termination, the Company wrote off $0.1 million in unamortized deferred financing fees which were recorded in interest expense in
the Companys Consolidated Statements of Income.

F-23

---



Table of Contents

|    |              
|--- | -------------
|10. | BENEFIT PLANS

Pension and Postretirement benefits

In connections with the acquisition of Lenox, The Company
assumed various defined benefit pension plans and postretirement health care plans providing retirement and health care benefits
(and related assets associated with the plans). The following discussion provides information about our obligations related to
these plans, the assets dedicated to meeting the obligations, and the amounts we recognized in our financial statements as a
result of sponsoring these plans. We use a measurement date of September 30 to determine the amounts of the plan obligations and
assets presented below.

Obligations

We provide eligible employees with pension and other
postretirement benefits based on such factors as years of service and compensation level during employment. The pension obligation
shown below (projected benefit obligation) consists of: (a) benefits earned by employees to date based on current
salary levels (accumulated benefit obligation); and (b) benefits to be received by the employees as a result of
expected future salary increases. (The obligation for medical and life insurance benefits is not affected by future salary
increases.). This table shows how the present value of our obligation changed since the acquisition of Lenox on September 1,
2005.

|                                       |  |                    |   |                      |   |  |  |   |        |   | 
|-------------------------------------- |  | ------------------ | - | -------------------- | - |  |  | - | ------ | - | 
|                                       |  |                    |   | Medical
  and Life   |  
|                                       |  | Pension
  Benefits |   | Insurance
  Benefits |  
|                                       |  | FY 2005            |   | FY 2005              |  
|                                       |  |                    |   |                      |  
|                                       |  |                    |   |                      |   |  |  |   |        |   | 
|Obligation at Lenox
  acquisition date |  |                    | $ | 200,380              |   |  |  | $ | 28,075 |   | 
|Service cost                           |  |                    |   | 2,001                |   |  |  |   | 172    |   | 
|Interest cost                          |  |                    |   | 3,329                |   |  |  |   | 454    |   | 
|Actuarial gain                         |  |                    |   | (16,188              | ) |  |  |   | (869   | ) | 
|Benefits paid                          |  |                    |   | (591                 | ) |  |  |   | (60    | ) | 
|                                       |  |                    |   |                      |   |  |  |   |        |   | 
|Obligation at end of the year          |  |                    | $ | 188,931              |   |  |  | $ | 27,772 |   | 
|                                       |  |                    |   |                      |   |  |  |   |        |   | 

Service cost represents the present value of the benefits
attributed to service rendered by employees during the year. Interest cost is the increase in the present value of the obligation
due to the passage of time. Actuarial loss (gain) is the change in the value of the obligation resulting from experience different
from that assumed or from a change in actuarial assumptions. (The actuarial assumptions used are discussed at the end of this
note).

As shown above, our pension and postretirement obligations were
reduced by benefit payments in 2005 of $591 and $60, respectively. Expected benefit payments and expected Medicare Part D subsidy
receipts over the next ten years are as follows:

|          |  |                  |   |                    |  |           |                    |   |          |  |  |  |   |        |   | 
|--------- |  | ---------------- | - | ------------------ |  | --------- | ------------------ | - | -------- |  |  |  | - | ------ | - | 
|          |  |                  |   |                    |  |           | Medical
  and Life |   | Medicare | 
|          |  | Pension Benefits |   | Insurance Benefits |  | Subsidies |                   
|          |  |                  |   |                    | 
|          |  |                  |   |                    |  |           |                   
|2006      |  |                  | $ | 15,477             |  |           |                    | $ | 1,877    |  |  |  | $ | (222   | ) | 
|2007      |  |                  |   | 7,623              |  |           |                    |   | 1,915    |  |  |  |   | (226   | ) | 
|2008      |  |                  |   | 7,848              |  |           |                    |   | 1,910    |  |  |  |   | (226   | ) | 
|2009      |  |                  |   | 8,093              |  |           |                    |   | 1,924    |  |  |  |   | (227   | ) | 
|2010      |  |                  |   | 8,408              |  |           |                    |   | 1,949    |  |  |  |   | (229   | ) | 
|2011-2015 |  |                  |   | 20,489             |  |           |                    |   | 10,638   |  |  |  |   | (1,255 | ) | 

F-24

---



Table of Contents

Assets

We specifically invest certain assets in order to fund our
pension benefit obligations. Our investment goal is to earn a total return over time that will grow assets sufficient to fund our
plans liabilities, after providing appropriate levels of contributions and accepting prudent levels of investment risk. In
order to achieve this goal, plan assets are invested primarily in funds or portfolios of funds actively managed by outside
managers. Investment risk is managed to prudent levels by company policies that require diversification of asset classes, manager
styles and individual holdings. We measure and monitor investment risk through periodic performance reviews and periodic
asset/liability studies.

Asset allocation is the most important method of achieving our
investment goals and is based on our assessment of the plans long-term return objectives and the appropriate balances needed
for liquidity, stability, and diversification. The allocation of our pension plan assets at fair value on December 31, 2005 and
the target allocation for 2006, by asset category, are as follows:

|                  |  |               |  |               |   |  |  |  |     |   | 
|----------------- |  | ------------- |  | ------------- | - |  |  |  | --- | - | 
|                  |  |               |  |               |   |  | 
|                  |  | Actual
  2005 |  | Target
  2006 |  
|                  |  |               |  |               |   |  |  |  |     |   | 
|Equity securities |  |               |  | 71            | % |  |  |  | 75  | % | 
|Debt securities   |  |               |  | 15            | % |  |  |  | 15  | % | 
|Real estate       |  |               |  | 5             | % |  |  |  | 5   | % | 
|Other             |  |               |  | 9             | % |  |  |  | 5   | % | 
|                  |  |               |  |               |   |  |  |  |     |   | 
|Total             |  |               |  | 100           | % |  |  |  | 100 | % | 
|                  |  |               |  |               |   |  |  |  |     |   | 

This table shows how the fair value of the pension assets
changed from the Lenox acquisition date until the end of the year. (We do not have assets set aside for postretirement medical or
life insurance benefits).

|                                       |  |                  |   |                    |   |  |  |   |     |   | 
|-------------------------------------- |  | ---------------- | - | ------------------ | - |  |  | - | --- | - | 
|                                       |  |                  |   | Medical
  and Life |  
|                                       |  | Pension Benefits |   | Insurance Benefits |  
|                                       |  | FY 2005          |   | FY 2005            |  
|                                       |  |                  |   |                    |  
|                                       |  |                  |   |                    |   |  |  |   |     |   | 
|Fair value at Lenox
  acquisition date |  |                  | $ | 110,966            |   |  |  |   |    |   | 
|Actual return on plan
  assets         |  |                  |   | 1,305              |   |  |  |   |    |   | 
|Company contributions                  |  |                  |   | 4,480              |   |  |  | $ | 60  |   | 
|Benefits paid                          |  |                  |   | (591               | ) |  |  |   | (60 | ) | 
|                                       |  |                  |   |                    |   |  |  |   |     |   | 
|Fair value at end of the year          |  |                  | $ | 116,160            |   |  |  | $ |    |   | 
|                                       |  |                  |   |                    |   |  |  |   |     |   | 

Consistent with our funding policy, we expect to contribute
approximately $16 million to our pension plans and approximately $2 million to our postretirement plans in 2006.

F-25

---



Table of Contents

Funded Status

The funded status of a plan refers to the difference between
its assets and its obligations. This amount differs from the amount recognized on the balance sheet because, as discussed below,
certain changes in the present value of the obligation and the fair value of plan assets are amortized over several years for
accounting purposes. This table reconciles the funded status of the plans to the net amount recognized on the consolidated balance
sheet.

|                                  |  |                    |   |                      |   |  |  |   |         |   | 
|--------------------------------- |  | ------------------ | - | -------------------- | - |  |  | - | ------- | - | 
|                                  |  |                    |   |                      |  
|                                  |  |                    |   | Medical
  and Life   |  
|                                  |  | Pension
  Benefits |   | Insurance
  Benefits |  
|                                  |  | FY 2005            |   | FY 2005              |  
|                                  |  |                    |   |                     
|                                 
|Assets                            |  |                    | $ | 116,160              |   |  |  |   |        |   | 
|Obligations                       |  |                    |   | (188,931             | ) |  |  | $ | (27,772 | ) | 
|                                  |  |                    |   |                      |   |  |  |   |         |   | 
|Funded status                     |  |                    |   | (72,771              | ) |  |  |   | (27,772 | ) | 
|Unrecognized net gain             |  |                    |   | (14,243              | ) |  |  |   | (788    | ) | 
|                                  |  |                    |   |                      |   |  |  |   |         |   | 
|Accrued postretirement
  benefits |  |                    | $ | (87,014              | ) |  |  | $ | (28,560 | ) | 
|                                  |  |                    |   |                      |   |  |  |   |         |   | 

The unrecognized net gain for the pension and postretirement
health care plans primarily relates to the difference between the actual cumulative return on plan assets versus the expected
cumulative return on plan assets and a change in the assumed discount rate which decreased the present value of the benefit
obligation.

The projected and accumulated benefit obligations for each of
our pension plans exceed the plan assets. The total accumulated benefit obligation for all plans was $176,547 at the end of
2005.

Pension Expense

This table shows the components of the pension expense
recognized from the Lenox acquisition date until the end of 2005.

|                               |  |                  |   |                    |   |  |  |   |     |  | 
|------------------------------ |  | ---------------- | - | ------------------ | - |  |  | - | --- |  | 
|                               |  |                  |   | Medical
  and Life |  
|                               |  | Pension Benefits |   | Insurance Benefits |  
|                               |  | FY 2005          |   | FY 2005            |  
|                               |  |                  |   |                    |  
|                               |  |                  |   |                    |   |  |  |   |     |  | 
|Service cost                   |  |                  | $ | 2,001              |   |  |  | $ | 172 |  | 
|Interest cost                  |  |                  |   | 3,329              |   |  |  |   | 454 |  | 
|Expected return on assets      |  |                  |   | (3,154             | ) |  |  |   |    |  | 
|                               |  |                  |   |                    |   |  |  |   |     |  | 
|Net periodic pension
  expense |  |                  | $ | 2,176              |   |  |  | $ | 626 |  | 
|                               |  |                  |   |                    |   |  |  |   |     |  | 

The pension expense recorded during the year was estimated at
the Lenox acquisition date. As a result, the amount is calculated using an expected return on plan assets rather than the actual
return. The difference between actual and expected returns is included in the unrecognized net gain at the end of the
year.

F-26

---



Table of Contents

Assumptions and Sensitivity

We use various assumptions to determine the obligations and
expense related to our pension and postretirement healthcare plans. The assumptions used in computing benefit plan obligations as
of the end of the year were as follows:

|                                 |  |                    |  |                      |   |  |  |  |      |   | 
|-------------------------------- |  | ------------------ |  | -------------------- | - |  |  |  | ---- | - | 
|                                 |  |                    |  | Medical
  and Life   |  
|                                 |  | Pension
  Benefits |  | Insurance
  Benefits |  
|                                 |  | FY 2005            |  | FY 2005              |  
|                                 |  |                    |  |                      |  
|                                 |  |                    |  |                      |   |  |  |  |      |   | 
|Discount rate                    |  |                    |  | 5.25                 | % |  |  |  | 5.25 | % | 
|Rate of salary increase          |  |                    |  | 4.00                 | % |  |  |  |     |   | 
|Expected return on plan
  assets |  |                    |  | 8.50                 | % |  |  |  |     |   | 

The
assumptions used in computing benefit plan expense during the year were as
follows:

|                                 |  |                    |  |                      |   |  |  |  |      |   | 
|-------------------------------- |  | ------------------ |  | -------------------- | - |  |  |  | ---- | - | 
|                                 |  |                    |  | Medical
  and Life   |  
|                                 |  | Pension
  Benefits |  | Insurance
  Benefits |  
|                                 |  | FY 2005            |  | FY 2005              |  
|                                 |  |                    |  |                      |  
|                                 |  |                    |  |                      |   |  |  |  |      |   | 
|Discount rate                    |  |                    |  | 5.00                 | % |  |  |  | 5.00 | % | 
|Rate of salary increase          |  |                    |  | 4.00                 | % |  |  |  |     |   | 
|Expected return on plan
  assets |  |                    |  | 8.00                 | % |  |  |  |     |   | 

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

The assumed rate of salary increase reflects the expected
annual increase in salaries as a result of inflation, merit increases, and promotions. A lower assumed rate decreases the present
value of the benefit obligation.

The expected return on plan assets represents the long-term
rate of return that we assume will be earned over the life of the pension assets, considering the distribution of those assets
among investment classes and the related historical rates of return.

The assumed healthcare cost trend rates as of the end of the
year were as follows:

|                                |  |                      |  |      |   |  |  |  |  |  | 
|------------------------------- |  | -------------------- |  | ---- | - |  |  |  |  |  | 
|                                |  | Medical
  and Life   | 
|                                |  | Insurance
  Benefits | 
|                                |  | FY 2005              | 
|                                |  |                      | 
|                               
|Healthcare cost trend
  rate:   |  |                      |  |      |   | 
|Present rate before age 65      |  |                      |  | 8.31 | % | 
|Present rate age 65 and
  after |  |                      |  | 9.56 | % | 

We project healthcare cost trend rates to decline gradually to
5.5% by 2010 and to remain level after that. Assumed healthcare cost trend rates have a significant effect on the amounts reported
for postretirement healthcare plans. A one percentage point increase in assumed healthcare cost trend rates would increase the
accumulated postretirement benefit obligation as of December 31, 2005 by $3,700 and the annual aggregate service and interest cost
by $430. A one percentage point decrease in assumed healthcare cost trend rates would decrease the accumulated postretirement
benefit obligation as of December 31, 2005 by $3,600 and the annual aggregate service and interest cost by $420.

F-27

---



Table of Contents

Savings Plan

The Company has qualified contributory retirement plans (the
Plans) under Section 401(k) of the Internal Revenue Code which covers substantially all full-time and certain part-time employees
who meet certain eligibility requirements. Voluntary contributions are made by participants and Company matching contributions are
made at the discretion of the Board of Directors, subject to certain limitations. Certain of the Plans also allow the Company to
make discretionary profit-sharing contributions to the Plan up to the maximum amount deductible for income tax purposes. All
Company contributions are invested in a series of diversified investment options at the election of the employee. The Company does
not make matching or profit sharing contributions in Company stock. The Companys total profit-sharing contributions were
$1,254, $1,717, and $1,817 for the years ended December 31, 2005, January 1, 2005, and January 3, 2004, respectively.

|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|11. | INCOME TAXES                                                                                                                              
|    |                                                                                                                                           
|    | The
  provision for income taxes for the years ended December 31, 2005, January 1,
  2005, and January 3, 2004 consisted of the following:

| |                                                           |  |      |        |      |   |        |   |   |        |  
| | --------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                           |  | 2005 |        | 2004 |   | 2003   |  
| |                                                           |  |      |        |      |   |        |   |   |        |  
| | Current:                                                  |  |      |        |      |   |        |   |   |        |  
| | Federal                                                   |  | $    | 10,830 |      | $ | 13,138 |   | $ | 13,622 |  
| | State                                                     |  |      | 1,964  |      |   | 787    |   |   | 1,052  |  
| | Foreign                                                   |  |      | 16     |      |   | 25     |   |   | 44     |  
| | Deferred:                                                 |  |      |        |      |   |        |   |   |        |  
| | Federal                                                   |  |      | (2,154 | )    |   | 991    |   |   | (111   | )
| | State                                                     |  |      | (510   | )    |   | 147    |   |   | (78    | )
| |                                                           |  |      |        |      |   |        |   |   |        |  
| | Provision
  for income taxes from continuing operations   |  |      | 10,146 |      |   | 15,088 |   |   | 14,529 |  
| | Provision
  for income taxes from discontinued operations |  |      | (1,227 | )    |   | (1,709 | ) |   | (5,301 | )
| |                                                           |  |      |        |      |   |        |   |   |        |  
| | Provision
  for income taxes                              |  | $    | 8,919  |      | $ | 13,379 |   | $ | 9,228  |  
| |                                                           |  |      |        |      |   |        |   |   |        |  

| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | The
  reconciliation between income tax expense based on statutory income tax rates
  and the provision for income taxes is as follows:

| |                                                            |  |      |        |      |   |        |   |   |        |  
| | ---------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
| |                                                            |  | 2005 |        | 2004 |   | 2003   |  
| |                                                            |  |      |        |      |   |        |   |   |        |  
| | Income taxes
  at federal statutory rate                   |  | $    | 9,624  |      | $ | 14,667 |   | $ | 14,070 |  
| | State income
  taxes, net of federal income tax deductions |  |      | 979    |      |   | 664    |   |   | 827    |  
| | Charitable
  donations of inventory                        |  |      | (32    | )    |   | (66    | ) |   | (255   | )
| | Other                                                      |  |      | (425   | )    |   | (177   | ) |   | (113   | )
| |                                                            |  |      |        |      |   |        |   |   |        |  
| | Provision
  for income taxes from continuing operations    |  |      | 10,146 |      |   | 15,088 |   |   | 14,529 |  
| | Provision
  for income taxes from discontinued operations  |  |      | (1,227 | )    |   | (1,709 | ) |   | (5,301 | )
| |                                                            |  |      |        |      |   |        |   |   |        |  
| | Provision
  for income taxes                               |  | $    | 8,919  |      | $ | 13,379 |   | $ | 9,228  |  
| |                                                            |  |      |        |      |   |        |   |   |        |  

F-28

---



Table of Contents

| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | The
  components of the net deferred tax asset at December 31, 2005 and January 1,
  2005 were as follows:

| |                                            |  |      |         |      |   |        |  
| | ------------------------------------------ |  | ---- | ------- | ---- | - | ------ | -
| |                                            |  | 2005 |         | 2004 |  
| |                                            |  |      |         |      |   |        |  
| | DEFERRED TAX
  ASSETS:                     |  |      |         |      |   |        |  
| | Defined
benefit pension reserve obligation |  | $    | 28,919  |      |   |       |  
| | Asset
valuation reserves                   |  |      | 8,890   |      | $ | 3,775  |  
| | Loss on
minority investment                |  |      | 1,520   |      |   | 1,520  |  
| | Deferred
compensation                      |  |      | 1,014   |      |   | 994    |  
| | Accrued
liabilities                        |  |      | 783     |      |   | 519    |  
| | Severance and
restructuring reserves       |  |      | 5,184   |      |   |       |  
| | Other                                      |  |      | 891     |      |   | 831    |  
| | Less: Deferred
tax valuation allowance     |  |      | (1,520  | )    |   | (1,520 | )
| |                                            |  |      |         |      |   |        |  
| | Total deferred
tax assets                  |  |      | 45,681  |      |   | 6,119  |  
| |                                            |  |      |         |      |   |        |  
| | DEFERRED TAX
  LIABILITIES:                |  |      |         |      |   |        |  
| | Intangible
assets                          |  |      | (26,127 | )    |   | (5,565 | )
| | Property and
equipment depreciation        |  |      | (5,294  | )    |   | (1,260 | )
| | Prepaids and
other                         |  |      | (2,304  | )    |   | (415   | )
| |                                            |  |      |         |      |   |        |  
| | Total deferred
tax liabilities             |  |      | (33,725 | )    |   | (7,240 | )
| |                                            |  |      |         |      |   |        |  
| |                                            |  | $    | 11,956  |      | $ | (1,121 | )
| |                                            |  |      |         |      |   |        |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The $11,956 net deferred tax asset at December 31, 2005 is
presented as a net deferred current asset of $13,380 and a net deferred noncurrent liability of $1,424. The $1,121 net deferred
tax liability at January 1, 2005 is presented as a net deferred current asset of $4,304 and a net deferred noncurrent liability of
$5,425.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company paid income taxes of $8,979, $10,746, and $11,616
during the years ended December 31, 2005, January 1, 2005, and January 3, 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | DEFERRED COMPENSATION OBLIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company has a deferred compensation plan with certain key
employees. Under this plan, employees may elect to defer (contribute) a portion of their eligible compensation into the plan. The
Company, at its discretion, may also contribute amounts into the plan on behalf of the key employees. The Company funds this plan
by purchasing and owning securities which are considered trading securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and are consequently marked-to-market. These securities
are recorded in Marketable Securities in the Companys Consolidated Balance Sheets. The plan participants bear the potential
economic risks and rewards of the investments performance and their interests in the underlying plan assets are subordinate
to general creditors.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|13. | CONCENTRATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | At December 31, 2005 one customer accounted for approximately
19% of the Companys total accounts receivable. For the twelve months ended December 31, 2005, this same customer accounted
for approximately 8% of the Companys total net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-29

---



Table of Contents

|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Operating Leases  The Company leases warehouse,
office and retail store space, equipment, and showroom display facilities under renewable operating leases with remaining terms of
up to 10 years. In addition to the base rent, the Company pays its proportionate share of taxes, special assessments, and
operating expenses of the warehouse and retail store space and showroom display facilities.
|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
  following is a schedule of future annual minimum lease payments for
  noncancelable operating leases as of December 31, 2005:                                                                                                                                                                                                                                                                      

| |            |  |   |        | 
| | ---------- |  | - | ------ | 
| | 2006       |  | $ | 12,956 | 
| | 2007       |  |   | 10,433 | 
| | 2008       |  |   | 8,505  | 
| | 2009       |  |   | 7,254  | 
| | 2010       |  |   | 4,952  | 
| | Thereafter |  |   | 3,872  | 
| |            |  |   |        | 
| |            |  | $ | 47,972 | 
| |            |  |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain of the Companys leases contain pre-determined
rent increases over the life of the lease. These rent increases are included in the above-referenced minimum lease table in the
year in which the rent increase occurs. When recording rent expense, the Company amortizes the total amount of the rent payments
on a straight-line basis over the term of the lease. When the Company receives leasehold improvement funding as an incentive to
enter into a lease, the Company amortizes these incentives against rent expense on a straight line basis over the term of the
lease. The Companys rent expense was $7,275, $4,157, and $4,660 for the years ended December 31, 2005, January 1, 2005, and
January 3, 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Letters of Credit  The Company had
  outstanding standby and commercial letters of credit of $3,760 at December
  31, 2005 relating primarily to securing our performance to third-parties
  under self-insurance programs as well as for purchase commitments issued to
  foreign suppliers and vendors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Legal Proceedings  In August 2004,
  plaintiffs purporting to represent a class of consumers who purchased
  tableware sold in the United States filed suit against Federated Department
  Stores, the May Department Stores Company, Waterford Wedgwood U.S.A., and
  Lenox, Incorporated in United States District Court for the Northern District
  of California. In November 2004, plaintiffs filed a consolidated amended
  complaint alleging that for the period beginning at least as early as May 1,
  2001 through the filing of the amended complaint on November 12, 2004,
  defendants violated Section 1 of the Sherman Act by conspiring to fix prices
  and to boycott sales to Bed, Bath & Beyond. Plaintiffs seek to recover an
  undisclosed amount of damages, trebled in accordance with antitrust laws, as
  well as costs, attorneys fees and injunctive relief. This matter is
  currently in the pre-trial discovery phase. The cut-off dates for fact
  discovery and expert discovery are March 31, 2006 and June 12, 2006, respectively.
  The court has set August 24, 2006 as the date for filling defendants motions
  for summary judgment and plaintiffs motion for class certification. The
  trial date is scheduled for October 30, 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On May 26,
  2004, Ashley Seaberg filed a product liability suit against Department 56,
  Inc. and Time to Celebrate in United States District Court for the District
  of Oregon, claiming that a strand of lights from defendant Time to Celebrate
  started a house fire. On May 16, 2005, the court granted plaintiffs motion
  to amend the complaint to add a claim for $10 million in punitive damages. On
  January 9, 2006, the court denied the Companys motion for summary judgment
  on plaintiffs punitive damages claim and granted plaintiffs motion for
  summary judgment on its negligence per se
  claim. Trial is set for May 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-30

---



Table of Contents

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | The Company
  denies the allegations and claims of the cases above and intends to defend
  the cases vigorously. It is not possible at this time to estimate possible
  losses or a range of losses, if any, in these lawsuits. However, an adverse
  result in either of these lawsuits could have a material adverse effect on
  the Companys financial position, results of operations and/or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | In addition
  to the above lawsuits, the Company is involved in various legal proceedings,
  claims, and governmental audits in the ordinary course of its business. The
  Company believes it has meritorious defenses to all proceedings, claims, and
  audits. Management believes the impact, if any, of these legal proceedings
  would not be material to the results of operations, financial position or
  cash flows of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|15. | SEGMENTS OF
  THE COMPANY AND RELATED INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | In
  connection with the Companys acquisition of Lenox, the Company has redefined
  its operating segments to include three reportable segments  Wholesale,
  Retail, and Direct. Although the product produced and sold for each segment
  is similar, the type of customer for the product and the method used to
  distribute the product are different. The segmentation of these operations
  also reflects how the Companys chief executive officer currently reviews the
  results of these operations. Operating income (loss) from continuing
  operations for each operating segment includes specifically identifiable
  operating costs such as cost of sales and selling expenses. General and
  administrative expenses are generally not allocated to specific operating
  segments and are therefore reflected in the corporate category. Other
  components of the statement of operations, which are classified below
  operating income (loss) from continuing operations, are also not allocated by
  segment. In addition, the Company does not account for or report assets,
  capital expenditures or certain depreciation and amortization by segment. All
  transactions between operating segments have been eliminated and are not
  included in the following table.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The
  following table presents the Companys segment information for the last three
  fiscal years:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | ----------------------------------------------- |  | -------------------------------- | ------- | ------------- | ----- | ------------------------------ |  | ------------- | ------- | ------------------------------ | ----- | ------------- |  | - | ------- |  | ----- | -
| | (In
  thousands)                                |  | 52 WEEKS
  ENDEDDECEMBER 31,2005 |         | % ofNet Sales |       | 52 WEEKS
  ENDEDJANUARY 1,2005 |  | % ofNet Sales |         | 53 WEEKS
  ENDEDJANUARY 3,2004 |       | % ofNet Sales
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |              
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | WHOLESALE:                                      |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | Net sales                                       |  | $                                | 217,009 |               | 100.0 | %                              |  | $             | 153,139 |                                | 100.0 | %             |  | $ | 166,895 |  | 100.0 | %
| | Gross profit                                    |  |                                  | 87,574  |               | 40.4  | %                              |  |               | 79,106  |                                | 51.7  | %             |  |   | 88,133  |  | 52.8  | %
| | Selling expenses                                |  |                                  | 24,076  |               | 11.1  | %                              |  |               | 15,520  |                                | 10.1  | %             |  |   | 15,942  |  | 9.6   | %
| | Income from continuing
operations               |  |                                  | 63,498  |               | 29.3  | %                              |  |               | 63,586  |                                | 41.5  | %             |  |   | 72,191  |  | 43.3  | %
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | RETAIL:                                         |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | Net sales                                       |  | $                                | 72,777  |               | 100.0 | %                              |  | $             | 9,769   |                                | 100.0 | %             |  | $ | 8,062   |  | 100.0 | %
| | Gross profit                                    |  |                                  | 42,745  |               | 58.7  | %                              |  |               | 7,185   |                                | 73.6  | %             |  |   | 5,755   |  | 71.4  | %
| | Selling expenses                                |  |                                  | 23,483  |               | 32.3  | %                              |  |               | 6,474   |                                | 66.3  | %             |  |   | 5,405   |  | 67.0  | %
| | Income from continuing
operations               |  |                                  | 19,262  |               | 26.5  | %                              |  |               | 711     |                                | 7.3   | %             |  |   | 350     |  | 4.3   | %
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | DIRECT:                                         |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | Net sales                                       |  | $                                | 41,129  |               | 100.0 | %                              |  |               |         |                                |       |               |  |   |         |  |       |  
| | Gross profit                                    |  |                                  | 25,611  |               | 62.3  | %                              |  |               |         |                                |       |               |  |   |         |  |       |  
| | Selling expenses                                |  |                                  | 16,971  |               | 41.3  | %                              |  |               |         |                                |       |               |  |   |         |  |       |  
| | Income from continuing
operations               |  |                                  | 8,640   |               | 21.0  | %                              |  |               |         |                                |       |               |  |   |         |  |       |  
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | CORPORATE:                                      |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | Unallocated general and
administrative expenses |  | $                                | 58,911  |               |       |                                |  | $             | 29,181  |                                |       |               |  | $ | 31,348  |  |       |  
| |                                                 |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | CONSOLIDATED:                                   |  |                                  |         |               |       |                                |  |               |         |                                |       |               |  |   |         |  |       |  
| | Net sales                                       |  | $                                | 330,915 |               |       |                                |  | $             | 162,908 |                                |       |               |  | $ | 174,957 |  |       |  
| | Operating income from
continuing operations     |  |                                  | 32,489  |               | 9.8   | %                              |  |               | 35,116  |                                | 21.6  | %             |  |   | 41,193  |  | 23.5  | %

F-31

---



Table of Contents

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|16. | STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Stock-Based Compensation Plans At December 31,
2005, the Company had compensation plans allowing the Company to grant options, stock appreciation rights, shares or performance
units to employees, directors, officers, consultants, and advisors. Under the stock option plans, all employee options granted
have an exercise price equal to the market value of the common stock at the date of grant, generally have a term of ten years, and
generally are exercisable in equal installments beginning on each of the first, second, and third anniversaries of the date of the
grant. At December 31, 2005, 256,651 shares were available for granting under the stock option and incentive plans.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | A summary of the status of the Companys stock option and
incentive plans as of December 31, 2005, January 1, 2005, and January 3, 2004, and changes during the years then ended is
presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                |  |        |           |                                       |   |        |  |                                       |           |        |   |                                       |  |   |           |   |   |       | 
| | -------------------------------------------------------------- |  | ------ | --------- | ------------------------------------- | - | ------ |  | ------------------------------------- | --------- | ------ | - | ------------------------------------- |  | - | --------- | - | - | ----- | 
| |                                                                |  | 2005   |           | 2004                                  |   | 2003   | 
| |                                                                |  |        |           |                                       |   |        | 
| |                                                                |  | Shares |           | Weighted
  Average
  Exercise
  Price |   | Shares |  | Weighted
  Average
  Exercise
  Price |           | Shares |   | Weighted
  Average
  Exercise
  Price | 
| |                                                                |  |        |           |                                       |   |        |  |                                       |           |        |   |                                       | 
| |                                                                |  |        |           |                                       |   |        |  |                                       |           |        |   |                                       |  |   |           |   |   |       | 
| | Outstanding at beginning of
year                               |  |        | 1,850,066 |                                       | $ | 15.42  |  |                                       | 2,184,781 |        | $ | 15.08                                 |  |   | 2,266,409 |   | $ | 14.96 | 
| | Granted                                                        |  |        | 622,562   |                                       |   | 13.49  |  |                                       | 263,000   |        |   | 16.00                                 |  |   | 46,405    |   |   | 16.05 | 
| | Exercised                                                      |  |        | (147,539  | )                                     |   | 11.12  |  |                                       | (397,641  | )      |   | 12.23                                 |  |   | (100,066  | ) |   | 9.08  | 
| | Forfeited                                                      |  |        | (117,898  | )                                     |   | 29.11  |  |                                       | (200,074  | )      |   | 18.38                                 |  |   | (27,967   | ) |   | 18.77 | 
| |                                                                |  |        |           |                                       |   |        |  |                                       |           |        |   |                                       |  |   |           |   |   |       | 
| | Outstanding at end of
year                                     |  |        | 2,207,191 |                                       |   | 14.32  |  |                                       | 1,850,066 |        |   | 15.42                                 |  |   | 2,184,781 |   |   | 15.08 | 
| |                                                                |  |        |           |                                       |   |        |  |                                       |           |        |   |                                       |  |   |           |   |   |       | 
| | Options exercisable at end of
year                             |  |        | 2,139,525 |                                       |   | 14.28  |  |                                       | 1,696,223 |        |   | 15.52                                 |  |   | 1,665,676 |   |   | 15.83 | 
| | Weighted average fair value of
options granted during the year |  | $      | 5.25      |                                       |   |        |  | $                                     | 8.27      |        |   |                                       |  | $ | 6.85      |   |   |       | 

| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | The
  following table summarizes information about the Companys stock option and
  incentive plans at December 31, 2005:

| |                              |             |                                            |           |                                                       |  |                                    |  |                                            |   |                                    |  |           |  |  |   |       | 
| | ---------------------------- | ----------- | ------------------------------------------ | --------- | ----------------------------------------------------- |  | ---------------------------------- |  | ------------------------------------------ | - | ---------------------------------- |  | --------- |  |  | - | ----- | 
| | Range of
  Exercise
  Prices |             | NumberOutstanding
  at December 31,
  2005 |           | WeightedAverageRemaining
  Contractual
  Life (years) |  | WeightedAverage
  Exercise
  Price |  | NumberExercisable
  at December 31,
  2005 |   | WeightedAverage
  Exercise
  Price | 
| |                              |             |                                            |           |                                                       |  |                                    |  |                                            |   |                                    | 
| |                              |             |                                            |           |                                                       |  |                                    |  |                                            |   |                                    |  |           |  |  |   |       | 
| | $                            | 6.54-12.50  |                                            | 383,519   |                                                       |  | 6.8                                |  |                                            | $ | 9.84                               |  | 382,019   |  |  | $ | 9.84  | 
| |                              | 12.51-13.75 |                                            | 957,723   |                                                       |  | 6.8                                |  |                                            |   | 12.94                              |  | 950,723   |  |  |   | 12.94 | 
| |                              | 13.76-15.00 |                                            | 197,833   |                                                       |  | 4.7                                |  |                                            |   | 13.86                              |  | 195,333   |  |  |   | 13.86 | 
| |                              | 15.01-37.75 |                                            | 668,116   |                                                       |  | 5.4                                |  |                                            |   | 19.01                              |  | 611,450   |  |  |   | 19.30 | 
| |                              |             |                                            |           |                                                       |  |                                    |  |                                            |   |                                    |  |           |  |  |   |       | 
| |                              |             |                                            | 2,207,191 |                                                       |  | 6.2                                |  |                                            |   | 14.32                              |  | 2,139,525 |  |  |   | 14.28 | 
| |                              |             |                                            |           |                                                       |  |                                    |  |                                            |   |                                    |  |           |  |  |   |       | 

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

F-32

---



Table of Contents

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    | Performance- and Time- Vesting Restricted Stock
The Company granted 309,112 restricted shares of common stock to executive officers, directors, and employees during 2005. Of
these shares, 171,257 shares were performance-vesting and 137,855 shares were time-vesting. Performance-vesting shares may be
earned and become vested in a specific percentage depending upon the extent to which the target performance is met as of the last
day of the performance cycle. Time-vesting shares generally become vested after the duration of a specified period of time. There
were no restricted stock issuances during 2004 and 2003. At December 31, 2005, there were 310,852 restricted shares
outstanding.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Company records unearned compensation expense on the grant
date based on the publicly quoted fair market value of the Companys common stock, and amortizes the balance over the vesting
period. The Company recorded unearned compensation of approximately $4.6 million in 2005, which is included within
stockholders equity. The Company recognized compensation expense of $588, $262, and $240 for the years ended December 31,
2005, January 1, 2005, and January 3, 2004, respectively.                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|17. | INCOME PER
  COMMON SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|    | The following tables reconcile income from continuing
operations per common share and income from continuing operations per common share assuming dilution:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | ----------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ---------- | 
| |                                                                               |  | 2005 |            | 2004 |   | 2003       | 
| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | Income from
continuing operations                                             |  | $    | 17,352     |      | $ | 26,820     |  | $ | 25,669     | 
| | Weighted
average number of shares outstanding                                 |  |      | 13,669,000 |      |   | 13,342,000 |  |   | 13,118,000 | 
| | Income per
share from continuing operations
   basic                         |  | $    | 1.27       |      | $ | 2.01       |  | $ | 1.96       | 
| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | Income from
continuing operations                                             |  | $    | 17,352     |      | $ | 26,820     |  | $ | 25,669     | 
| | Weighted
average number of shares
  outstanding                               |  |      | 13,669,000 |      |   | 13,342,000 |  |   | 13,118,000 | 
| | Dilutive
impact of options outstanding                                        |  |      | 83,000     |      |   | 188,000    |  |   | 92,000     | 
| |                                                                               |  |      |            |      |   |            |  |   |            | 
| | Weighted
average number of shares and
  potential dilutive shares outstanding |  |      | 13,752,000 |      |   | 13,530,000 |  |   | 13,210,000 | 
| | Income per
share from continuing operations
   assuming dilution             |  | $    | 1.26       |      | $ | 1.98       |  | $ | 1.94       | 

| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Options to purchase 865,949, 618,477, and 998,884 shares of
common stock were outstanding at December 31, 2005, January 1, 2005, and January 3, 2004, respectively, but were not included in
the computation of income per common share assuming dilution because the exercise prices were greater than the average market
price of the common stock.

F-33

---



Table of Contents

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | ENVIRONMENTAL MATTERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | As a result of the acquisition of Lenox, the Company is
responsible for the cleanup and/or monitoring of two environmental sites located in New Jersey pursuant to an Administrative
Consent Order and Memorandum of Understanding with the New Jersey Department of Environmental Protection (NJDEP). The
Company is also responsible for monitoring solid waste management units at its Pomona, NJ manufacturing facility pursuant to a
Hazardous & Solid Waste Amendment (HSWA) permit with the U.S. Environmental Protection Agency. The Company accrues
for losses associated with environmental cleanup obligations when such losses are probable and can be reasonably
estimated.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | At one of the NJDEP sites there are other potentially
responsible parties who bear part of the cost of the cleanup, in which case the Companys accrual is based on the
Companys share of the total costs. A portion of the cleanup costs with respect to the two NJDEP sites is paid by insurance.
The estimated recovery of cleanup costs is recorded as an asset when receipt is deemed probable.                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | As of December 31, 2005, the Company estimated, based on
engineering studies, total remediation and ongoing monitoring costs to be $4.8 million, including the effects of inflation.
Accordingly, the Company recorded a liability of approximately $3.3 million in other noncurrent liabilities, which represents the
net present value of the estimated future costs discounted at 5.25%. The estimated insurance recovery assets as of December 31,
2005 were $1.8 million and are included in other assets.                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|19. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On March 3, 2006, the Company entered into an asset purchase
agreement with Willitts Designs International, Inc. (Willitts) to acquire certain assets and assume certain
liabilities of Willitts. The purchase price will be equal to the historical cost of the assets acquired less the obligations
assumed as of the closing date. The net purchase price is estimated to be approximately $3.5 million. In addition to the purchase
price, the Company may be required to make additional payments contingent on performance through 2009.                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-34

---



Table of Contents

|                                   
|-----------------------------------
|LENOX
  GROUP INC. AND SUBSIDIARIES
|                                   
|SCHEDULE II                        
|VALUATION AND QUALIFYING ACCOUNTS  
|(In thousands)                     
|                                   

|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        |  | 
|--------------------------------------- |  | --------- | ------ | ---------- | - | ------- |  | ---------- | ----- | ------- | - | ------ | --- | - | ------ |  | 
|                                        |  | Balance   |        | Charged to |   |         |  |            |       | Balance |  
|                                        |  | Beginning |        | Costs and  |   | Other   |  |            |       | End of  |  
|Description                             |  | of Period |        | Expenses   |   | Changes |  | Deductions |       | Period  |  
|                                        |  |           |        |            |   |         |  |            |       |         |   |       
|Year ended
December 31, 2005:           |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|Allowance for
doubtful accounts         |  | $         | 5,051  |            | $ | 3,025   |  | $          | 2,729 | (a)     | $ | 3,939  | (b) | $ | 6,866  | 
|Allowance for
sales returns and credits |  |           | 1,352  |            |   | 9,734   |  |            | 4,373 | (a)     |   | 8,791  |     |   | 6,668  | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|                                        |  | $         | 6,403  |            | $ | 12,759  |  | $          | 7,102 | (a)     | $ | 12,730 |     | $ | 13,534 | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|Year ended
January 1, 2005:             |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|Allowance for
doubtful accounts         |  | $         | 5,714  |            | $ | 1,614   |  |            |      |         | $ | 2,277  | (b) | $ | 5,051  | 
|Allowance for
sales returns and credits |  |           | 2,964  |            |   | 3,043   |  |            |      |         |   | 4,655  |     |   | 1,352  | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|                                        |  | $         | 8,678  |            | $ | 4,657   |  | $          |      |         | $ | 6,932  |     | $ | 6,403  | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|Year ended
January 3, 2004:             |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|Allowance for
doubtful accounts         |  | $         | 6,529  |            | $ | 1,761   |  |            |      |         | $ | 2,576  | (b) | $ | 5,714  | 
|Allowance for
sales returns and credits |  |           | 3,853  |            |   | 4,582   |  |            |      |         |   | 5,471  |     |   | 2,964  | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 
|                                        |  | $         | 10,382 |            | $ | 6,343   |  | $          |      |         | $ | 8,047  |     | $ | 8,678  | 
|                                        |  |           |        |            |   |         |  |            |       |         |   |        |     |   |        | 

|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Amounts acquired as part of the acquisition of Lenox, Inc. See footnote 3.                                                                                 
|(b) | Accounts determined to be uncollectible and charged against
allowance account, net of collections on accounts previously charged against allowance account.

S-1

---