UNITED STATESSECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

# FORM 10-Q

# QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended:
  April 2, 2005

Commission file number:
    1-11908



|Department 56, Inc.                                   
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|Delaware                                                       | 13-3684956                         
|-------------------------------------------------------------- | -----------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. EmployerIdentification No.)

|One Village Place,
6436 City West Parkway, Eden Prairie, MN 55344
|-----------------------------------------------------------------
|(Address of principal
executive offices)(Zip Code)               

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

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act).

Yes  X    No

As
of April 29, 2005, 13,774,967 shares of the registrants common stock, par value $.01
per share, were outstanding.

---

# PART I 
FINANCIAL INFORMATION

# Item 1.    Financial Statements

# DEPARTMENT 56, INC.
AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)(In thousands)

|ASSETS
|------

|                                      |  | APRIL 2,2005 |   | JANUARY 1,2005 |  | APRIL 3,2004
|------------------------------------- |  | ------------ | - | -------------- |  | ------------
|CURRENT ASSETS:                       |  |              |   |                |  |             
|Cash and cash equivalents             |  |              | $ | 25,211         |  | $           
|Short-term investments                |  |              |   | 20,000         |  |             
|Accounts receivable, net              |  |              |   | 21,022         |  |             
|Inventories                           |  |              |   | 18,364         |  |             
|Deferred taxes                        |  |              |   | 4,076          |  |             
|Income tax receivable                 |  |              |   |               |  |             
|Other current assets                  |  |              |   | 2,448          |  |             
|                                      |  |              |   |                |  |             
|Total current assets                  |  |              |   | 91,121         |  |             
|                                     
|PROPERTY AND EQUIPMENT, net           |  |              |   | 15,112         |  |             
|GOODWILL                              |  |              |   | 37,074         |  |             
|TRADEMARKS AND OTHER INTANGIBLES, net |  |              |   | 14,382         |  |             
|MARKETABLE SECURITIES                 |  |              |   | 2,267          |  |             
|OTHER ASSETS                          |  |              |   | 424            |  |             
|                                      |  |              |   |                |  |             
|                                      |  |              | $ | 160,380        |  | $           
|                                      |  |              |   |                |  |             

|LIABILITIES
AND STOCKHOLDERS EQUITY
|------------------------------------

|                                          |  |  |  
|----------------------------------------- |  |  | -
|CURRENT LIABILITIES:                      |  |  |  
|Accounts payable                          |  |  | $
|Accrued compensation and benefits payable |  |  |  
|Income tax payable                        |  |  |  
|Other current liabilities                 |  |  |  
|                                          |  |  |  
|Total current liabilities                 |  |  |  
|                                         
|DEFERRED COMPENSATION OBLIGATION          |  |  |  
|DEFERRED TAXES                            |  |  |  
|STOCKHOLDERS EQUITY                      |  |  |  
|                                          |  |  |  
|                                          |  |  | $
|                                          |  |  |  

See
notes to condensed consolidated financial statements.

2

---

DEPARTMENT
56, INC. AND SUBSIDIARIES

# CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except
per share amounts)

|                                                    |  | 13 WEEKSENDEDAPRIL 2,2005 |   | 13 WEEKSENDEDAPRIL 3,2004
|--------------------------------------------------- |  | ------------------------- | - | -------------------------
|NET SALES                                           |  |                           | $ | 20,040                   
|COST OF SALES                                       |  |                           |   | 11,134                   
|                                                    |  |                           |   |                          
|Gross profit                                        |  |                           |   | 8,906                    
|                                                   
|OPERATING EXPENSES -                                |  |                          
|Selling, general, and administrative                |  |                           |   | 13,071                   
|                                                    |  |                           |   |                          
|                                                   
|OPERATING LOSS FROM CONTINUING OPERATIONS           |  |                           |   | (4,165                   
|                                                   
|OTHER EXPENSE (INCOME):                             |  |                          
|Interest expense                                    |  |                           |   | 99                       
|Other, net                                          |  |                           |   | (155                     
|                                                    |  |                           |   |                          
|                                                   
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                           |   | (4,109                   
|                                                   
|INCOME TAX BENEFIT                                  |  |                           |   | (1,479                   
|                                                    |  |                           |   |                          
|                                                   
|LOSS FROM CONTINUING OPERATIONS                     |  |                           |   | (2,630                   
|                                                    |  |                           |   |                          
|                                                   
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX       |  |                           |   |                         
|                                                    |  |                           |   |                          
|                                                   
|NET LOSS                                            |  |                           | $ | (2,630                   
|                                                    |  |                           |   |                          
|                                                   
|LOSS PER SHARE - BASIC:                             |  |                          
|LOSS PER SHARE FROM CONTINUING OPERATIONS           |  |                           | $ | (0.19                    
|LOSS PER SHARE FROM DISCONTINUED OPERATIONS         |  |                           |   |                         
|                                                    |  |                           |   |                          
|                                                   
|NET LOSS PER SHARE - BASIC                          |  |                           | $ | (0.19                    
|                                                    |  |                           |   |                          
|                                                   
|LOSS PER SHARE - ASSUMING DILUTION:                 |  |                          
|LOSS PER SHARE FROM CONTINUING OPERATIONS           |  |                           | $ | (0.19                    
|LOSS PER SHARE FROM DISCONTINUED OPERATIONS         |  |                           |   |                         
|                                                    |  |                           |   |                          
|                                                   
|NET LOSS PER SHARE - ASSUMING DILUTION              |  |                           | $ | (0.19                    
|                                                    |  |                           |   |                          
|                                                   
|WEIGHTED AVERAGE SHARES OUTSTANDING:                |  |                          
|BASIC                                               |  |                           |   | 13,641                   
|ASSUMING DILUTION                                   |  |                           |   | 13,641                   

See
notes to condensed consolidated financial statements.

3

---

# DEPARTMENT
56, INC. AND SUBSIDIARIES

# CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)

|                                                   |  | 13 WEEKSENDEDAPRIL 2,
2005 |   | 13 WEEKSENDEDAPRIL 3,
2004
|-------------------------------------------------- |  | -------------------------- | - | --------------------------
|CASH FLOWS FROM OPERATING ACTIVITIES -             |  |                            |   |                           
|Net cash used in operating activities              |  |                            | $ | (1,123                    
|                                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:              |  |                           
|Purchases of property and equipment                |  |                            |   | (68                       
|Net purchases of available-for-sale securities     |  |                            |   | (8,850                    
|                                                   |  |                            |   |                           
|Net cash used in investing activities              |  |                            |   | (8,918                    
|                                                   |  |                            |   |                           
|                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:              |  |                           
|Proceeds from the exercise of common stock options |  |                            |   | 1,496                     
|Purchases of treasury stock                        |  |                            |   |                          
|                                                   |  |                            |   |                           
|Net cash provided by financing activities          |  |                            |   | 1,496                     
|                                                   |  |                            |   |                           
|                                                  
|Net cash provided by discontinued operations       |  |                            |   |                          
|                                                   |  |                            |   |                           
|                                                  
|NET DECREASE IN CASH AND                           |  |                           
|CASH EQUIVALENTS                                   |  |                            |   | (8,545                    
|                                                  
|CASH AND CASH EQUIVALENTS AT BEGINNING             |  |                           
|OF PERIOD                                          |  |                            |   | 33,756                    
|                                                   |  |                            |   |                           
|                                                  
|CASH AND CASH EQUIVALENTS AT END                   |  |                           
|OF PERIOD                                          |  |                            | $ | 25,211                    
|                                                   |  |                            |   |                           
|                                                  
|SUPPLEMENTAL DISCLOSURES OF CASH                   |  |                           
|FLOW INFORMATION -                                 |  |                           
|Cash paid (received) for:                          |  |                           
|Interest                                           |  |                            | $ | 85                        
|Income taxes                                       |  |                            |   | (858                      

See
notes to condensed consolidated financial statements.

4

---

# DEPARTMENT 56, INC.
AND SUBSIDIARIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(In thousands, except
per share amounts)

|1. |  | Basis
of Presentation
|-- |  | ---------------------

The
accompanying condensed consolidated balance sheet as of January 1, 2005 was derived from
the audited consolidated balances as of that date. The remaining accompanying condensed
consolidated financial statements are unaudited and, in the opinion of management,
include all adjustments necessary for a fair presentation.

The
results of operations for the quarter ended April 2, 2005 are not necessarily indicative
of the results for the full fiscal year. It is suggested that these financial statements
be read in conjunction with the consolidated financial statements and notes thereto
included in the 2004 Annual Report to Stockholders and Annual Report on Form 10-K as filed
by Department 56, Inc. (the Company) with the Securities and Exchange Commission.
Comprehensive income for the periods ended April 2, 2005 and April 3, 2004 was equivalent
to reported net income.

Reclassifications
 Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications had no impact on net income (loss) or retained
earnings as presented. Auction rate securities, previously classified as cash and cash
equivalents, are now classified as short-term investments for all periods presented. The
Company classifies these short-term investments as available for sale
securities under SFAS No. 115. As of April 2, 2005, January 1, 2005, and April 3, 2004,
auction rate securities were $20.0 million, $11.2 million, and $17.5 million,
respectively.

|2. |  | Income
(Loss) per Common Share
|-- |  | ------------------------------

Net
income (loss) per common share is calculated by dividing net income (loss) by the weighted
average number of shares outstanding during the period. Net income (loss) per common share
assuming dilution reflects per share amounts that would have resulted had the
Companys dilutive outstanding stock options been converted to common stock.
Restricted stock is considered outstanding on the date the restrictions lapse when
computing net income (loss) per common share  basic. Restricted stock is considered
outstanding on the grant date when computing net income per common share  assuming
dilution. All options and unvested restricted stock were considered anti  dilutive
and excluded from the computation of common equivalent shares at April 2, 2005 and April
3, 2004 because the Company reported a net loss.

|3. |  | Discontinued
Operations
|-- |  | -----------------------

In
December 2003, the Company committed to a plan to cease operations of its Geppeddo
seasonal kiosk business. Geppeddo ceased operations during the first quarter of 2004, and
in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has classified Geppeddos results in discontinued
operations for all periods presented. Geppeddos sales for the first quarter of 2005
were $0, compared to $3,396 during the first quarter of 2004.

5

---

|4. |  | Stock-Based
Compensation
|-- |  | ------------------------

The
Company accounts for its stock option plans using the intrinsic value method and has
adopted the disclosure only provisions of SFAS No. 123, as amended by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure.
Accordingly, no compensation cost has been recognized for stock options granted. Had
compensation cost been determined based upon fair value (using the Black-Scholes
option-pricing method) at the grant date for awards under these plans, the Companys
net loss and loss per share would have been increased as follows:

|                                                     |  | 13 WEEKSENDEDAPRIL 2,
2005 |   | 13 WEEKSENDEDAPRIL 3,
2004
|---------------------------------------------------- |  | -------------------------- | - | --------------------------
|Net loss:                                            |  |                            |   |                           
|As reported                                          |  |                            | $ | (2,630                    
|Stock-based compensation, net of related tax effects |  |                            |   | (664                      
|                                                     |  |                            |   |                           
|Pro forma                                            |  |                            | $ | (3,294                    
|                                                     |  |                            |   |                           
|                                                    
|Net loss per common share - basic:                   |  |                           
|As reported                                          |  |                            | $ | (0.19                     
|Pro forma                                            |  |                            |   | (0.24                     
|                                                    
|Net loss per common share - assuming dilution:       |  |                           
|As reported                                          |  |                            | $ | (0.19                     
|Pro forma                                            |  |                            |   | (0.24                     

|5. |  | Goodwill
and Other Intangible Assets
|-- |  | ------------------------------------

The
Company accounts for its goodwill and other intangible  assets under SFAS No. 142,
 Goodwill and Other Intangible  Assets. The Company has determined that its trademarks
are indefinite-lived intangible assets.

In accordance with SFAS No. 142, the
Company will continue to amortize its finite-lived intangible assets, which currently
consist of non-compete agreements. Amortization of non-compete agreements was $35 during
the first quarters of both 2004 and 2005. Expected annual amortization expense for
non-compete agreements recorded as of January 1, 2005 is as follows:

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

6

---

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

Included
in Goodwill and Trademarks and Other Intangibles on the Companys condensed
consolidated balance sheets as of April 2, 2005 and April 3, 2004, are the following
acquired intangible assets for the wholesale segment (net of accumulated amortization).
Accumulated amortization of non-compete agreements was $2,084, $2,049 and $1,944 as of
April 2, 2005, January 1, 2005 and April 3, 2004, respectively.

|                       |  | APRIL 2,
2005 |   | JANUARY 1,
2005 |  | APRIL 3,
2004
|---------------------- |  | ------------- | - | --------------- |  | -------------
|Goodwill               |  |               | $ | 37,074          |  | $            
|Trademarks             |  |               |   | 13,761          |  |              
|Non-compete agreements |  |               |   | 621             |  |              
|                       |  |               |   |                 |  |              
|                       |  |               | $ | 51,456          |  | $            
|                       |  |               |   |                 |  |              

|6. |  | Segments
of the Company and Related Information
|-- |  | -----------------------------------------------

The
Company has two reportable segments  Wholesale and Retail. Although the product
produced and sold for each segment is similar, the type of customer for the product and
the method used to distribute the product are different. The segmentation of these
operations also reflects how the Companys chief executive officer (the CEO)
currently reviews the results of these operations. Operating income (loss) from continuing
operations for each operating segment includes specifically identifiable operating costs
such as cost of sales and selling expenses. General and administrative expenses are
generally not allocated to specific operating segments and are therefore reflected in the
corporate category. Other components of the statement of operations, which are classified
below operating income (loss) from continuing operations, are also not allocated by
segment. In addition, the Company does not account for or report assets, capital
expenditures or depreciation and amortization by segment. All transactions between
operating segments have been eliminated and are not included in the following table.

7

---

|(In thousands)                                  |  | 13 WEEKS |   |        |   | 13 WEEKS |     |  
|----------------------------------------------- |  | -------- | - | ------ | - | -------- | --- | -
|
|
|
|WHOLESALE:                                      |  |          |   |        |   |          |     |  
|Village sales                                   |  |          | $ | 10,194 |   |          | 56  | %
|Giftware sales                                  |  |          |   | 8,081  |   |          | 44  |  
|                                                |  |          |   |        |   |          |     |  
|                                               
|Net sales                                       |  |          | $ | 18,275 |   |          | 100 |  
|Gross Margin                                    |  |          |   | 8,032  |   |          | 44  |  
|Selling expenses                                |  |          |   | 3,158  |   |          | 17  |  
|Operating income from continuing operations     |  |          |   | 4,874  |   |          | 27  |  
|                                               
|RETAIL:                                         |  |         
|Net sales                                       |  |          | $ | 1,765  |   |          | 100 |  
|Gross Margin                                    |  |          |   | 874    |   |          | 50  |  
|Selling expenses                                |  |          |   | 2,057  |   |          | 117 |  
|Operating loss from continuing operations       |  |          |   | (1,183 | ) |          | (67 | )
|                                               
|CORPORATE -                                     |  |         
|Unallocated general and administrative expenses |  |          | $ | (7,856 | ) |          |     |  
|                                               
|CONSOLIDATED:                                   |  |         
|Net sales                                       |  |          | $ | 20,040 |   |          | 100 |  
|Operating loss from continuing operations       |  |          |   | (4,165 | ) |          | (21 | )

|7. |  | New
Accounting Pronouncements
|-- |  | -----------------------------

In December 2004, the FASB
issued SFAS No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. On April 14, 2005, the U.S.
Securities and Exchange Commission (the SEC) announced a deferral of the effective date of SFAS 123(R) which will
require our adoption in the first quarter of 2006. SFAS No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures
previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under
SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include
modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be
restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires
that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of
adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R and expect
that the adoption of SFAS No. 123R will have a material impact on our consolidated results of operations and earnings (loss)
per share. We have not yet determined the method of adoption or the effect of adopting SFAS No. 123R.

8

---

Item 2.    Managements Discussion and Analysis
of Financial Condition and Results of Operations

# RESULTS OF OPERATIONS

Comparison of Results of Operations for the Quarter Ended
April 2, 2005 to the Quarter Ended April 3, 2004.

This Item should be read in
conjunction with the segment financial table presented in Note 6 to the Condensed Consolidated Financial Statements. Other
components of the statement of operations which are classified below income (loss) from operations (i.e. interest expense,
provision (benefit) for income taxes, etc.) are not allocated by segment and are discussed separately.

Wholesale

Net sales decreased $0.5
million, or 2.5%, from $18.7 million in 2004 to $18.3 million in 2005. The decrease in wholesale sales was principally due to a
decrease in liquidation shipments.

Gross profit as a percentage
of net sales was 51% and 44% in the first quarter of 2004 and 2005, respectively. The decrease in the gross profit percentage was
due to a higher provision for excess inventory as a result of lower wholesale orders.

Selling, general and
administrative expenses were $3.0 million or 16% of sales in 2004 compared to $3.2 million or 17% of sales in 2005. The increase
in selling, general and administrative expenses was principally due to an increase in the provision for doubtful accounts.

Operating income from
continuing operations decreased from $6.7 million in 2004 to $4.9 million in 2005. The decrease in operating income was
principally due to the lower gross profit rate as explained above.

Retail

Net sales increased $0.3
million, or 18%, from $1.5 million in 2004 to $1.8 million in 2005. The increase was due to the opening of a new retail store in
June 2004 (which operated during the first quarter of 2005, but not the first quarter of 2004).

Gross profit as a percentage
of net sales was 60% and 50% in the first quarter of 2004 and 2005, respectively. The decrease in the gross profit percentage was
due to higher markdowns and an increase in the provision for excess Time to Celebrate inventory.

9

---

Selling,
general and administrative expenses were $1.8 million in 2004 compared to $2.1 million in
2005. The increase in selling, general and administrative expenses was principally due to
the opening of the new retail store in June 2004.

Operating
loss from continuing operations increased from $0.9 million in 2004 to $1.2 million in
2005. The increase in loss from operations was principally due to the opening of the new
retail store in June 2004. The Companys retail operations historically generate
losses from operations in the first three quarters of the Companys fiscal year and
income from operations during the fourth quarter.

Corporate

Unallocated
general and administrative expense was $7.9 million in the first quarter of both 2004 and
2005.

Provision for Income Taxes

The
effective income tax rate was 36% during the first quarter of both 2004 and 2005.

Loss from Discontinued
Operations, Net of Tax

The
Company completed the closing of its Geppeddo subsidiary during the first quarter of 2004
and classified its results as discontinued operations for all periods presented.

# SEASONALITY AND
WHOLESALE CUSTOMER ORDERS

|     |  | Wholesale Customer Orders Entered(1)(In millions) |  
|---- |  | ------------------------------------------------- | -
|
|2003 |  |                                                   | $
|2004 |  |                                                   |  
|2005 |  |                                                   |  

(1) Customer orders entered
are orders received and approved by the Company, net of any cancellation for various reasons including credit considerations,
inventory stock-outs, and customer requests. Customer orders entered do not include freight and other revenue adjustments, which
are included in net sales. Additionally, wholesale customer orders entered exclude orders from company-operated retail stores.

Wholesale customer orders
decreased $15.7 million, or 15.5%, from $101.0 million in the first quarter of 2004 to $85.3 million in the first quarter of 2005.
Orders for the Companys Giftware products were down 12% while Village product orders were down 19%. Orders for both Giftware
and Village products continue to be negatively impacted by cautious buying patterns and the continued attrition among the
Companys dealers.

10

---

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 67% and 63% of its total net annual wholesale orders
during the first quarter of 2004 and 2003, respectively. Cancellations of total annual wholesale customer orders were 8% in 2004
and 7% in 2003. 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 $86.4
million and $70.2 million at April 3, 2004 and April 2, 2005, 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 sales and related net income compared with the prior year due to the
timing of receipt of product from suppliers and subsequent shipment of product from the Company to customers, as well as the
timing of orders placed by customers. 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.

# LIQUIDITY AND CAPITAL RESOURCES

# Cash Flows from Operations

Net cash used in operating
activities decreased $3.5 million, from $4.6 million in 2004 to $1.1 million in 2005, principally due to higher cash collections
and lower net income tax payments, partially offset by higher inventory purchases.

Accounts receivable, net of
reserves, which principally consists of wholesale trade receivables, increased from $15.5 million at April 3, 2004 to $21.0
million at April 2, 2005. Accounts receivable increased due to a $2.0 million increase in sales of spring seasonal merchandise
with payment due dates after the end of the first quarter, with the balance of the increase coming from slower customer payments.
Management believes it has adequately provided for doubtful accounts.

Inventories increased from
$13.1 million at April 3, 2004 to $18.4 million at April 2, 2005. The increase was principally due to the timing of receipt of
wholesale inventory from overseas vendors, higher retail segment inventories resulting from the addition of a new retail store
and an increase in Time to Celebrate operations.

Because the Companys
wholesale business is not capital intensive, the Company has historically not incurred significant capital expenditures. Capital
expenditures were $0.4 million in the first quarter of 2004 and $0.1 million in the first quarter of 2005.

11

---

# Sources of Liquidity

The
Companys primary source of cash is the funds generated from operations.
Additionally, the Company has a revolving credit facility available for working capital
and investment needs as described below. Based on current levels of operations, the
Company believes its funds generated from operations, its available cash, and its
revolving credit facility will be sufficient to finance any capital expenditures,
contractual obligations or strategic initiatives in the foreseeable future.

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

The
Companys revolving credit facility provides for borrowings of up to $75 million,
which may be in the form of letters of credit and revolving credit loans. The letters of
credit are issued primarily in connection with inventory purchases. Borrowings under the
credit agreement are subject to certain borrowing base limitations (as defined in the
agreement). The Companys borrowing capacity under the revolving credit facility as
of April 2, 2005 was $75 million and will fluctuate during 2005 based on accounts
receivable and inventory levels. The credit agreement includes restrictions as to, among
other things, the amount of additional indebtedness, liens, contingent obligations,
investments and dividends. Under the most restrictive of these covenants, approximately
$244 million of the Companys $299 million retained earnings balance at April 2, 2005
were restricted. The credit agreement also requires maintenance of minimum levels of
interest coverage, net worth and maximum levels of leverage, in each case at the end of
each fiscal quarter. None of these restrictions are expected to have a material adverse
effect on the Companys ability to operate in the foreseeable future.

# OFF-BALANCE SHEET
ARRANGEMENTS

The
Company does not have off-balance sheet arrangements.

# CONTRACTUAL OBLIGATIONS

The Company
had open purchase orders to suppliers of $24.2 million at the end of the first quarter of
2005 compared to $8.3 million and $19.5 million at January 1, 2005 and April 3, 2004,
respectively. There were no other material changes in contractual obligations from those
disclosed in the Companys 2004 Annual Report on Form 10-K.

12

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# WHOLESALE CREDIT AND
RETURN 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 and willingness 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 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.

# CRITICAL ACCOUNTING
POLICIES

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

The
following accounting policies are the accounting policies that management believes require
the most difficult, subjective or complex judgments about matters that are inherently
uncertain:

Sales
Returns and Credits  An allowance is established for credits related to possible
returned or damaged product, pricing and shipping discrepancies. The amount of the
allowance is based on historical ratios of credits to sales, the historical average length
of time between the sale and the credit, and other factors. Changes in customers
behavior versus historical experience, changes in product damage or defect rates, or
changes in the Companys return policies are among the factors that would result in
materially different amounts for this item.

Inventory
Valuation  Inventory is valued at the lower of cost or net realizable value. The
amount is determined by analyzing historical and projected sales information, plans for
discontinued products and other factors. The Company procures product based on forecasted
sales volume. If actual sales were significantly lower than forecasted sales due to
unexpected economic or competitive conditions, it could result in materially higher
surplus and discontinued inventories.

13

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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 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. Additionally, since the majority of the Companys
wholesale sales have dating terms which come due in November and December, the Company
does not have visibility into overdue balances for most of its wholesale customers until
the fourth quarter of its fiscal year. Due to the seasonality of the Companys
business, the extended dating terms provided to customers and the relative size of
accounts receivable balances at year  end, it is not uncommon for the Company to
experience fluctuations in the provision for bad debt expense from quarter to quarter as
the Company refines its estimate. Unexpected changes in the aforementioned factors would
result in materially different amounts for this item. In addition, results could be
materially different if economic conditions worsened for the Companys customers.

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

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

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

14

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Notes concerning
forward-looking statements:Any conclusions or expectations
expressed in, or drawn from, the statements in this filing concerning matters that are not
historical corporate financial results are forward-looking statements that
involve risks and uncertainties. These statements are based on managements
estimates, assumptions and projections as of today and are not guarantees of future
performance. 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. Please read the bases, assumptions
and factors set out in Item 7 in the Companys Form 10-K for 2004 dated March 17,
2005 and filed under the Securities Exchange Act of 1934, all of which is incorporated
herein by reference and applicable to the forward-looking statements set forth herein.

# Item 3.    Quantitative and
Qualitative Disclosures about Market Risk

There
has been no significant change in the Companys exposure to market risk since year
end. The Companys risk is limited to interest rate risk associated with investment
balances and credit instruments as well as foreign currency exchange rate risk.

# Item 4.    Controls and
Procedures

As
of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon and as of
the date of that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that those disclosure controls and procedures were effective.

There
have been no changes in the Companys internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.

15

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# PART II  OTHER
INFORMATION

# Item 6.    Exhibits

The
following documents are exhibits to this Report:

| |  | 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.)
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.5 |  | Letter
Agreement Adopting the Rights Agreement, dated as of March 14, 2005, between the
Company and Wells Fargo  Shareholder  Services,  as Rights Agent.  (Incorporated
herein by reference to Exhibit 4.5 of
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| |  |  |  | Registrant's  Annual
Report on Form 10-K for the fiscal year ended January 1, 2005.  SEC File No. 1-11908.)
| |  |  |  | -----------------------------------------------------------------------------------------------------------

| |  | 11.1 |  | Computation
of net loss per share *
| |  | ---- |  | -----------------------------------

| |  | 31.1 |  | Certification
of Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of
2002 *
| |  | ---- |  | -----------------------------------------------------------------------------------------------------

| |  | 31.2 |  | Certification
of Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of
2002 *
| |  | ---- |  | -----------------------------------------------------------------------------------------------------

| |  | 32.1 |  | Officer
Certification  pursuant to Section  906 of the  Sarbanes-Oxley  Act of 2002,  18
U.S.C. Section 1350 *
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------

* Filed herewith

17

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# SIGNATURES

Pursuant to the requirements
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:    May 12, 2005 | /s/ Susan E. Engel                                                                                  
|                      | Susan E. EngelChairwoman of the Board and Chief Executive Officer
(Principal Executive Officer)     
|                     
|                     
|Date:    May 12, 2005 | /s/ Timothy J. Schugel                                                                              
|                      | Timothy J. SchugelChief Financial Officer and Executive Vice President
(Principal Financial Officer)

18

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# EXHIBIT INDEX

|ExhibitNumber | ExhibitName                                                                                                |  |  | PageNumber
|------------- | ---------------------------------------------------------------------------------------------------------- |  |  | ----------
|             
|11.1          | Computation of net loss per share                                                                          | 
|             
|31.1          | Certification of Chief Executive Officer pursuant to Section 302
    of the Sarbanes-Oxley Act of 2002     | 
|             
|31.2          | Certification of Chief Financial Officer pursuant to Section 302
   of the Sarbanes-Oxley Act of 2002      | 
|             
|32.1          | Officer Certification pursuant to Section 906 of the Sarbanes-Oxley
   Act of 2002, 18 U.S.C. Section 1350 | 

19

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