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 1934 (Fee Required) For the fiscal year ended December 29, 2001
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|    | OR                                                                                                                                             
|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from  to
.

Commission file number 1-11908

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

Delaware(State or other jurisdiction of
incorporation or organization)

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

55344(Zip Code)


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

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

Title of each class

Name of each exchange
on which registeredCommon Stock, par value $.01 per share

New York Stock Exchange


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

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

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

The
aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $166,731,061 as of March 18, 2002 (based on the closing price of
consolidated trading in the Common Stock on that date as published inYahoo! Finance). For purposes of this computation, shares held by affiliates and
by directors and officers of the registrant have been excluded. Such exclusion of shares held by directors and officers is not intended, nor shall it be deemed, to be an admission that such persons
are affiliates of the registrant.

Number
of Shares of Common Stock, par value $.01 per share, outstanding as of March 18, 2002: 12,936,682.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders filed with the Securities and Exchange Commission concurrently with this
Form 10-K (the "2002 Proxy Statement") are incorporated by reference in Part III.

---

FORM 10-K TABLE OF CONTENTS

|           |  |                                                                                       |  | Page
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|
|Part I     |  |                                                                                      
|Item 1.    |  | Business                                                                              |  | 1   
|Item 2.    |  | Properties                                                                            |  | 7   
|Item 3.    |  | Legal Proceedings                                                                     |  | 8   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 8   
|Part II    |  |                                                                                      
|Item 5.    |  | Market for the Registrant's Common Equity and Related Stockholder Matters             |  | 9   
|Item 6.    |  | Selected Financial Data                                                               |  | 10  
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|Item 8.    |  | Financial Statements and Supplementary Data                                           |  | 21  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 21  
|Part III   |  |                                                                                      
|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  | 21  
|Item 11.   |  | Executive Compensation                                                                |  | 21  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 21  
|Item 13.   |  | Certain Relationships and Related Transactions                                        |  | 21  
|Part IV    |  |                                                                                      
|Item 14.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 22  
|Signatures |  | 24                                                                                   

---



PART I

ITEM 1. BUSINESS

General:

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

The
Company was incorporated in Delaware in 1992 to hold the equity of a Minnesota corporation formed in 1984 under the name "Department 56, Inc.," which has since changed its name to "D
56, Inc." and has continued as the Company's principal operating subsidiary.

The
Company seeks businesses that reinforce synergies, allows it to complement its internal product development and accelerates its penetration into new markets and new channels. In the third quarter
of fiscal year 2001, the Company completed its acquisition of the business of Axis Corporation (the "Geppeddo Business" or "Geppeddo"), a designer and importer of porcelain and vinyl dolls, doll
accessories and plush items sold through customized seasonal kiosks under the Geppeddo® brand. The Company believes opportunities exist to enhance and expand the selling season of Geppeddo
through the addition of new products. The Company's focused, multi-faceted strategy is intended to position Department 56 as the premier giftware and collectibles company for the future.

The
Company sells its products through several channels including approximately 13,600 wholesale customers, three Company-owned retail stores and approximately 370 seasonal stores and kiosks located
throughout the U. S. and Canada.

Wholesale Operations:

The Company sells its products to retailers through its wholesale operations which consist of eight corporate showrooms and three independently operated wholesale showrooms,
covering the major giftware market areas in the U.S. and Canada. In addition, the Company markets and sells through giftware trade shows throughout the U. S. and Canada.

The
Company's domestic wholesale operations serve an extensive base of retailers primarily consisting of small, independent gift stores. The Company's principal customers (accounting for approximately
90% of its sales) are approximately 13,500 independent gift retailers across the United States. These retailers include approximately 1,550 independently owned Gold Key and Showcase Dealers, who
receive special recognition and qualify for improved sales terms by satisfying certain requirements, such as maintaining the Company's products on display in an attractive setting for at least six
months. Approximately 8% of the Company's sales are made to department stores and mail order houses. No single account represented more than 3% of the Company's sales in fiscal 2001. The Company
provides volume discounts to its customers with respect to most of its products. The Company has generally had only limited sales outside the United States. International sales, which are made
primarily in Canada, were less than 3% of the Company's sales in fiscal 2001.

1

---

As
part of the Company's strategy of selective distribution, only approximately 5,050 retailers receive the Company's Village Series and/or Snowbabies products (which the Company sometimes refers to
as its "collectible" products and/or lines). Certain of the Company's limited edition and year of production lighted Village Series and Snowbabies products are sold on allocation. Under its allocation
practice, the Company specifies certain items among its principal Village Series and Snowbabies product lines, which it does not allow customers to purchase in unlimited quantities. The Company
periodically evaluates and adjusts its distribution network and reviews its policies with a view of optimizing both the Company's distribution strategy and the store-level operations of its
independent retailers. While the Company remains committed to selective distribution for the Village Series and Snowbabies products, the Company plans to continue to seek complementary retailers (at
times, with a less-than-full offering of the Company's product assortment) to maintain sufficient market presence to build consumer awareness, interest and trial of the
Company's products.

Over
the past two years, the Company's principal customers have decreased in number by approximately 4,000, or 23%. Similarly, customers who sell the Company's Village Series and/or Snowbabies
products have decreased by approximately 850, or 14%. The Company believes the decrease in customers and related decrease in sales is due to several factors including: the problems experienced during
the implementation of the Company's enterprise-wide computer system, and an overall weakness in the economy which has forced some of the Company's customers to go out of business. The
Company has enacted programs to curb the decline in customers and wholesale sales experienced over the past two years including implementing new customer ordering and shipping programs. The Company is
also strengthening its sales management team, working to refine its product development process, improving the gift and decorating appeal of its product, and broadening the seasonal coverage of its
product lines to drive sales growth.

The
Company continues to market and advertise its products to retailers principally through giftware trade shows, brochures and trade journals. The Company provides merchandising and product
information to its customers distributing collectible products through its business-to-business Internet site ("WIN" or Web Information Network). The
Company continues to expand the use of WIN in order to develop greater merchandising effectiveness and operational efficiencies for its customers and the Company. The Company also extends its consumer
advertising through use of cooperative advertising with its Gold Key Dealers using various media formats.

Retail Operations:

The Company sells its products to existing and potentially new consumers through its retail operations which include three retail stores located in tourist destinations at the
Mall of America, outside Minneapolis, Minnesota; Aladdin Casino and Resort in Las Vegas, Nevada; and Downtown Disney® in Anaheim, California. During 2001, the Company also operated ten
seasonal stores under the name "Holidays by Department 56" and through the Geppeddo business distributed Geppeddo® brand products through customized seasonal kiosks located in
approximately 360 major malls and shopping centers throughout the U.S. and Canada. The Company will continue to consider the addition of more corporate owned stores and continue to expand seasonal
kiosks during fiscal 2002.

The
Company markets and advertises to existing and potentially new consumers through seasonal advertisements in magazines and newspapers, brochures, point-of-sale information
and booth presence at major collectibles expos. In addition, the Company publishes and sellsFifty-Six,a quarterly consumer
magazine

2

---

which contains product-related articles and description of its product lines, and maintains an interactive consumer information center on an Internet web site (www.department56.com). Department 56
maintains a toll-free telephone line for collector and consumer questions and participates in collector conventions. The Company also operates a collectors' club to which consumers of its
Snowbabies product line may subscribe for exclusive product offerings and information.

Products:

Village Series Products Department 56 is best known for its Village Series, which includes several different
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. To allow for these new introductions and to keep each series appropriately balanced, the Company has
traditionally retired a number of its existing pieces from production each year. Retirement decisions are based on management's judgment as to, among other things, expected consumer demand, whether a
piece continues to fit the evolving design characteristics of a series, manufacturing considerations and, importantly, injecting an element of surprise. In 2001, to build upon the Company's success
with its Halloween lighted pieces, the Company also introduced new lighted pieces and accessories for a variety of holidays and special days, including St. Patrick's Day, Easter and Fourth of July.
The Company will continue to consider the introduction of new lighted pieces and accessories for other holidays and special day themes.

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

General Giftware The Company offers a wide range of other decorative giftware and home accessory items including: the Company's Snowbabies
and Snowbunnies® figurines; holiday and seasonal decorative items; as well as tableware. Under the Geppeddo® brand, the Company also offers a range of porcelain and vinyl
dolls, doll accessories and plush items. General Giftware product lines are product lines developed around either a seasonal or unique design theme. The Company generally introduces new products and
refines its product offerings twice a year. The Company currently maintains an aggregate of approximately 3,800 stock keeping units, of which approximately 3,100 are General Giftware products.

Design and Production:

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

Department
56 believes that its relationships with its manufacturers, and the quality of their craftsmanship, provide a competitive advantage and are a significant contributor to the Company's
success. The Company imports most of its products from the Pacific Rim, primarily the People's Republic of China, Taiwan (Republic of China) and the Philippines. The Company also imports a small
percentage of its products from

3

---

India, and Europe (primarily Germany, Poland and Czechoslovakia). During fiscal 2001, the Company imported products from approximately 184 independent manufacturing sources, some of which are
represented by independent trading companies. The Company's single largest manufacturing source represented approximately 23% of the Company's imports in fiscal 2001. The Company's
emphasis on high-quality craftsmanship at affordable prices limits the sources from which the Company chooses to obtain products. The Company has long-standing relationships
with the majority of its manufacturers (many for 20 years or more) and may purchase (typically on a year-to-year basis) a manufacturer's entire output for a year. As a
result of these relationships, the Company has experienced a low turnover of its manufacturing sources.

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

Distribution and Systems:

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

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

The
Company's retail systems also monitor and transmit to the Company on a daily basis the POS (point of sales) data for the Company's three retail stores and department totals for the ten seasonal
stores.

Backlog and Seasonality:

The Company receives products, pays its suppliers and ships products throughout the year, although historically the majority of shipments have occurred in the second and third
quarters of each year as retailers stock merchandise in anticipation of the winter holiday season. The Company continues to ship wholesale merchandise until mid-December each year.
Accordingly, the Company's wholesale backlog typically is lowest at the beginning of January. As of December 29, 2001, Department 56 had unfilled wholesale orders of approximately
$4.7 million compared to $4.6 million at December 30, 2000. All of the backlog is scheduled to be shipped to customers during the current fiscal year. Approximately 7% to 8% of

4

---

the Company's total annual customer orders have been cancelled in each of the last three years for a number of reasons, including inventory shortages and customer credit considerations.

Department
56 historically experiences a significant seasonal pattern in its working capital requirements and operating results. During the first quarter of each of the last three years due to the
timing of the wholesale trade shows early in the calendar year and retailers' desire for early product delivery of collectible products in particular, the Company has received approximately 61% to 68%
of its annual wholesale orders for such year. The Company offers extended payment terms to many of its wholesale customers for seasonal merchandise. Accordingly, the Company collects a substantial
portion of its accounts receivable for its wholesale customers in the fourth and first quarters. The Company can experience fluctuations in quarterly wholesale sales due to the timing of receipt of
product from suppliers and subsequent shipment of product from the Company to wholesale customers, as well as the timing of orders placed by wholesale customers. Due to the seasonal pattern of
shipping and accounts receivable collection, the Company generally has had greater working capital needs in its second and third quarters and has experienced greater cash availability in its fourth
and first quarters. The Company typically finances its operations through net cash and marketable securities balances, internally generated cash flow and short-term seasonal borrowings. As
a result of the Company's sales pattern, the Company has historically recorded a substantial portion of its wholesale revenues in its second and third quarters. In addition, the Company recognizes the
majority of its retail sales in the fourth quarter during the peak holiday shopping season.

Trademarks and Other Proprietary Rights:

The Company owns 38 U.S. trademark registrations and has pending U.S. trademark applications with respect to certain of its logos and brand names. In addition, the Company from
time to time registers selected trademarks in certain foreign countries.

Department
56 regards its trademarks and other proprietary rights as valuable assets and intends to maintain and renew its trademarks and their registrations and vigorously defend against
infringement. The U.S. registrations for the Company's trademarks are currently scheduled to expire or be cancelled at various times between 2002 and 2011, but can be maintained and renewed provided
that the marks are still in use for the goods and services covered by such registrations. The Company has historically renewed its trademarks and expects to continue to renew them in the future.

Competition:

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

5

---

products. Some of the Company's competitors, however, have greater financial resources and a wider range of products than the Company.

Restrictions on Imports:

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

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

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

In
fiscal 2001, approximately 87% of the Company's imports were manufactured in the People's Republic of China ("China"), and the Company anticipates 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 widespread in China, including the handling of intellectual properties, as well as certain political and military actions taken or suggested by China,
are under review by the U.S. government. China, moreover, 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 which may be taken by the U.S. government, none of which the Company believes would have a material impact on its 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, the Company is unable to predict what, if any,
action the President could consider taking 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 the Company is 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

6

---

materially impaired. In such an event, there could be an adverse effect on the Company until alternative arrangements for the manufacture of its products were obtained on economic, production and
operational terms at least as favorable as those currently in effect.

Employees:

As of March 6, 2002, the Company had 353 full-time employees in the United States, eight in Canada and one in Taiwan. Of the total workforce, approximately
100 are engaged in wholesale sales representation throughout North America and 38 are associated with the Company's retail operations. The Company's 59 U.S.-based warehouse, shipping and receiving
personnel employed as of that date are represented by Local Union No. 638 of the Teamsters under a contract that expires on December 31, 2004. The Company believes that its labor
relations are good and has never experienced a work stoppage.

Environmental Matters:

The Company is subject to various federal, state and local laws and regulations governing the use, discharge and disposal of hazardous materials. Compliance with current laws
and regulations has not had and is not expected to have a material adverse effect on the Company's financial condition. It is possible, however, that environmental issues may arise in the future that
the Company cannot currently predict.

ITEM 2. PROPERTIES

The Company owns or leases buildings that contain approximately 688,800 square feet of floor space, as identified in the following table. The Company's primary
corporate showroom, executive offices and creative center are located in Eden Prairie, Minnesota. The office building in Eden Prairie, Minnesota is owned by the Company and the remainder of the
Company's facilities are leased. In addition, the Company leases space for approximately 370 seasonal stores and kiosks located throughout the U.S. and Canada during the peak holiday shopping season.

|Facility                                                          |  | Location           |  | Lease
Expiration Date  |  | Approximate
Number of
Square Feet
|----------------------------------------------------------------- |  | ------------------ |  | ---------------------- |  | ---------------------------------
|
|Executive Offices, Creative Center and Primary Corporate Showroom |  | Eden Prairie, MN   |  | Company-owned facility |  | 66,400                           
|Warehouse and Distribution Facility                               |  | Rogers, MN         |  | 6-30-2010              |  | 333,700                          
|Offices, Warehouse and Distribution Facility                      |  | Salt Lake City, UT |  | 6-30-2002              |  | 54,400                           
|Showroom                                                          |  | Atlanta, GA        |  | 12-31-2006             |  | 12,946                           
|Showroom                                                          |  | Chicago, IL        |  | 11-30-2006             |  | 7,480                            
|Showroom                                                          |  | Dallas, TX         |  | 1-31-2007              |  | 9,143                            
|Showroom                                                          |  | Los Angeles, CA    |  | 12-31-2002             |  | 6,600                            
|Showroom                                                          |  | New York, NY       |  | 12-31-2005             |  | 10,300                           
|Showroom                                                          |  | Fairfax, VA        |  | 12-31-2003             |  | 4,300                            
|Showroom                                                          |  | Bedford, MA        |  | 6-30-2004              |  | 1,800                            
|Showroom                                                          |  | Columbus, OH       |  | 5-31-2009              |  | 2,485                            
|Retail Store                                                      |  | Bloomington, MN    |  | 4-30-2009              |  | 10,200                           
|Retail Store                                                      |  | Las Vegas, NV      |  | 10-31-2010             |  | 3,100                            
|Retail Store                                                      |  | Anaheim, CA        |  | 3-31-2012              |  | 6,250                            

7

---

ITEM 3. LEGAL PROCEEDINGS

On September 14, 2000, Arthur Andersen LLP filed a lawsuit against the Company in The Fourth Judicial District, State of Minnesota alleging breach of
contract in connection with computer system implementation work and seeking $0.6 million plus interest and legal costs. On March 1, 2001, the Company filed suit in The Circuit Court of
Baltimore City, State of Maryland against Andersen Worldwide Société Coopérative and W. Robert Grafton alleging fraud, conspiracy, tortuous conduct and
breach of contract in connection with the computer systems implementation work solicited and performed by Arthur Andersen LLP. On July 12, 2001, the Company dismissed all claims brought against
W. Robert Grafton. On March 1, 2002, the Company received net proceeds (before taxes) of $11.0 million in settlement of all parties' claims.

On
March 5 and March 9, 2001 lawsuits seeking unspecified compensatory damages were filed against the Company and its Chairwoman and Chief Executive Officer Susan E. Engel, in the United
States District Court for the District of Minnesota purportedly on behalf of the class of persons who purchased Department 56 common stock during the period February 24, 1999 through
April 26, 2000. The purported class action lawsuits allege the Company and its Chairwoman violated federal securities laws by making a series of false and misleading statements concerning the
Company's financial statements. On August 29, 2001, the Court consolidated all the actions into In Re Department 56, Inc. Securities Litigation. Oral arguments are scheduled to be heard
in connection with the Company's Motion to Dismiss on March 22, 2002. The Company has tendered a claim for coverage to the underwriters of its Directors and Officers Liability Insurance, and
believes that such insurance will respond to the coverage claim net of a $250,000 deductible. The Company intends to defend this lawsuit vigorously, but the Company is unable to predict the outcome of
these proceedings or to
reasonably estimate the impact, if any, that the ultimate resolution of these matters will have on the Company's results of operations, financial position or cash flows.

In
the ordinary course of its business, the Company is involved in various additional legal proceedings, claims and governmental audits, in addition to the above lawsuits. The Company believes it has
meritorious defenses to all proceedings, claims and audits. While management cannot predict the eventual outcome of these proceedings, 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 29, 2001.

8

---

PART II

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

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

|            |                | High |       | Low
|----------- | -------------- | ---- | ----- | ---
|
|FISCAL 2001 |                |      |       |    
|            | First quarter  |      | 13.06 |    
|            | Second quarter |      | 8.98  |    
|            | Third quarter  |      | 11.10 |    
|            | Fourth quarter |      | 9.71  |    
|FISCAL 2000 |                |      |       |    
|            | First quarter  |      | 23.69 |    
|            | Second quarter |      | 15.69 |    
|            | Third quarter  |      | 14.94 |    
|            | Fourth quarter |      | 15.88 |    

The Company has not declared or paid dividends on its Common Stock. The Company does not anticipate paying dividends in the foreseeable future. As a holding
company, the ability of the Company to pay cash dividends will depend upon the receipt of dividends or other payments from its subsidiaries.

As
of March 18, 2002, the number of holders of record of the Company's Common Stock was 984.

9

---



ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY (In thousands, except per share amounts)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000, JANUARY 1, 2000, JANUARY 2, 1999, AND JANUARY 3, 1998

The following selected consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements and related Notes thereto, included elsewhere herein.

|                                                |                                                            | December 29,
20011 |         | December 30,
20001 |   | January 1,
20001 |        | January 2,
19991 |         | January 3,
19981 |  
|----------------------------------------------- | ---------------------------------------------------------- | ------------------ | ------- | ------------------ | - | ---------------- | ------ | ---------------- | ------- | ---------------- | -
|
|STATEMENTS OF INCOME                            |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Net sales                                       |                                                            | $                  | 200,447 |                    | $ | 234,058          |        | $                | 255,528 |                  | $
|Cost of sales                                   |                                                            |                    | 89,845  |                    |   | 109,522          |        |                  | 113,475 |                  |  
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Gross profit                                    |                                                            |                    | 110,602 |                    |   | 124,536          |        |                  | 142,053 |                  |  
|Operating expenses:                             |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|                                                | Selling, general and administrative                        |                    |         | 68,589             |   |                  | 74,166 |                  |         | 61,542           |  
|                                                | Amortization of goodwill, trademarks and other intangibles |                    |         | 5,189              |   |                  | 5,486  |                  |         | 5,145            |  
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Total operating expenses                        |                                                            |                    | 73,778  |                    |   | 79,652           |        |                  | 66,687  |                  |  
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Income from operations                          |                                                            |                    | 36,824  |                    |   | 44,884           |        |                  | 75,366  |                  |  
|Other expense (income):                         |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|                                                | Interest expense                                           |                    |         | 7,036              |   |                  | 11,729 |                  |         | 6,719            |  
|                                                | Gain on sale of aircraft2                                  |                    |         |                   |   |                  |       |                  |         |                 |  
|                                                | Impairment and equity in losses of minority investment3    |                    |         | 3,304              |   |                  | 427    |                  |         |                 |  
|                                                | Other, net                                                 |                    |         | (662               | ) |                  | (809   | )                |         | (153             | )
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Income before income taxes                      |                                                            |                    | 27,146  |                    |   | 33,537           |        |                  | 68,800  |                  |  
|Provision for income taxes                      |                                                            |                    | 11,184  |                    |   | 12,744           |        |                  | 26,144  |                  |  
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Net income                                      |                                                            | $                  | 15,962  |                    | $ | 20,793           |        | $                | 42,656  |                  | $
|                                                |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Net income per common share  basic             |                                                            | $                  | 1.24    |                    | $ | 1.47             |        | $                | 2.48    |                  | $
|Net income per common share  assuming dilution |                                                            | $                  | 1.24    |                    | $ | 1.47             |        | $                | 2.45    |                  | $
|BALANCE SHEET DATA                              |                                                            |                    |         |                    |   |                  |        |                  |         |                  |  
|Working capital                                 |                                                            | $                  | 62,894  |                    | $ | 65,581           |        | $                | 32,289  |                  | $
|Total assets                                    |                                                            |                    | 279,821 |                    |   | 277,808          |        |                  | 287,108 |                  |  
|Total debt                                      |                                                            |                    | 85,000  |                    |   | 105,000          |        |                  | 102,500 |                  |  
|Total stockholders' equity4                     |                                                            |                    | 156,747 |                    |   | 140,575          |        |                  | 152,924 |                  |  

10

---



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

(In millions, except per share amounts)

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

|                                                           |  | 2001 |       | 2000 |     | 1999 |  
|---------------------------------------------------------- |  | ---- | ----- | ---- | --- | ---- | -
|
|
|Net sales                                                  |  | $    | 200.4 |      | 100 | %    | $
|Gross profit                                               |  |      | 110.6 |      | 55  |      |  
|Selling, general and administrative expenses               |  |      | 68.6  |      | 34  |      |  
|Amortization of goodwill, trademarks and other intangibles |  |      | 5.2   |      | 3   |      |  
|Income from operations                                     |  |      | 36.8  |      | 18  |      |  
|Interest expense                                           |  |      | 7.0   |      | 4   |      |  
|Other, net                                                 |  |      | 2.6   |      | 1   |      |  
|Income before income taxes                                 |  |      | 27.1  |      | 14  |      |  
|Provision for income taxes                                 |  |      | 11.2  |      | 6   |      |  
|Net income                                                 |  |      | 16.0  |      | 8   |      |  
|Net income per common share assuming dilution              |  |      | 1.24  |      |     |      |  

COMPARISON OF RESULTS OF OPERATIONS 2001 TO 2000

Net Sales

Net sales decreased $33.7 million, or 14%, from $234.1 million in 2000 to $200.4 million in 2001. The decrease in sales was principally due to a decrease
in wholesale sales to independent gift retailers
("wholesale customers"), partially offset by an increase in retail sales. The Company has enacted programs to curb the decline in wholesale sales experienced over the past two years including
implementing new customer ordering and shipping programs. The Company is also strengthening its sales management team, working to refine its product development process, improving the gift and
decorating appeal of its product, and broadening the seasonal coverage of its product lines in order to drive sales growth.

Wholesale
sales decreased $50.1 million, or 22%, from $231.2 million in 2000 to $181.1 million in 2001. This decrease was due to lower volume sales to existing wholesale customers
as well as sales to fewer wholesale customers in 2001 than in 2000. The decrease in customers was principally due to the problems experienced during the implementation of the Company's
enterprise-wide computer system and an overall weakness in the economy which has forced some of the Company's customers to go out of business. The decrease in sales was partially offset by
the impact of a customer appreciation discount that the Company offered on orders taken during the first quarter of 2000 and higher charges for product claims in 2000. Product claims have returned to
normal levels during 2001. Wholesale sales of the Company's Village Series products decreased $39.9 million, or 27%, while sales of General Giftware products decreased $10.2 million, or
13% between the two periods. Village Series products represented 61% of the Company's sales during 2001 versus 65% during 2000.

Retail
sales increased $16.5 million from $2.9 million in 2000 to $19.4 million in 2001 principally due to the Company's acquisition of Geppeddo during the third quarter of 2001
(see Note 8 to the Consolidated

11

---

Financial Statements). Geppeddo is a designer and specialty retailer of porcelain dolls, doll accessories and plush items, which are marketed under the brand name Geppeddo.® Retail sales
also increased due to the Company opening its third "full-line" Department 56-branded retail store as well as testing ten Department 56-branded seasonal stores
during the peak holiday shopping season.

Gross Profit

Gross profit as a percentage of net sales was 53% and 55% in 2000 and 2001, respectively. Excluding the impact of the customer appreciation discount and the higher charges for
product claims, gross profit as a percent of sales would have been approximately 56% in 2000. The decrease in gross profit as a percentage of net sales during 2001 compared to this adjusted gross
profit as a percentage of net sales for 2000 was primarily the result of higher charges recorded to provide for excess inventories and a shift in product mix toward general giftware as noted above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $5.6 million, or 8%, between 2000 and 2001. Selling, general and administrative expenses as a percentage of net
sales was approximately 32% in 2000 and 34% in 2001. In 2000, the Company recorded higher than normal bad debt costs as a result of the problems experienced during the implementation of the Company's
new enterprise-wide computer system beginning in early 1999, as previously communicated. Excluding the impact on net sales of the customer appreciation discount and the higher charges for
product claims and the impact on selling, general and administrative expense from higher bad debt costs, selling, general and administrative expenses as a percentage of net sales would have been
approximately 28% in 2000.

The
increase in selling, general and administrative expenses as a percentage of net sales in 2001 compared to the adjusted percentage in 2000 is principally due to an increase in retail store
operations resulting from the acquisition of Geppeddo, the Company opening its third retail store, consumer research and the testing of ten seasonal stores during the peak holiday shopping season.
Retail net sales, which have higher selling, general and administrative expenses as a percentage of net sales than wholesale net sales, represented 10% of total net sales in 2001 compared to 1% in
2000. Selling, general and administrative expense as a percentage of net sales was also higher in 2001 due to the decrease in wholesale sales. Many of the Company's wholesale operating expenses such
as rent and labor do not vary directly with net sales. As a result, wholesale operating expenses were not reduced proportionately with the decrease in wholesale net sales.

Income from Operations

Income from operations decreased $8.1 million, or 18%, from 2000 to 2001 due to the factors described above. Operating margins decreased from 19% of net sales in 2000 to
18% of net sales in 2001. Excluding the impact of the customer appreciation discount and the higher charges for product claims and bad debts, income from operations would have been approximately 26%
of net sales in 2000.

Interest Expense

Interest expense decreased $4.7 million, or 40%, between 2000 and 2001 principally due to decreased borrowings under the Company's credit facilities as a result of
improved cash collections, lower inventory
balances, and higher cash balances at the beginning of 2001. Interest expense also decreased due to lower interest rates paid by the Company in 2001.

12

---

Other, net

Other expense increased $3.0 million from 2000 to 2001 principally due to a $3.0 million impairment of the Company's minority investment in 2-Day
Designs, Inc. given continued deterioration in the U.S. home furnishings market. The impairment charge recorded reduces the carrying value of the Company's minority investment to zero. The
Company has not guaranteed any debt obligations of 2-Day Designs, Inc.

Provision for Income Taxes

The effective income tax rate was 38% and 41% during 2000 and 2001, respectively. The effective income tax rate in 2001 was higher primarily because the Company recognized no
tax benefit associated with its impairment charge of 2-Day Designs, Inc. (see Note 5 to the Consolidated Financial Statements). This increase was partially offset by a
$1.0 million tax benefit that the Company recorded related to prior year tax accruals that were no longer needed.

COMPARISON
OF RESULTS OF OPERATIONS 2000 TO 1999

Net Sales

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

Gross Profit

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $12.6 million, or 21%, between 1999 and 2000. The increase is principally due to an increase in the amount
provided for bad debts, an increase in depreciation and expenses related to the Company's continued investment in its business-to-business internet site and its new
distribution center, an increase in expenses related to the Company's launching of its new business-to-business extranet, and an increase in other administrative expenses. The
increase in the provision for bad debts was primarily due to a $5.5 million charge taken during the first quarter of 2000 as a result of the problems experienced during the implementation of
the Company's new enterprise-wide information system beginning in early 1999, as previously communicated. These increases were principally offset by a decrease in marketing expense, a
decrease in commission expense, and acquisition costs existing in 1999 but

13

---

not in 2000. Selling, general and administrative expenses as a percentage of sales was 24% and 32% during 1999 and 2000, respectively. Excluding the impact of the customer appreciation discount and
increased provisions for returned product and bad debts, selling, general and administrative expenses as a percentage of sales would have been approximately 28% in 2000.

Income from Operations

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

Interest Expense

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

Provision for Income Taxes

The effective income tax rate was 38.0% during 1999 and 2000.

SEASONALITY

Historically, due to the timing of wholesale trade shows early in the calendar year, the Company has received the majority of its total annual wholesale
customer orders during the first quarter of each year. The Company entered 61% and 68% of its total net annual wholesale customer orders during 2001 and 2000, respectively, during the first quarter of
each of those years. Cancellations of total annual wholesale customer orders were approximately 8% and 7% in 2001 and 2000, respectively. Orders not shipped in a particular year, net of cancellations,
are carried into backlog for the following year and have historically been orders for Spring and Easter products. The Company's backlog of wholesale customer orders was $4.7 million and
$4.6 million at December 29, 2001 and December 30, 2000, respectively.

The
Company receives products, pays its suppliers and ships products throughout the year, although historically the majority of wholesale shipments occur in the second and third quarters as retailers
stock merchandise in anticipation of the holiday season. As a result of this seasonal pattern, the Company generally records its highest wholesale sales during the second and third quarters of each
year. However, the Company can experience fluctuations in quarterly wholesale 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 wholesale customers, as well as the timing of orders placed by wholesale customers. In addition, the Company recognizes the majority of its retail
sales in the fourth quarter during the peak holiday shopping season. 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.

14

---

|                                                           |  | 2001 |       | 2000
|---------------------------------------------------------- |  | ---- | ----- | ----
|
|Wholesale customer orders entered1                         |  | $    | 110.4 |     
|Net sales  wholesale                                      |  |      | 28.7  |     
|Net sales  retail                                         |  |      | 0.4   |     
|Net sales  total                                          |  |      | 29.1  |     
|Gross profit                                               |  |      | 15.8  |     
|Selling, general and administrative expenses               |  |      | 14.8  |     
|Amortization of goodwill, trademarks and other intangibles |  |      | 1.4   |     
|(Loss) income from operations                              |  |      | (0.4  | )   
|Net (loss) income                                          |  |      | (1.4  | )   
|Net (loss) income per common share assuming dilution2      |  |      | (.11  | )   

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities decreased $4.7 million, or 8%, from $61.6 million in 2000 to $56.9 million in 2001 principally
due to the decrease in net sales which resulted in a decrease in net income in 2001 and higher cash collections in 2000 as a result of the higher than normal accounts receivable balances at the end of
1999. This decrease was partially offset by an increase in cash due to lower inventory and higher payable balances in 2001.

Consistent
with customary practice in the giftware industry, the Company offers extended accounts receivable terms to many of its wholesale customers. This practice has typically created significant
working capital requirements in the second and third quarters for which the Company has generally financed with internally generated cash flow and seasonal borrowings. The Company's cash and cash
equivalents balances peak during the first quarter of the subsequent year, following the collection of accounts receivable with extended payment terms due in November and December.

Accounts
receivable, net of reserves, which principally consists of wholesale trade receivables, decreased by 36%, from $37.0 million at December 30, 2000 to $23.6 million at
December 29, 2001. The decrease in accounts receivable was principally due to a decrease in wholesale sales from 2000 to 2001 and improved cash collections. Management believes there is
adequate provision for any doubtful accounts receivable and product claims that may arise.

Inventories
decreased from $15.7 million at December 30, 2000 to $11.2 million at December 29, 2001. The decrease in inventories was principally due to additional
write-downs related to excess inventories and the Company's initiative to reduce inventory levels through better inventory planning and more efficient product flow through the Company's distribution
center. The decrease in inventory was partially offset by $2.8 million of additional inventory on hand at the end of 2001 as a result of the Geppeddo acquisition.

Capital
expenditures were $2.9 million, $7.1 million and $16.3 million in 2001, 2000 and 1999, respectively. Capital expenditures in 2000 and 1999 included $3.3 million and
$7.7 million, respectively, for information systems principally related to the Company's implementation of its integrated computer systems. The Company expects capital expenditures in 2002 to
be at or below its 2002 depreciation.

15

---

During
the third quarter of 2001, the Company completed its $9.7 million acquisition of Geppeddo, a privately held designer, importer and specialty retailer based in Salt Lake City whose
products, primarily porcelain dolls, doll accessories and plush items, are marketed under the brand name Geppeddo.® The Geppeddo business operates customized kiosks located in
approximately 360 major malls and shopping centers throughout the United States and Canada during the peak holiday shopping season. The acquisition gives the Company additional differentiated and
branded products, and access to a new channel of distribution. The high quality and creativity of Geppeddo's products and strength of the Geppeddo® brand complement the reputation of
Department 56 for quality, branded product lines. The Company sees the potential to expand upon this brand and distribution channel with new concepts designed to enhance and lengthen the selling
season of the acquired business. The founders and entire management team of the acquired business are continuing in their positions. Revenue generated by Geppeddo in 2001 was approximately
$12.0 million since the acquisition date. The selling shareholders of the acquired business have the ability to earn up to an additional $12.0 million of cash consideration if certain
pre-specified financial performance measures are attained as measured annually over a three-year period concluding February 29, 2004.

During
January 2000, the Company completed a $4.0 million strategic minority investment in 2-Day Designs, Inc., a manufacturer and marketer of high quality accent
furniture and wooden accessories sold primarily through furniture, home furnishings, and catalog retailers principally in the United States. The transaction was accounted for under the equity method
of accounting. During the quarter ended September 29, 2001, the Company recognized a $3.0 million impairment of the Company's minority investment in 2-Day
Designs, Inc. given continued deterioration in the U.S. home furnishings market. The impairment charge recorded reduced the carrying value of the Company's minority investment to zero. The
Company has not guaranteed any debt obligations of 2-Day Designs, Inc.

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

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

In
2000, the Company repurchased 2.4 million shares at an average price of $14 per share. No shares were repurchased in 2001. Since January 1997, the Company has repurchased a total of
9.2 million shares. The Company had no remaining authorization from the Board of Directors to repurchase any additional shares at the end of 2001.

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

16

---

these restrictions are expected to have a material adverse effect on the Company's ability to operate in the future.

During
the first quarter of 2000, the Company borrowed an additional $90 million of term debt under its term loan facility which brought the total outstanding term debt to $150 million
as of April 1, 2000. During the second quarter of 2000, the Company prepaid $45 million of term debt which cannot be reborrowed and included the $22.5 million payment due
March 2001. During the first quarter of 2001, the Company prepaid $20 million of term debt under its term loan facility. As of December 29, 2001, the total term debt outstanding
was $85 million. The Company's remaining term debt requires annual amortization payments of $0.9 million, $32.4 million, and $51.7 due March 2002, 2003, and 2004,
respectively. The Company's borrowing capacity under the revolving credit facility as of December 29, 2001 was $30.0 million and will fluctuate during 2002 based on accounts receivable
and inventory levels.

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

CREDIT,
RETURN AND OTHER CRITICAL ACCOUNTING POLICIES

The Company has credit policies that establish specific criteria related to creditworthiness that its customers must meet prior to the shipment of product to
the customer. The Company periodically
makes limited and selective exceptions to its policy of not shipping to customers with overdue balances when the particular customer has met specific criteria which are indicative of a wherewithal to
pay their past due and future balances.

The
Company does not accept returns from wholesale customers without its prior authorization. Returns are typically accepted only for damaged or defective goods, or for pricing or shipping
discrepancies. The Company reserves the right to refuse authorization of any returns and to discard any unauthorized returns. If the Company accepts an unauthorized return or if a return is the result
of a customer error, the wholesale customer may be subject to a 20% handling charge. The Company reserves the right to cancel open orders or backorders for those wholesale customers who abuse or
excessively use return privileges.

The
Company believes that the selection and application of its accounting policies are appropriately reasoned. The following are the accounting policies that management believes require the most
difficult, subjective or complex judgments about matters that are inherently uncertain.

Sales Returns An allowance is established for expenses and losses related to possible returns of product. The amount of the allowances is
based on historical ratios of returns to sales, the historical average length of time between the sale and the return, and other factors. Changes in customers' behavior versus historical experience or
changes in the Company's return policies are among the factors that would result in materially different amounts for this item.

Inventory Valuation Inventory is written down for estimated surplus and discontinued inventory items. The amount of the reserve is
determined by analyzing historical and projected sales information, plans for discontinued products and other factors. Changes in sales volumes due to unexpected economic or competitive conditions are
among the factors that would result in materially different amounts for this item.

Allowance for Doubtful Accounts An allowance is established for estimated uncollectible accounts receivable. The required allowance is
determined by reviewing customer accounts and making estimates of

17

---

amounts that may be uncollectible. Factors considered in determining the amount of the reserve include the age of the receivable, the financial condition of the customer, general business, economic
and political conditions, and other relevant facts and circumstances. Unexpected changes in the aforementioned factors would result in materially different amounts for this item.

RECENT
DEVELOPMENTS

On March 1, 2002, the Company received net proceeds (before taxes) of $11.0 million in settlement of its litigation with Andersen Worldwide
Société Coopérative and W. Robert Grafton. See discussion in Legal Proceedings under Item 3.

RECENT
ACCOUNTING PRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board (FASB) approved for issuance Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and
SFAS No. 142,Goodwill and Intangible Assets. Major provisions of
these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited
except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other
legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill
and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. In general, impairment testing will entail a comparison of the fair value of a reporting unit
with its carrying value including goodwill. These statements are effective for fiscal years beginning after December 15, 2001, at which time goodwill will no longer be subject to amortization.

As
of December 29, 2001, the Company had net goodwill of $138.6 million. Goodwill amortization expense recorded during fiscal year 2001 was $4.4 million.

Based
on a preliminary review of the new standard, management believes the Company will record a goodwill impairment charge upon adoption, and that the amount of such charge will likely be significant
in relation to the Company's unamortized goodwill balance. However, the Company has not completed its evaluation to determine the exact amount of such a charge. Such impairment charge will be recorded
as a cumulative effect of a change in accounting principle and therefore will not affect operating income. Also, the Company believes this charge will not meaningfully affect the financial covenant
calculations under the Company's credit agreement.

See
Note 1 to the Consolidated Financial Statements for a more complete discussion of new accounting standards.

FOREIGN
EXCHANGE

Approximately 97% of the Company's sales in 2001 were denominated in United States dollars and, as a result, were not subject to changes in exchange rates.
Approximately 3% of the Company's sales were denominated in foreign currencies which were subject to changes in exchange rates.

18

---

The
Company imports its product from manufacturers located in the Pacific Rim, principally China. Although the Company generally pays for its product in United States dollars, the cost of such product
may fluctuate with the value of the Chinese currency because the purchase price paid to the Company's vendors in United States dollars would be worth more or less in the Chinese currency. As a result,
the Company's costs could be adversely affected if the Chinese currency appreciates significantly relative to the United States dollar. Conversely, its costs would be favorably affected if the Chinese
currency depreciates significantly relative to the United States dollar. In addition, the Company purchased less than 2% of its product from Taiwan (Republic of China) in 2001. These purchases were
denominated in New Taiwan Dollars and were subject to changes in exchange rates.

The
Company, from time to time, will enter into foreign exchange contracts or build foreign currency deposits as a partial hedge against currency fluctuations. The Company did not enter into any
foreign exchange contracts nor have any foreign exchange contracts outstanding in fiscal 2000 and 2001.

EFFECT
OF INFLATION

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

FACTORS
AFFECTING FUTURE EARNINGS

On February 20, 2002, the Company issued a press release stating in relevant part: "The Company intends to provide an outlook for fiscal 2002 in
conjunction with its release of first quarter 2002 financial results in April. Information on its wholesale orders received during the first quarter of 2002 will also be disclosed at that time. For
the last several years the Company has released wholesale order information in February in conjunction with its reporting of prior year results. However, as described below, the Company has
implemented certain customer ordering programs that management believes will materially change the timing of customer orders. As a result, the comparability of customer orders to prior year levels
through mid-February does not provide a sufficiently accurate guideline for the Company to provide investors with an outlook for 2002 at this time."

The
press release further stated: "During 2001 the Company performed extensive research within its core customer base of gift and collectible stores. In response to this feedback, the Company has
designed and implemented new ordering, sales, marketing and operational programs designed to improve the quality of service to its customers. One of the significant objectives of these programs is to
guarantee customers a specific time frame for delivery of product based upon the month in which the customer orders. These programs will alter the timing of customer orders within the first quarter
and, to a lesser extent, throughout the year."

Over
the past two years, the Company's principal customers have decreased by approximately 4,000, or 23%. Similarly, customers who sell the Company's Village Series and/or Snowbabies products have
decreased by approximately 850, or 14%. The Company believes the decrease in customers and related decrease in sales is due to several factors including: the problems experienced during the
implementation of the Company's enterprise-wide computer system, and an overall weakness in the economy which has forced some of the Company's customers to go out of business. The Company
has enacted programs to curb the decline in customers and wholesale sales experienced over the past two years including implementing new customer

19

---

ordering and shipping programs. The Company is also strengthening its sales management team, working to refine its product development process, improving the gift and decorating appeal of its
product, and broadening the seasonal coverage of its product lines to drive sales growth.

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

The
Company's sales, gross margin, earnings and earnings per share can be significantly impacted by many factors including consumer acceptance of new products; product development efforts;
identification and retention of sculpting and other talent; shift in product mix; completion of third-party product manufacturing; retailer reorders and order cancellations; the volume, number, mix
and timing of retailers' orders, retailer inventory policies, and the Company's ability to forecast and fulfill changes in anticipated product demand; control of operating expenses; collection of
accounts receivable; changes in freight rates; 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, 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, and international trade and monetary
conditions; 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.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risks relate primarily to changes in interest rates and currency exchange rates. The first component of the Company's interest rate risk
relates to its debt outstanding. At December 29, 2001, the Company had $85.0 million outstanding under its credit facility, which bears interest at variable rates. Because this facility
carries a variable interest rate, the Company's results of operations and cash flows will be exposed to changes in interest rates. Based on December 29, 2001 borrowing levels, a 1% increase or
decrease in current market interest rates would have an impact of approximately $0.9 million.

The
second component of the Company's interest rate risk involves the short-term investment of excess cash. Excess cash flow is typically invested in high-quality fixed income
securities issued by banks, corporations and the U.S. government; municipal securities; and overnight repurchase agreements backed by U.S. government securities. These securities are classified as
cash equivalents on the Company's balance sheet. At December 29, 2001, the Company's cash balance was approximately $48.1 million. Earnings from cash equivalents were approximately
$0.7 million for the fifty-two weeks ended December 29, 2001. Based on the December 29, 2001 cash balance, a 1% increase or decrease in current market interest rates would have an
impact of approximately $0.4 million.

Approximately
3% of the Company's sales and less than 2% of the Company's product purchases in fiscal year 2001 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 million.

20

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements on page F-1 herein.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item is included in the 2002 Proxy Statement in the sections captioned "Item 1  Election of Directors 
Nominees for Terms Ending at the 2003 Annual Meeting of Stockholders" and "Biographical Information Regarding Executive Officers," and such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this Item is included in the 2002 Proxy Statement in the section captioned "Further Information Concerning the Board of the Directors
and Committees  Compensation Committee Interlocks and Insider Participation" and " Director Compensation" and in the section captioned "Compensation of Executive Officers"
(other than the subsection thereof captioned "Compensation Committee and Stock Incentive Committee Report on Executive Compensation" and "Performance Graph"), and such information (other than the
subsections thereof captioned "Compensation Committee Report on Executive Compensation" and "Performance Graph") is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item is included in the 2002 Proxy Statement in the section captioned "Security Ownership of Certain Beneficial Owners and
Management," and such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

21

---



PART IV

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

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

|    |  |                                                                        |  |                                                                                |  | Page
|--- |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ |  | ----
|
|(a) |  | 1.                                                                     |  | Financial Statements                                                           |  |     
|    |  |                                                                        |  | Independent Auditors' Report                                                   |  | F-1 
|    |  |                                                                        |  | Consolidated Balance Sheets as of December 29, 2001 and December 30, 2000      |  | F-2 
|    |  |                                                                        |  | For the years ended December 29, 2001, December 30, 2000, and January 1, 2000: |  |     
|    |  |                                                                        |  | Consolidated Statements of Income                                              |  | F-3 
|    |  |                                                                        |  | Consolidated Statements of Cash Flows                                          |  | F-4 
|    |  |                                                                        |  | Consolidated Statements of Stockholders' Equity                                |  | F-5 
|    |  |                                                                        |  | Notes to Consolidated Financial Statements                                     |  | F-6 
|    |  | 2.                                                                     |  | Financial Statement Schedule                                                   |  |     
|    |  |                                                                        |  | II. Valuation and Qualifying Accounts                                          |  | S-1 
|    |  | All other schedules have been omitted because they are not applicable. |  |                                                                               
|    |  | 3.                                                                     |  | Exhibits                                                                       |  |     

Exhibits required in connection with this Annual Report on Form 10-K are listed below.

|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|3.1     |  | Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. SEC File No. 1-11908.)                                                                                                                              
|3.2     |  | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company. (Incorporated herein by reference to Exhibit 1.1 of Registrant's Amendment No. 1, dated
May 12, 1997, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                                
|3.3     |  | Restated By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 of Registrant's Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of Registrant's Current Report on
Form 8-K dated February 15, 1996. SEC File No. 1-11908.)                                                                        
|4.1     |  | Specimen Form of Company's Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File
No. 1-11908.)                                                                                                                         
|4.2     |  | Rights Agreement (including Exhibits A, B and C thereto), dated as of April 23, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to
Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                     
|4.3     |  | First Amendment, dated as of March 13, 1998, to Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 1 to Registrant's
Amendment No. 2, dated March 16, 1998, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)
|4.4     |  | Amendment No. 2 to Rights Agreement, dated as of February 25, 1999, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 99.2 of
Registrant's Current Report on Form 8-K dated February 26, 1999. SEC File No. 1-11908.)                                          
|10.1    |  | Department 56, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of Registrant's Registration Statement on Form S-1, No. 33-61514.)                                                                                                                                                                            
|10.2    |  | Form of Stock Option Agreement in connection with the 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1, No. 33-61514.)
                                                                                                                                         
|10.3    |  | Form of Outside Directors Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.3 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. SEC File
No. 1-11908.)                                                                                                                            

22

---

|10.4  |  | Lease Agreement dated April 14, 1999 between D 56, Inc. and Ryan Companies US, Inc. pertaining to the Rogers warehouse and distribution facility. (Incorporated herein by reference to Exhibit 10.4 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                         
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  |  | Guaranty of Lease dated April 14, 1999 between the Company and Ryan Companies US, Inc. pertaining to the Rogers warehouse and distribution facility. (Incorporated herein by reference to Exhibit 10.5 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                      
|10.6  |  | Credit Agreement, dated as of March 19, 1999 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and The First National Bank of Chicago, as documentation agents, U.S. Bank National Association, as
managing agent, and The Chase Manhattan Bank, as administrative agent. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908.)  
|10.7  |  | First Amendment to the Credit Agreement, dated as of January 27, 2000 among the Company, the Banks parties thereto, ABN Amro Bank N.V. and Bank One NA, as documentation agents, U.S. Bank National Association, as
managing agent, and The Chase Manhattan Bank, as administrative agent. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)
|10.8  |  | Guarantee and Collateral Assignment, dated as of March 19, 1999, by the Company and certain of its direct or indirect subsidiaries in favor of The Chase Manhattan Bank. (Incorporated herein by reference to
Exhibit 10.8 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. SEC File No. 1-11908.)                                                                                                                  
|10.9  |  | Form of Indemnification Agreement between the Company and its directors and executive officers. (Incorporated herein by reference to Exhibit 10.24 of Registrant's Registration Statement on Form S-1,
No. 33-61514.)                                                                                                                                                                                                                                    
|10.10 |  | Department 56, Inc. 1993 Stock Incentive Plan.*                                                                                                                                                                                                                                                                                                                                                                                                         
|10.11 |  | Department 56, Inc. 1995 Stock Incentive Plan.*                                                                                                                                                                                                                                                                                                                                                                                                         
|10.12 |  | Department 56, Inc. 1997 Stock Incentive Plan.*                                                                                                                                                                                                                                                                                                                                                                                                         
|10.13 |  | Form of Executive Stock Option Agreement in connection with Department 56, Inc. 1993 Stock Incentive Plan, Department 56, Inc. 1995 Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.13 of Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                            
|10.14 |  | Form of Performance  Accelerated Vesting Stock Option Agreement in connection with Department 56, Inc. 1993, 1995 and 1997 Stock Incentive Plans. (Incorporated herein by reference to Exhibit 10.14 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. SEC File No. 1-11908.)                                                                                                                                      
|10.15 |  | Forms of Letter Agreement between the Company and its executive officers.*                                                                                                                                                                                                                                                                                                                                                                              
|10.16 |  | Form of Department 56, Inc. Restricted Stock Agreement.*                                                                                                                                                                                                                                                                                                                                                                                                
|10.17 |  | Form of Department 56, Inc. 2001 Non-Officer Stock Option Plan.*                                                                                                                                                                                                                                                                                                                                                                                        
|10.18 |  | Department 56, Inc. Annual Cash Incentive Program.*                                                                                                                                                                                                                                                                                                                                                                                                     
|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.*                                                                                                                                                                                                                                         
|21.1  |  | Subsidiaries of the Company.*                                                                                                                                                                                                                                                                                                                                                                                                                            
|23.1  |  | Independent Auditors' Consent.*                                                                                                                                                                                                                                                                                                                                                                                                                          

---

The
Company filed Form 8-K dated October 19, 2001 containing a press release and financial statements.

23

---



SIGNATURES

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

|                     |  | DEPARTMENT 56, INC.
|-------------------- |  | -------------------
|Date: March 28, 2002 |  | By:                

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

|Signature                                 |  | Capacity in which signed                                                                     |  | Date          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------
|
|                                          |  |                                                                                              |  |               
|/s/SUSAN E. ENGELSusan E. Engel           |  | Chairwoman of the Board and
Chief Executive Officer
(Principal Executive Officer)            |  | March 28, 2002
|/s/GREGG A. PETERSGregg A. Peters         |  | Managing Director of Finance and
Principal Accounting Officer
(Principal Accounting Officer) |  | March 28, 2002
|/s/JAMES E. BLOOMJames E. Bloom           |  | Director                                                                                     |  | March 28, 2002
|/s/MICHAEL R. FRANCISMichael R. Francis   |  | Director                                                                                     |  | March 28, 2002
|/s/STEWART M. KASENStewart M. Kasen       |  | Director                                                                                     |  | March 28, 2002
|/s/GARY S. MATTHEWSGary S. Matthews       |  | Director                                                                                     |  | March 28, 2002
|/s/STEVEN G. ROTHMEIERSteven G. Rothmeier |  | Director                                                                                     |  | March 28, 2002
|/s/VIN WEBERVin Weber                     |  | Director                                                                                     |  | March 28, 2002

24

---



INDEPENDENT AUDITORS' REPORT

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

We
have audited the consolidated balance sheets of Department 56, Inc. and subsidiaries (the Company) as of December 29, 2001 and December 30, 2000 and the related consolidated
statements of income, cash flows, and stockholders' equity for the years ended December 29, 2001, December 30, 2000, and January 1, 2000. Our audit also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 29, 2001 and December 30, 2000 and the
results of its operations and cash flows for the years ended December 29, 2001, December 30, 2000, and January 1, 2000 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

Deloitte &
Touche LLP

Minneapolis,
Minnesota
February 22, 2002
(March 1, 2002 as to the first paragraph of Legal Proceedings of Note 6)

F-1

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
AS OF DECEMBER 29, 2001 AND DECEMBER 30, 2000

|                                                                                                     |                                                                                                        | 2001                       |         | 2000     |        
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | -------- | -------
|
|ASSETS                                                                                               |                                                                                                        |                            |         |          |        
|CURRENT ASSETS:                                                                                      |                                                                                                        |                            |         |          |        
|                                                                                                     | Cash and cash equivalents                                                                              |                            | $       | 48,088   |        
|                                                                                                     | Accounts receivable, net of allowances of $11,942 and $19,591, respectively                            |                            |         | 23,584   |        
|                                                                                                     | Inventories                                                                                            |                            |         | 11,151   |        
|                                                                                                     | Deferred taxes                                                                                         |                            |         | 7,318    |        
|                                                                                                     | Other current assets                                                                                   |                            |         | 4,010    |        
|                                                                                                     |                                                                                                        |                            |         |          |        
|                                                                                                     |                                                                                                        | Total current assets       |         |          | 94,151 
|PROPERTY AND EQUIPMENT, net                                                                          |                                                                                                        |                            | 29,749  |          |        
|GOODWILL, net of accumulated amortization of $38,708 and $34,402, respectively                       |                                                                                                        |                            | 138,640 |          |        
|TRADEMARKS AND OTHER INTANGIBLES, net of accumulated amortization of $5,787 and $5,030, respectively |                                                                                                        |                            | 15,323  |          |        
|OTHER ASSETS                                                                                         |                                                                                                        |                            | 1,958   |          |        
|                                                                                                     |                                                                                                        |                            |         |          |        
|                                                                                                     |                                                                                                        | $                          | 279,821 |          | $      
|                                                                                                     |                                                                                                        |                            |         |          |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                 |                                                                                                        |                            |         |          |        
|CURRENT LIABILITIES:                                                                                 |                                                                                                        |                            |         |          |        
|                                                                                                     | Current portion of long-term debt                                                                      |                            | $       | 900      |        
|                                                                                                     | Accounts payable                                                                                       |                            |         | 10,811   |        
|                                                                                                     | Accrued compensation and benefits                                                                      |                            |         | 7,428    |        
|                                                                                                     | Income taxes payable                                                                                   |                            |         | 8,626    |        
|                                                                                                     | Other current liabilities                                                                              |                            |         | 3,492    |        
|                                                                                                     |                                                                                                        |                            |         |          |        
|                                                                                                     |                                                                                                        | Total current liabilities  |         |          | 31,257 
|DEFERRED TAXES                                                                                       |                                                                                                        |                            | 7,717   |          |        
|LONG-TERM DEBT                                                                                       |                                                                                                        |                            | 84,100  |          |        
|COMMITMENTS AND CONTINGENCIES (Note 6)                                                               |                                                                                                        |                            |         |          |        
|STOCKHOLDERS' EQUITY:                                                                                |                                                                                                        |                            |         |          |        
|                                                                                                     | Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued                            |                            |         |          |        
|                                                                                                     | Common stock, $.01 par value; authorized 100,000 shares; issued 22,063 and 21,990 shares, respectively |                            |         | 221      |        
|                                                                                                     | Additional paid-in capital                                                                             |                            |         | 50,655   |        
|                                                                                                     | Unearned compensation  restricted shares                                                              |                            |         | (427     | )      
|                                                                                                     | Treasury stock, at cost; 9,166 shares                                                                  |                            |         | (216,636 | )      
|                                                                                                     | Retained earnings                                                                                      |                            |         | 322,934  |        
|                                                                                                     |                                                                                                        |                            |         |          |        
|                                                                                                     |                                                                                                        | Total stockholders' equity |         |          | 156,747
|                                                                                                     |                                                                                                        |                            |         |          |        
|                                                                                                     |                                                                                                        | $                          | 279,821 |          | $      
|                                                                                                     |                                                                                                        |                            |         |          |        

See notes to consolidated financial statements.

F-2

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000, AND JANUARY 1, 2000

|                                              |                                                            | 2001                     |         | 2000    |        | 1999    |        
|--------------------------------------------- | ---------------------------------------------------------- | ------------------------ | ------- | ------- | ------ | ------- | -------
|
|NET SALES                                     |                                                            | $                        | 200,447 |         | $      | 234,058 |        
|COST OF SALES                                 |                                                            |                          | 89,845  |         |        | 109,522 |        
|                                              |                                                            |                          |         |         |        |         |        
|                                              | Gross profit                                               |                          |         | 110,602 |        |         | 124,536
|OPERATING EXPENSES:                           |                                                            |                          |         |         |        |         |        
|                                              | Selling, general and administrative                        |                          |         | 68,589  |        |         | 74,166 
|                                              | Amortization of goodwill, trademarks and other intangibles |                          |         | 5,189   |        |         | 5,486  
|                                              |                                                            |                          |         |         |        |         |        
|                                              |                                                            | Total operating expenses |         |         | 73,778 |         |        
|                                              |                                                            |                          |         |         |        |         |        
|INCOME FROM OPERATIONS                        |                                                            |                          | 36,824  |         |        | 44,884  |        
|OTHER EXPENSE (INCOME):                       |                                                            |                          |         |         |        |         |        
|                                              | Interest expense                                           |                          |         | 7,036   |        |         | 11,729 
|                                              | Impairment and equity in losses of minority investment     |                          |         | 3,304   |        |         | 427    
|                                              | Other, net                                                 |                          |         | (662    | )      |         | (809   
|                                              |                                                            |                          |         |         |        |         |        
|INCOME BEFORE INCOME TAXES                    |                                                            |                          | 27,146  |         |        | 33,537  |        
|PROVISION FOR INCOME TAXES                    |                                                            |                          | 11,184  |         |        | 12,744  |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME                                    |                                                            | $                        | 15,962  |         | $      | 20,793  |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME PER COMMON SHARE                   |                                                            | $                        | 1.24    |         | $      | 1.47    |        
|                                              |                                                            |                          |         |         |        |         |        
|NET INCOME PER COMMON SHARE ASSUMING DILUTION |                                                            | $                        | 1.24    |         | $      | 1.47    |        
|                                              |                                                            |                          |         |         |        |         |        

See notes to consolidated financial statements.

F-3

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000, AND JANUARY 1, 2000

|                                                 |                                                                                   | 2001                                                       |                                                     | 2000    |        | 1999    |         
|------------------------------------------------ | --------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------- | --------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 | Net income                                                                        |                                                            | $                                                   | 15,962  |        | $       | 20,793  
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities: |                                                            |                                                     |         |        |         |         
|                                                 |                                                                                   | Depreciation                                               |                                                     |         | 5,873  |         |         
|                                                 |                                                                                   | Gain on sale of assets                                     |                                                     |         | (62    | )       |         
|                                                 |                                                                                   | Impairment and equity in losses of minority investment     |                                                     |         | 3,304  |         |         
|                                                 |                                                                                   | Amortization of goodwill, trademarks and other intangibles |                                                     |         | 5,189  |         |         
|                                                 |                                                                                   | Amortization of deferred financing fees                    |                                                     |         | 385    |         |         
|                                                 |                                                                                   | Compensation expense  restricted shares                   |                                                     |         | 152    |         |         
|                                                 |                                                                                   | Deferred taxes                                             |                                                     |         | 2,773  |         |         
|                                                 | Changes in assets and liabilities:                                                |                                                            |                                                     |         |        |         |         
|                                                 |                                                                                   | Accounts receivable                                        |                                                     |         | 13,488 |         |         
|                                                 |                                                                                   | Inventories                                                |                                                     |         | 5,102  |         |         
|                                                 |                                                                                   | Other assets                                               |                                                     |         | (797   | )       |         
|                                                 |                                                                                   | Accounts payable                                           |                                                     |         | 2,659  |         |         
|                                                 |                                                                                   | Commissions payable                                        |                                                     |         | 287    |         |         
|                                                 |                                                                                   | Other current liabilities                                  |                                                     |         | 2,568  |         |         
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 |                                                                                   |                                                            | Net cash provided by operating activities           |         |        | 56,883  |         
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 | Purchases of property and equipment                                               |                                                            |                                                     | (2,906  | )      |         | (7,109  
|                                                 | Proceeds from sale of assets                                                      |                                                            |                                                     | 142     |        |         |        
|                                                 | Acquisitions                                                                      |                                                            |                                                     | (9,729  | )      |         | (4,000  
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 |                                                                                   |                                                            | Net cash used in investing activities               |         |        | (12,493 | )       
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 | Proceeds from the exercise of common stock options                                |                                                            |                                                     |        |        |         | 66      
|                                                 | Borrowings on revolving credit agreement                                          |                                                            |                                                     | 35,000  |        |         | 64,500  
|                                                 | Principal payments on revolving credit agreement                                  |                                                            |                                                     | (35,000 | )      |         | (107,000
|                                                 | Purchases of treasury stock                                                       |                                                            |                                                     |        |        |         | (33,316 
|                                                 | Proceeds from issuance of long-term debt                                          |                                                            |                                                     |        |        |         | 90,000  
|                                                 | Principal payments on long-term debt                                              |                                                            |                                                     | (20,000 | )      |         | (45,000 
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         
|                                                 |                                                                                   |                                                            | Net cash (used in) provided by financing activities |         |        | (20,000 | )       
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         
|NET INCREASE IN CASH AND CASH EQUIVALENTS        |                                                                                   |                                                            | 24,390                                              |         |        | 19,736  |         
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |                                                                                   |                                                            | 23,698                                              |         |        | 3,962   |         
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         
|CASH AND CASH EQUIVALENTS AT END OF PERIOD       |                                                                                   | $                                                          | 48,088                                              |         | $      | 23,698  |         
|                                                 |                                                                                   |                                                            |                                                     |         |        |         |         

See notes to consolidated financial statements.

F-4

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
YEARS ENDED DECEMBER 29, 2001, DECEMBER 30, 2000, AND JANUARY 1, 2000

|                                |                                                         | Common Stock |        |   |     |   |   |        |       |   |      |      |  
|------------------------------- | ------------------------------------------------------- | ------------ | ------ | - | --- | - | - | ------ | ----- | - | ---- | ---- | -
|
|
|
|
|BALANCE AS OF JANUARY 2, 1999   |                                                         | 18,023       |        | $ | 219 |   | $ | 48,295 |       | $ |     |      | $
|                                | Net income                                              |              |        |   |     |   |   |        |       |   |      |      |  
|                                | Shares issued upon the exercise of common stock options |              | 60     |   |     | 1 |   |        | 1,439 |   |      |      |  
|                                | Shares repurchased                                      |              | (2,925 | ) |     |   |   |        |       |   |      |      |  
|                                | Other                                                   |              | 4      |   |     |   |   |        | 111   |   |      |      |  
|                                |                                                         |              |        |   |     |   |   |        |       |   |      |      |  
|BALANCE AS OF JANUARY 1, 2000   |                                                         | 15,162       |        |   | 220 |   |   | 49,845 |       |   |     |      |  
|                                | Net income                                              |              |        |   |     |   |   |        |       |   |      |      |  
|                                | Shares issued upon the exercise of common stock options |              | 20     |   |     |   |   |        | 81    |   |      |      |  
|                                | Shares repurchased                                      |              | (2,364 | ) |     |   |   |        |       |   |      |      |  
|                                | Other                                                   |              | 6      |   |     |   |   |        | 93    |   |      |      |  
|                                |                                                         |              |        |   |     |   |   |        |       |   |      |      |  
|BALANCE AS OF DECEMBER 30, 2000 |                                                         | 12,824       |        |   | 220 |   |   | 50,019 |       |   |     |      |  
|                                | Net income                                              |              |        |   |     |   |   |        |       |   |      |      |  
|                                | Restricted shares issued                                |              | 67     |   |     | 1 |   |        | 578   |   |      | (579 | )
|                                | Restricted shares vested                                |              |        |   |     |   |   |        |       |   |      | 152  |  
|                                | Other                                                   |              | 6      |   |     |   |   |        | 58    |   |      |      |  
|                                |                                                         |              |        |   |     |   |   |        |       |   |      |      |  
|BALANCE AS OF DECEMBER 29, 2001 |                                                         | 12,897       |        | $ | 221 |   | $ | 50,655 |       | $ | (427 | )    | $
|                                |                                                         |              |        |   |     |   |   |        |       |   |      |      |  

See notes to consolidated financial statements.

F-5

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



F-6

---



F-7

---



F-8

---



2.  PROPERTY
AND EQUIPMENT



2001

2000Leasehold improvements

$
7,022

$
6,199Furniture and fixtures


5,142


4,761Computer hardware and software


20,320


19,205Other equipment


7,485


6,179Building


7,206


7,045Land


906


90648,081


44,295Less accumulated depreciation


18,332


12,499Property and equipment, net

$
29,749

$
31,796


3.  OTHER CURRENT LIABILITIES



2001

2000Accrued sales tax payable

$
787

$
104Deferred revenue


504


662Accrued royalty fees


555


1,421Other


1,646


1,253$
3,492

$
3,440


4.  CREDIT AGREEMENT



2001

2000Total debt

$
85,000

$
105,000Less borrowings classified as current


900


$
84,100

$
105,000


F-9

---



5.  INCOME
TAXES



2001

2000

1999Current:Federal

$
7,799

$
11,423

$
25,427State


477


979


2,180Foreign


135


99


373Deferred:Federal


2,554


224


(1,691
)State


219


19


(145
)$
11,184

$
12,744

$
26,144


F-10

---



2001

2000

1999Income taxes at federal statutory rate

$
9,501

$
11,738

$
24,080State income taxes, net of federal income tax deductions


332


508


1,033Goodwill amortization


1,448


1,448


1,448Deferred tax valuation allowance


1,520





Charitable donations of inventory


(681
)

(287
)

(47
)Adjustment of prior year tax accruals


(1,000
)




Other


64


(663
)

(370
)Provision for income taxes

$
11,184

$
12,744

$
26,144




2001

2000DEFERRED TAX ASSETS:Asset valuation reserves

$
5,964

$
9,509Loss on minority investment


1,520


Deferred compensation


590


376Accrued liabilities


482


414Charitable contributions


741


Other


854


1,001Less: Deferred tax valuation allowance


(1,520
)

Total deferred tax assets


8,631


11,300DEFERRED TAX LIABILITIES:Trademark amortization


(5,449
)

(5,399
)Property and equipment depreciation


(3,266
)

(3,187
)Other


(315
)

(340
)Total deferred tax liabilities


(9,030
)

(8,926
)$
(399
)
$
2,374




6.  COMMITMENTS
AND CONTINGENCIES



F-11

---



2002

$
3,9472003


3,5542004


3,5282005


3,5662006


3,203Thereafter


9,677$
27,475




F-12

---



7.  RETIREMENT
PLAN



8.  ACQUISITIONS



F-13

---





9.  SEGMENTS
OF THE COMPANY AND RELATED INFORMATION



Wholesale

Retail

Other

ConsolidatedFifty-Two Weeks Ended December 29, 2001:Net sales

$
181,056

$
19,391




$
200,447Income from operations


81,219


1,851

$
(46,246
)

36,824Fifty-Two Weeks Ended December 30, 2000:Net sales

$
231,182

$
2,876




$
234,058Income (loss) from operations


95,699


(324
)
$
(50,491
)

44,884Fifty-Two Weeks Ended January 1, 2000:Net sales

$
253,133

$
2,395




$
255,528Income (loss) from operations


119,708


(264
)
$
(44,078
)

75,366


10.  STOCKHOLDERS' EQUITY



F-14

---



2001

2000

1999Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at beginning of year


2,533,581

$22.54


2,094,311

$26.70


1,724,357

$26.80Granted


286,817

8.16


693,713

12.43


458,300

25.42Exercised












(56,482
)
20.52Forfeited


(1,284,671
)
26.32


(254,443
)
29.81


(31,864
)
24.77Outstanding at end of year


1,535,727

16.15


2,533,581

22.54


2,094,311

26.70Options exercisable at end of year


852,999

20.06


1,601,921

26.22


1,446,272

27.63Weighted average fair value of options granted during the year

$
4.53



$
5.83



$
12.33




2001

2000

1999Net income:As reported

$
15,962

$
20,793

$
42,656Pro forma


14,583


19,567


40,647Net income per common share 
basic:As reported

$
1.24

$
1.47

$
2.48Pro forma


1.13


1.39


2.36Net income per common share 
assuming dilution:As reported

$
1.24

$
1.47

$
2.45Pro forma


1.13


1.38


2.34




F-15

---



Range of
Exercise
Prices

Number
Outstanding
at December 29,
2001

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Number
Exercisable
at December 29,
2001

Weighted
Average
Exercise
Price$
3.33

40,500

1.2 years

$
3.33

40,500

$
3.333.34-17.99

953,550

8.6


10.99

299,392


11.5718.00-21.47

263,981

5.2


20.49

251,082


20.5721.48-37.75

277,696

5.2


31.59

262,025


31.871,535,727






852,999




F-16

---



11.  INCOME
PER COMMON SHARE



2001

2000

1999Net income

$
15,962

$
20,793

$
42,656Weighted average number of shares outstanding


12,878,000


14,110,000


17,214,000Net income per common share  basic

$
1.24

$
1.47

$
2.48Net income

$
15,962

$
20,793

$
42,656Weighted average number of shares outstanding


12,878,000


14,110,000


17,214,000Dilutive impact of options outstanding


30,000


54,000


174,000Weighted average number of shares and potential dilutive shares outstanding


12,908,000


14,164,000


17,388,000Net income per common share  assuming dilution

$
1.24

$
1.47

$
2.45




F-17

---



DEPARTMENT 56, INC. AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (In thousands)

|Column A                      |                                         | Column B |        | Column C |   | Column D |        | Column E
|----------------------------- | --------------------------------------- | -------- | ------ | -------- | - | -------- | ------ | --------
|
|
|Year ended December 29, 2001: |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 10,483   |   | $        | 545    |         
|                              | Allowance for sales returns and credits |          |        | 9,108    |   |          | 4,603  |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 19,591 |          | $ | 5,148    |        | $       
|                              |                                         |          |        |          |   |          |        |         
|Year ended December 30, 2000: |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 7,659    |   | $        | 8,476  |         
|                              | Allowance for sales returns and credits |          |        | 10,628   |   |          | 15,986 |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 18,287 |          | $ | 24,462   |        | $       
|                              |                                         |          |        |          |   |          |        |         
|Year ended January 1, 2000:   |                                         |          |        |          |   |          |        |         
|                              | Allowance for doubtful accounts         |          | $      | 5,179    |   | $        | 3,276  |         
|                              | Allowance for sales returns and credits |          |        | 7,729    |   |          | 12,737 |         
|                              |                                         |          |        |          |   |          |        |         
|                              |                                         | $        | 12,908 |          | $ | 16,013   |        | $       
|                              |                                         |          |        |          |   |          |        |         

S-1

---

QuickLinks