UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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### FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



|For the quarterly period ended:July 1, 2006
|-------------------------------------------



|Commission File Number:     1-11908
|-----------------------------------



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|Lenox Group Inc                                       
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|Delaware                                                      |  | 13-3684956                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation 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)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)





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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 xNo o

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

Large
accelerated filer oAccelerated filer
xNon-accelerated
filer o

Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).

Yes oNo x

As of July 28, 2006, 14,085,351 shares of the
registrants common stock, par value $.01 per share, were outstanding.





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PART
I  -
FINANCIAL INFORMATION

Item 1.   Financial
Statements

LENOX GROUP INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

|                                               |  |              |         |                  |   |              |  |   |         | 
|---------------------------------------------- |  | ------------ | ------- | ---------------- | - | ------------ |  | - | ------- | 
|                                               |  | JULY 1,
2006 |         | DECEMBER 31,2005 |   | JULY 2,
2005 | 
|                                               |  |              |         |                  |   |              | 
|ASSETS                                         |  |              |         |                  |   |              |  |   |         | 
|Current assets:                                |  |              |         |                  |   |              |  |   |         | 
|Cash and cash
  equivalents                    |  | $            | 295     |                  | $ | 1,279        |  | $ | 10,842  | 
|Short-term
  investments                       |  |              |        |                  |   |             |  |   | 10,000  | 
|Accounts
  receivable, net                     |  |              | 64,810  |                  |   | 55,563       |  |   | 43,370  | 
|Inventories                                    |  |              | 121,994 |                  |   | 94,346       |  |   | 25,469  | 
|Deferred taxes                                 |  |              | 9,864   |                  |   | 13,380       |  |   | 3,943   | 
|Income tax
  receivable                        |  |              | 6,200   |                  |   |             |  |   |        | 
|Other current
  assets                         |  |              | 8,942   |                  |   | 8,411        |  |   | 3,951   | 
|Current assets
  of discontinued operations    |  |              |        |                  |   |             |  |   | 2,630   | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|Total current
  assets                         |  |              | 212,105 |                  |   | 172,979      |  |   | 100,205 | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|Property and equipment, net                    |  |              | 70,027  |                  |   | 71,428       |  |   | 14,491  | 
|Assets held for sale                           |  |              | 6,749   |                  |   | 17,018       |  |   |        | 
|Goodwill                                       |  |              | 16,926  |                  |   | 53,769       |  |   | 37,074  | 
|Trademarks, net                                |  |              | 122,718 |                  |   | 121,971      |  |   | 13,761  | 
|Other intangibles, net                         |  |              | 15,297  |                  |   | 17,037       |  |   | 586     | 
|Marketable securities                          |  |              | 1,949   |                  |   | 2,449        |  |   | 2,260   | 
|Deferred taxes                                 |  |              | 584     |                  |   |             |  |   |        | 
|Other assets                                   |  |              | 12,640  |                  |   | 13,277       |  |   | 105     | 
|Noncurrent assets of
  discontinued operations |  |              |        |                  |   |             |  |   | 148     | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|                                               |  | $            | 458,995 |                  | $ | 469,928      |  | $ | 168,630 | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|LIABILITIES AND STOCKHOLDERS
  EQUITY         |  |              |         |                  |   |              |  |   |         | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|Current liabilities:                           |  |              |         |                  |   |              |  |   |         | 
|Current portion
  of long-term debt            |  | $            | 9,155   |                  | $ | 10,000       |  |   |         | 
|Borrowings on
  revolving credit facility      |  |              | 79,947  |                  |   | 10,468       |  |   |         | 
|Accounts payable                               |  |              | 37,147  |                  |   | 31,270       |  | $ | 7,236   | 
|Accrued compensation and benefits payable      |  |              | 11,842  |                  |   | 16,538       |  |   | 2,251   | 
|Income tax payable                             |  |              |        |                  |   | 6,590        |  |   | 2,525   | 
|Severance and restructuring reserves           |  |              | 5,030   |                  |   | 12,201       |  |   |        | 
|Other current liabilities                      |  |              | 4,197   |                  |   | 6,554        |  |   | 994     | 
|Current liabilities of discontinued
operations |  |              |        |                  |   | 32           |  |   | 37      | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|Total current liabilities                      |  |              | 147,318 |                  |   | 93,653       |  |   | 13,043  | 
|                                              
|Deferred compensation
  obligation             |  |              | 1,964   |                  |   | 2,489        |  |   | 2,260   | 
|Pension obligations                            |  |              | 85,483  |                  |   | 87,014       |  |   |        | 
|Postretirement obligations                     |  |              | 29,120  |                  |   | 28,560       |  |   |        | 
|Deferred taxes                                 |  |              |        |                  |   | 1,424        |  |   | 5,465   | 
|Long-term debt                                 |  |              | 76,450  |                  |   | 90,250       |  |   |        | 
|Other noncurrent liabilities                   |  |              | 3,989   |                  |   | 4,789        |  |   | 685     | 
|Commitments and contingencies
  (Note 13)      |  |              |         |                  |   |              |  |   |         | 
|Stockholders equity                           |  |              | 114,671 |                  |   | 161,749      |  |   | 147,177 | 
|                                               |  |              |         |                  |   |              |  |   |         | 
|                                               |  | $            | 458,995 |                  | $ | 469,928      |  | $ | 168,630 | 
|                                               |  |              |         |                  |   |              |  |   |         | 

See notes to
condensed consolidated financial statements.

2

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LENOX GROUP INC AND SUBSIDIARIES

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

|                                                               |  |                             |         |                             |   |        |  
|-------------------------------------------------------------- |  | --------------------------- | ------- | --------------------------- | - | ------ | -
|                                                               |  | 13 WEEKS
ENDED
JULY 1,
2006 |         | 13 WEEKS
ENDED
JULY 2,
2005 |  
|                                                               |  |                             |         |                             |  
|NET SALES                                                      |  | $                           | 97,828  |                             | $ | 36,355 |  
|COST OF SALES                                                  |  |                             | 51,373  |                             |   | 18,839 |  
|                                                               |  |                             |         |                             |   |        |  
|Gross
profit                                                   |  |                             | 46,455  |                             |   | 17,516 |  
|                                                               |  |                             |         |                             |   |        |  
|OPERATING EXPENSES:                                            |  |                             |         |                             |   |        |  
|Selling, general
  and administrative                          |  |                             | 51,658  |                             |   | 10,572 |  
|Goodwill
impairment                                            |  |                             | 37,074  |                             |   |       |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|OPERATING (LOSS) INCOME FROM CONTINUING
  OPERATIONS           |  |                             | (42,277 | )                           |   | 6,944  |  
|                                                               |  |                             |         |                             |   |        |  
|OTHER EXPENSE (INCOME):                                        |  |                             |         |                             |   |        |  
|Interest
expense                                               |  |                             | 3,964   |                             |   | 56     |  
|Other, net                                                     |  |                             | (70     | )                           |   | (123   | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES |  |                             | (46,171 | )                           |   | 7,011  |  
|                                                               |  |                             |         |                             |   |        |  
|INCOME TAX (BENEFIT) EXPENSE                                   |  |                             | (4,989  | )                           |   | 2,524  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                       |  |                             | (41,182 | )                           |   | 4,487  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF
  TAX                |  |                             |        |                             |   | (367   | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME                                              |  | $                           | (41,182 | )                           | $ | 4,120  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET(LOSS) INCOME PER SHARE  BASIC:                            |  |                             |         |                             |   |        |  
|(LOSS) INCOME PER
  SHARE FROM CONTINUING OPERATIONS           |  | $                           | (3.00   | )                           | $ | 0.33   |  
|LOSS PER SHARE FROM
  DISCONTINUED OPERATIONS                  |  |                             |        |                             |   | (0.03  | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME
  PER SHARE  BASIC                          |  | $                           | (3.00   | )                           | $ | 0.30   |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME PER SHARE  ASSUMING
  DILUTION:             |  |                             |         |                             |   |        |  
|(LOSS) INCOME PER
  SHARE FROM CONTINUING OPERATIONS           |  | $                           | (3.00   | )                           | $ | 0.33   |  
|LOSS PER SHARE FROM
  DISCONTINUED OPERATIONS                  |  |                             |        |                             |   | (0.03  | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME
  PER SHARE  ASSUMING DILUTION              |  | $                           | (3.00   | )                           | $ | 0.30   |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:                           |  |                             |         |                             |   |        |  
|BASIC                                                          |  |                             | 13,746  |                             |   | 13,676 |  
|ASSUMING
DILUTION                                              |  |                             | 13,746  |                             |   | 13,748 |  

See notes to
condensed consolidated financial statements.

3

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LENOX GROUP INC AND SUBSIDIARIES

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

|                                                               |  |                             |         |                             |   |        |  
|-------------------------------------------------------------- |  | --------------------------- | ------- | --------------------------- | - | ------ | -
|                                                               |  | 26 WEEKS
ENDED
JULY 1, 2006 |         | 26 WEEKS
ENDED
JULY 2,
2005 |  
|                                                               |  |                             |         |                             |  
|NET SALES                                                      |  | $                           | 188,214 |                             | $ | 55,974 |  
|COST OF SALES                                                  |  |                             | 93,296  |                             |   | 29,529 |  
|                                                               |  |                             |         |                             |   |        |  
|Gross
profit                                                   |  |                             | 94,918  |                             |   | 26,445 |  
|                                                               |  |                             |         |                             |   |        |  
|OPERATING EXPENSES:                                            |  |                             |         |                             |   |        |  
|Selling, general
  and administrative                          |  |                             | 108,460 |                             |   | 23,081 |  
|Goodwill
impairment                                            |  |                             | 37,074  |                             |   |       |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS             |  |                             | (50,616 | )                           |   | 3,364  |  
|                                                               |  |                             |         |                             |   |        |  
|OTHER EXPENSE (INCOME):                                        |  |                             |         |                             |   |        |  
|Interest
expense                                               |  |                             | 7,008   |                             |   | 114    |  
|Other, net                                                     |  |                             | (71     | )                           |   | (278   | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES |  |                             | (57,553 | )                           |   | 3,528  |  
|                                                               |  |                             |         |                             |   |        |  
|INCOME TAX (BENEFIT) EXPENSE                                   |  |                             | (9,285  | )                           |   | 1,270  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|(LOSS) INCOME FROM CONTINUING OPERATIONS                       |  |                             | (48,268 | )                           |   | 2,258  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF
  TAX                |  |                             |        |                             |   | (768   | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME                                              |  | $                           | (48,268 | )                           | $ | 1,490  |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME PER SHARE  BASIC:                           |  |                             |         |                             |   |        |  
|(LOSS) INCOME PER
  SHARE FROM CONTINUING OPERATIONS           |  | $                           | (3.51   | )                           | $ | 0.17   |  
|LOSS PER SHARE FROM
  DISCONTINUED OPERATIONS                  |  |                             |        |                             |   | (0.06  | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME
  PER SHARE  BASIC                          |  | $                           | (3.51   | )                           | $ | 0.11   |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME PER SHARE  ASSUMING
  DILUTION:             |  |                             |         |                             |   |        |  
|(LOSS) INCOME PER
  SHARE FROM CONTINUING OPERATIONS           |  | $                           | (3.51   | )                           | $ | 0.16   |  
|LOSS PER SHARE FROM
  DISCONTINUED OPERATIONS                  |  |                             |        |                             |   | (0.05  | )
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|NET (LOSS) INCOME
  PER SHARE  ASSUMING DILUTION              |  | $                           | (3.51   | )                           | $ | 0.11   |  
|                                                               |  |                             |         |                             |   |        |  
|                                                               |  |                             |         |                             |   |        |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:                           |  |                             |         |                             |   |        |  
|BASIC                                                          |  |                             | 13,736  |                             |   | 13,644 |  
|ASSUMING
DILUTION                                              |  |                             | 13,736  |                             |   | 13,800 |  

See notes to
condensed consolidated financial statements.

4

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LENOX GROUP INC AND SUBSIDIARIES

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

|                                                                     |  |                             |         |                             |   |         |  
|-------------------------------------------------------------------- |  | --------------------------- | ------- | --------------------------- | - | ------- | -
|                                                                     |  | 26 WEEKS
ENDED
JULY 1,
2006 |         | 26 WEEKS
ENDED
JULY 2,
2005 |  
|                                                                     |  |                             |         |                             |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |  |                             |         |                             |   |         |  
|Net cash used in
  operating activities                              |  | $                           | (58,004 | )                           | $ | (24,221 | )
|Net cash used in
  operating activities from discontinued operations |  |                             | (32     | )                           |   | (902    | )
|                                                                     |  |                             |         |                             |   |         |  
|Net cash used in
  operating activities                              |  |                             | (58,036 | )                           |   | (25,123 | )
|                                                                     |  |                             |         |                             |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                |  |                             |         |                             |   |         |  
|Purchases of
  property and equipment                                |  |                             | (4,891  | )                           |   | (449    | )
|Proceeds from sale
  of assets                                       |  |                             | 10,183  |                             |   |        |  
|Sale of
  available-for-sale securities                              |  |                             |        |                             |   | 1,150   |  
|Acquisition of
  Willitts                                            |  |                             | (2,990  | )                           |   |        |  
|Net cash used in
  investing activities from discontinued operations |  |                             |        |                             |   | (3      | )
|                                                                     |  |                             |         |                             |   |         |  
|Net cash provided
  by investing activities                          |  |                             | 2,302   |                             |   | 698     |  
|                                                                     |  |                             |         |                             |   |         |  
|                                                                     |  |                             |         |                             |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |  |                             |         |                             |   |         |  
|Proceeds from the
  exercise of common stock options                 |  |                             | 340     |                             |   | 1,524   |  
|Payments of
  deferred financing fees                                |  |                             | (397    | )                           |   |        |  
|Excess tax
  benefits from stock-based compensation                  |  |                             | 32      |                             |   |        |  
|Borrowings on
  revolving credit facility                            |  |                             | 69,479  |                             |   |        |  
|Principal payments
  on capital leases                               |  |                             | (59     | )                           |   |        |  
|Payments on
  long-term debt                                         |  |                             | (14,645 | )                           |   |        |  
|                                                                     |  |                             |         |                             |   |         |  
|Net cash provided
  by financing activities                          |  |                             | 54,750  |                             |   | 1,524   |  
|                                                                     |  |                             |         |                             |   |         |  
|                                                                     |  |                             |         |                             |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                            |  |                             | (984    | )                           |   | (22,901 | )
|                                                                     |  |                             |         |                             |   |         |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD                   |  |                             | 1,279   |                             |   | 33,743  |  
|                                                                     |  |                             |         |                             |   |         |  
|                                                                     |  |                             |         |                             |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  | $                           | 295     |                             | $ | 10,842  |  
|                                                                     |  |                             |         |                             |   |         |  
|                                                                     |  |                             |         |                             |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION                 |  |                             |         |                             |   |         |  
|Depreciation
  expense from continuing operations                    |  | $                           | 6,197   |                             | $ | 1,651   |  
|Intangible
  amortization expense                                    |  |                             | 1,741   |                             |   | 70      |  
|Cash paid (received)
  for:                                          |  |                             |         |                             |   |         |  
|Interest                                                             |  |                             | 5,988   |                             |   | 170     |  
|Income
taxes                                                         |  |                             | 2,142   |                             |   | (790    | )

See notes to
condensed consolidated financial statements.

5

---

LENOX GROUP 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 December 31, 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 and 26 weeks ended July 1, 2006 and July 2, 2005,
respectively, 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
2005 Annual Report on Form 10-K filed by Lenox Group Inc (the Company) with the
Securities and Exchange Commission (SEC). Comprehensive (loss) income for the
periods ended July 1, 2006 and July 2, 2005 was equivalent to reported net
(loss) income.

Reclassifications 
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications had no impact on net loss or
retained earnings and are primarily related to the reporting of the
discontinued operations of the Companys Time to Celebrate business. See Note
5.

|   |                         
|-- | ------------------------
|2. | New Accounting Standards

On July 13,
2006, Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109, was issued. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The new FASB standard also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The provisions of FIN 48 are effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating
the effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.

6

---

|   |                         
|-- | ------------------------
|3. | Stock-Based Compensation

Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123R (revised 2004), Share-Based Payment, which revised SFAS
No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25). This standard requires
compensation costs related to share-based payment transactions to be recognized
in the financial statements. The Company adopted the standard using the
modified prospective transition method, which requires the application of the
accounting standard to all share-based awards issued on or after the date of
adoption and any outstanding share-based awards that were issued but not vested
as of the date of adoption. Accordingly, the Company did not restate the
financial information for 2005 as a result of the adoption.

Total
stock-based compensation expense from continuing operations during the second
quarter and 26 weeks ended July 1, 2006 was $367 and $738, respectively. The
adoption of SFAS 123R in 2006 resulted in the recognition of incremental
pre-tax stock-based compensation expense during the second quarter and 26 weeks
ended July 1, 2006 of $1 and $59, respectively, and an increase in net loss of
$1 and $37, respectively ($0.00 impact on basic and diluted earnings per share
in both periods). The adoption also resulted in a reduction in cash flows from
operating activities of $32 and an increase in cash flows from financing
activities of $32 for the 26 weeks ended July 1, 2006. Additionally, upon
adoption of SFAS 123R the Company reclassified unearned compensation on
non-vested restricted stock of $3,469 to additional paid in capital. The
cumulative effect adjustment for forfeitures related to non-vested restricted
stock and options was not material.

Total
stock-based compensation expense from continuing operations during the second
quarter and 26 weeks ended July 2, 2005 was $55 and $110, respectively (which
are included in the net income as reported figures in the table below). Prior
to 2006, the Company applied APB Opinion No. 25 and the disclosure-only
provisions of SFAS No. 123. The following table illustrates the effect on net
income and net income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensations
during the second quarter and 26 weeks ended July 2, 2005.

|                                                       |  |                                   |       |                                   |   |       |  
|------------------------------------------------------ |  | --------------------------------- | ----- | --------------------------------- | - | ----- | -
|                                                       |  | 13 WEEKS
  ENDED
  JULY 2,
  2005 |       | 26 WEEKS
  ENDED
  JULY 2,
  2005 |  
|                                                       |  |                                   |       |                                   |  
|Net income:                                            |  |                                   |       |                                   |   |       |  
|As reported                                            |  | $                                 | 4,120 |                                   | $ | 1,490 |  
|Stock-based
  compensation, net of related tax effects |  |                                   | (311  | )                                 |   | (975  | )
|                                                       |  |                                   |       |                                   |   |       |  
|Pro forma                                              |  | $                                 | 3,809 |                                   | $ | 515   |  
|                                                       |  |                                   |       |                                   |   |       |  
|                                                       |  |                                   |       |                                   |   |       |  
|Net income per common share  basic:                   |  |                                   |       |                                   |   |       |  
|As reported                                            |  | $                                 | 0.30  |                                   | $ | 0.11  |  
|Pro forma                                              |  |                                   | 0.28  |                                   |   | 0.04  |  
|                                                       |  |                                   |       |                                   |   |       |  
|Net income per common share  assuming
  dilution:     |  |                                   |       |                                   |   |       |  
|As reported                                            |  | $                                 | 0.30  |                                   | $ | 0.11  |  
|Pro forma                                              |  |                                   | 0.28  |                                   |   | 0.04  |  

7

---

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

|                                |  |                                   |             |                                   |  |      | 
|------------------------------- |  | --------------------------------- | ----------- | --------------------------------- |  | ---- | 
|                                |  | 26 WEEKS
  ENDED
  JULY 1,
  2006 |             | 26 WEEKS
  ENDED
  JULY 2,
  2005 | 
|                                |  |                                   |             |                                   | 
|Risk-free interest rate         |  |                                   | 4.7% - 5.1% |                                   |  | 3.8% | 
|Expected dividend yield         |  |                                   | 0%          |                                   |  | 0%   | 
|Expected stock price volatility |  |                                   | 49%         |                                   |  | 32%  | 
|Expected life (in years)        |  |                                   | 6           |                                   |  | 6    | 

Stock Incentive Plans

As of July 1,
2006, the Company had incentive plans allowing the Company to grant options,
stock appreciation rights, shares or performance units to employees, directors,
officers, consultants and advisors. As of July 1, 2006, 195,539 shares were
available for granting under the stock incentive plans.

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

A summary of
the status of the Companys stock option activity as of July 1, 2006 and
changes during the 26 weeks then ended is presented below:

|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |   | 
|------------------------------------- |  | ------ | --------- | ------------------------------------- | - | ------------------------------------------------- |  | --------------------------------------- | --- |  | - | - | 
|                                      |  | 2006   |          
|                                      |  |        |          
|                                      |  | Shares |           | Weighted
  Average
  Exercise
  Price |   | Weighted
  Remaining
  Contractual
  Life (Years) |  | Average
  Aggregate
  Intrinsic
  Value |    
|                                      |  |        |           |                                       |   |                                                   |  |                                         |    
|                                     
|Outstanding at beginning of year      |  |        | 2,207,191 |                                       | $ | 14.32                                             |  |                                         |     |  |   |   | 
|Granted                               |  |        | 58,000    |                                       |   | 12.55                                             |  |                                         |     |  |   |   | 
|Exercised                             |  |        | (33,600   | )                                     |   | 10.08                                             |  |                                         |     |  |   |   | 
|Forfeited                             |  |        | (25,567   | )                                     |   | 15.77                                             |  |                                         |     |  |   |   | 
|Expired or Canceled                   |  |        | (45,664   | )                                     |   | 21.43                                             |  |                                         |     |  |   |   | 
|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |   | 
|Outstanding at end of quarter         |  |        | 2,160,360 |                                       |   | 14.17                                             |  |                                         | 5.6 |  | $ | 7 | 
|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |   | 
|Options exercisable at end of quarter |  |        | 2,094,359 |                                       |   | 14.22                                             |  |                                         | 5.4 |  | $ | 7 | 

The
weighted-average grant date fair value of options granted during the 26 weeks
ended July 1, 2006 and July 2, 2005 was estimated to be $6.66 and $5.44 per
share, respectively. The total intrinsic value of options that were exercised
during the 26 weeks ended July 1, 2006 and July 2, 2005 was $86 and $696,
respectively. As of July 1, 2006, the total unrecognized compensation cost
related to stock options was $369 and is expected to be recognized over a
weighted average period of 1.2 years.

Cash received
from option exercises during the 26 weeks ended July 1, 2006 and July 2, 2005
was $340 and $1,524, respectively. The actual tax benefit realized for the tax
deductions from option exercises totaled $32 and $251 for the 26 weeks ended
July 1, 2006 and July 2, 2005, respectively.

8

---

Performance- and Time- Vesting Restricted
Stock  The Company granted 36,500 restricted shares
of common stock to executive officers, directors and employees during the 26
weeks ended July 1, 2006. Under SFAS 123R, these shares are considered to be
nonvested shares, as defined. Of these shares, 9,000 shares were
performance-vesting and 27,500 shares were time-vesting. Performance-vesting
shares may be earned and become vested in a specific percentage depending upon
the extent to which the target performance is met as of the last day of the
performance cycle. Time-vesting shares generally become vested after the duration
of a specified period of time.

A summary of
the status of the Companys nonvested restricted stock activity as of July 1,
2006 and changes during the 26 weeks then ended is presented below:

|                                 |  |        |         |                             |   |       | 
|-------------------------------- |  | ------ | ------- | --------------------------- | - | ----- | 
|                                 |  | 2006   |        
|                                 |  |       
|                                 |  | Shares |         | Grant
  Date
  Fair
  Value |  
|                                
|                                
|Outstanding at beginning of year |  |        | 312,282 |                             | $ | 13.72 | 
|Granted                          |  |        | 36,500  |                             |   | 12.27 | 
|Forfeited                        |  |        | (21,818 | )                           |   | 13.75 | 
|                                 |  |        |         |                             |   |       | 
|Outstanding at end of quarter    |  |        | 326,964 |                             |   | 13.59 | 
|                                 |  |        |         |                             |   |       | 

As of July 1,
2006, the total unrecognized compensation cost related to non-vested restricted
stock granted was $3.0 million. Of this amount, $1.7 million is expected to be
recognized over a weighted average period of 1.0 years, and the remaining $1.3
million relates to the performance-vesting restricted stock for which target
performance is not expected to be met and therefore the cost is not expected to
be recognized. The total fair value of restricted stock vested during the 26
weeks ended July 1, 2006 and July 2, 2005 were $0 and $0, respectively (as no
restricted shares vested during these periods).

|   |                               
|-- | ------------------------------
|4. | Income (Loss) per Common Share

Net income
(loss) per common share is calculated by dividing net income (loss) by the
weighted average number of shares outstanding during the period. Net income
(loss) per common share assuming dilution reflects per share amounts that would
have resulted had the Companys dilutive outstanding stock options been
converted to common stock. Restricted stock is considered outstanding on the
date the stock becomes vested when computing net income (loss) per common share
 basic. Restricted stock, to the extent it is probable that the stock will
become vested, is considered outstanding on the grant date when computing net
income (loss) per common share  assuming dilution. All options and unvested
restricted stock were considered anti-dilutive and excluded from the
computation of common equivalent shares at July 1, 2006 because the Company
reported a net loss for both the second quarter and 26 weeks ended July 1,
2006.

9

---

|   |                        
|-- | -----------------------
|5. | Discontinued Operations

In October
2005, the Company committed to a plan to cease operations of its Time to
Celebrate business. Time to Celebrate ceased operations in December 2005, and
in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company has reclassified Time to Celebrates results
into discontinued operations for all periods presented. Prior to being
classified as discontinued operations, Time to Celebrates operating results
had been presented in the retail reportable segment. Time to Celebrates sales
for the second quarter and first half of 2006 was $0 compared to $530 and $951
during the second quarter and first half of 2005, respectively.

|   |            
|-- | -----------
|6. | Acquisition

Lenox Acquisition

Effective
September 1, 2005, the Company completed the acquisition of all of the capital
stock of Lenox, Incorporated (Lenox) from Brown-Forman Corporation for $204.0
million, which included transaction costs of $7.6 million. The acquisition of
Lenox, which sells products under the Lenox, Dansk and Gorham brand names, added
strong, market-leading brands and complementary product lines and distribution
channels to the Companys portfolio.

The initial
allocation of purchase price for the Lenox acquisition was based on preliminary
estimates and will be revised as asset valuations are finalized and further
information is obtained on the fair value of liabilities.

The following
condensed consolidated financial results of operations are presented comparing
actual second quarter and 26 weeks ended July 1, 2006 results to pro forma
second quarter and 26 weeks ended July 2, 2005 results (with the pro forma
information assuming that the acquisition described above had been completed at
the beginning of each 2005 period presented):

|                                            |  |                |         |                |   |                |   |                |         |   |   |         |  
|------------------------------------------- |  | -------------- | ------- | -------------- | - | -------------- | - | -------------- | ------- | - | - | ------- | -
|                                            |  | 13 Weeks Ended |         | 26 Weeks Ended |  
|                                            |  |                |         |                |  
|                                            |  | July 1,
  2006 |         | July 2,
  2005 |   | July 1,
  2006 |   | July 2,
  2005 |        
|                                            |  |                |         |                |   |                |   |                |        
|                                            |  |                |         |                |   |                |   |                |         |   |   |         |  
|Net sales                                   |  | $              | 97,828  |                | $ | 111,408        |   | $              | 188,214 |   | $ | 224,960 |  
|Goodwill impairment                         |  |                | 37,074  |                |   |               |   |                | 37,074  |   |   |        |  
|Loss from continuing
  operations           |  |                | (41,182 | )              |   | (2,756         | ) |                | (48,268 | ) |   | (9,750  | )
|Net loss                                    |  |                | (41,182 | )              |   | (3,123         | ) |                | (48,268 | ) |   | (10,518 | )
|                                            |  |                |         |                |   |                |   |                |         |   |   |         |  
|Loss
  per share from continuing operations |  |                |         |                |   |                |   |                |         |   |   |         |  
|Basic                                       |  | $              | (3.00   | )              | $ | (0.20          | ) | $              | (3.51   | ) | $ | (0.71   | )
|Assuming dilution                           |  |                | (3.00   | )              |   | (0.20          | ) |                | (3.51   | ) |   | (0.71   | )
|                                            |  |                |         |                |   |                |   |                |         |   |   |         |  
|Weighted
  average shares outstanding       |  |                |         |                |   |                |   |                |         |   |   |         |  
|Basic                                       |  |                | 13,746  |                |   | 13,676         |   |                | 13,736  |   |   | 13,644  |  
|Assuming dilution                           |  |                | 13,746  |                |   | 13,676         |   |                | 13,736  |   |   | 13,644  |  

10

---

The actual
second quarter and 26 weeks ended July 1, 2006 results above include a net
positive purchase accounting adjustment of $0.4 million and $3.5 million,
respectively, as a result of the requirement to value Lenox inventory at its
estimated selling price less cost of disposal at the opening balance sheet
date.

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

Willitts Acquisition

Effective May
1, 2006, the Company completed its acquisition of certain assets and the
assumption of certain liabilities of Willitts Design International, Inc.
(Willitts), a California-based designer and wholesaler of collectible and home
décor products. The acquisition of the Willitts product lines, which include
Thomas Blackshears Ebony Visions and Possible Dreams, added a broad range of
diversity and contemporary expression to the Companys portfolio. The cash
purchase price, which is based primarily upon the historical cost of the assets
acquired less the obligations assumed as of the closing date, was $3.0 million.
In addition to the cash purchase price, the Company may be required to make
additional payments contingent on performance through 2009.

Of the $3.0
million cash purchase price, $0.7 million was allocated to indefinite-lived
trademarks and the remaining $2.3 million was allocated to tangible assets
purchased net of assumed liabilities. The initial allocation of the purchase
price was based upon preliminary estimates and will be revised as asset
valuations are finalized. The results of operations from the acquired net
assets since the acquisition date have been included in the Companys condensed
consolidated financial statements and are not considered material.

|   |                     
|-- | --------------------
|7. | Assets Held for Sale

In the second
quarter of 2006, the Company sold its Langhorne, Pennsylvania facility for $9.9
million, net of closing costs. As these assets, including land and building,
were recently purchased as part of the acquisition of Lenox, no gain or loss
was recognized.

The Company
continues to list the assets associated with the Pomona facility for sale.
While the Company continues to actively market the facility, it has not entered
into a sales agreement to date. The assets are listed on the balance sheet as
held for sale at their carrying amount which approximates fair value less
expected selling costs in the cumulative amount of $6.7 million.

11

---

|   |                                  
|-- | ---------------------------------
|8. | Severance and Restructuring Costs

In connection with the acquisition of Lenox, the Company assumed
severance reserves related to plant closings, retail store closings and general
restructurings that took place prior to the Companys acquisition of Lenox. At
September 1, 2005, the acquisition date, the Company accrued additional amounts
related to an additional plant closing, retail store closings and general
restructurings that were planned as part of the acquisition.

The severance and restructuring reserves recorded at the acquisition
date were based on preliminary estimates and may be revised as the plans are
finalized. The Company expects to substantially complete the plant closing,
retail store closings and general restructuring by the end of the third quarter
of fiscal 2006.

The table below shows a reconciliation of the severance and
restructuring reserve activity as of July 1, 2006:

|                             |  |                |                                 |       |                                 |       |                |   |        |   |   |        |   |   |        |  
|---------------------------- |  | -------------- | ------------------------------- | ----- | ------------------------------- | ----- | -------------- | - | ------ | - | - | ------ | - | - | ------ | -
|                             |  | Plant
Closings |                                 |       |                                 |       |                |   |       
|                             |  |                | Retail
Store
Closings
Severance |       | General
Restructuring
Severance |       | Total
Reserves |  
|                             |  |                |                                 |       |                                 |      
|                             |  | Severance      |                                 | Other |                                 |       |                |  
|                             |  |                |                                 |       |                                 |       |                |   |        |   |  
|                            
|Balance,
  December 31, 2005 |  | $              | 3,694                           |       | $                               | 2,609 |                | $ | 1,793  |   | $ | 4,105  |   | $ | 12,201 |  
|                            
|Incurred                     |  |                | (2,742                          | )     |                                 | (611  | )              |   | (1,348 | ) |   | (2,470 | ) |   | (7,171 | )
|                             |  |                |                                 |       |                                 |       |                |   |        |   |   |        |   |   |        |  
|                             |  |                |                                 |       |                                 |       |                |   |        |   |   |        |   |   |        |  
|Balance,
  July 1, 2006      |  | $              | 952                             |       | $                               | 1,998 |                | $ | 445    |   | $ | 1,635  |   | $ | 5,030  |  
|                             |  |                |                                 |       |                                 |       |                |   |        |   |   |        |   |   |        |  

|   |               
|-- | --------------
|9. | Concentrations

At July 1, 2006, one customer accounted for approximately 18% of the
Companys total accounts receivable. For the three months ended and 26 weeks
ended July 1, 2006, this same customer accounted for approximately 18% and 15%,
respectively, of the Companys total net sales.

|    |            
|--- | -----------
|10. | Inventories

Inventories
from continuing operations were comprised of:

|                    |  |               |         |                   |   |              |  |   |        | 
|------------------- |  | ------------- | ------- | ----------------- | - | ------------ |  | - | ------ | 
|                    |  | July 1, 
2006 |         | December 31, 2005 |   | July 2, 2005 | 
|                    |  |               |         |                   |   |              | 
|                   
|Raw
  materials     |  | $             | 3,770   |                   | $ | 4,038        |  |   |       | 
|Work-in-process     |  |               | 6,727   |                   |   | 6,442        |  |   |       | 
|Finished
  goods    |  |               | 111,497 |                   |   | 83,866       |  | $ | 25,469 | 
|                    |  |               |         |                   |   |              |  |   |        | 
|Total
  inventories |  | $             | 121,994 |                   | $ | 94,346       |  | $ | 25,469 | 
|                    |  |               |         |                   |   |              |  |   |        | 

12

---

|    |                                     
|--- | ------------------------------------
|11. | Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill as of July 1, 2006 by
segment were as follows:

|                                  |  |           |         |        |  |        |  |        |   |              |   |        |  |   |         |  
|--------------------------------- |  | --------- | ------- | ------ |  | ------ |  | ------ | - | ------------ | - | ------ |  | - | ------- | -
|                                  |  | Wholesale |         | Retail |  | Direct |  | Other* |   | Consolidated |  
|                                  |  |           |         |        |  |        |  |        |   |              |  
|Balance at December 31,
  2005    |  | $         | 37,074  |        |  |       |  |        |  |              | $ | 16,695 |  | $ | 53,769  |  
|Adjustment to acquired
  goodwill |  |           |        |        |  |       |  |        |  |              |   | 231    |  |   | 231     |  
|Goodwill impairment               |  |           | (37,074 | )      |  |       |  |        |  |              |   |       |  |   | (37,074 | )
|                                  |  |           |         |        |  |        |  |        |   |              |   |        |  |   |         |  
|Balance at July 1, 2006           |  | $         |        |        |  |       |  |        |  |              | $ | 16,926 |  | $ | 16,926  |  

* The Company has not yet allocated the goodwill acquired in connection with the purchase of Lenox to a reporting
segment as it continues to evaluate the purchase price allocation.

During the second quarter, the Company re-forecast its 2006 Gift and Specialty channel sales within
the Department 56 wholesale reporting unit. The Company also experienced a decline in the quoted market price of its stock in the
second quarter. Given these events, the Company determined it was more likely than not that a reduction of the fair value of the
Department 56 wholesale reporting unit may have occurred. As a result, the Company completed a review of the Department 56
wholesale reporting unit goodwill in accordance with SFAS No. 142. Based on the results of this analysis, the Company recorded an
impairment charge of $37.1 million to write-down the goodwill related to the Department 56 wholesale reporting unit. The fair
value of that reporting unit was estimated using the expected present value of future cash flows. The impairment charge will
result in no future cash expenditures.

Intangible assets, other than goodwill, are comprised of the following:

|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|--------------------------------- |  | ----------------------- | ------- | ------------------------- | - | ------------ | - | ---------------------- | ------- | ------------------------ | - | ------- |  | ---------------------- | ------ | ------------------------ | - | ------- |  | - | ------ |  | - | ------ | - | - | ------ | 
|                                  |  | July 1,
2006            |         | December
31, 2005         |   | July 2,
2005 |  
|                                  |  |                         |         |                           |   |              |  
|                                  |  | Gross 
carrying 
amount |         | Accumulated 
amortization |   | Net          |   | Gross 
carrying
amount |         | Accumulated
amortization |   | Net     |  | Gross carrying 
amount |        | Accumulated
amortization |   | Net     | 
|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         | 
|Finite-life intangible assets     |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|Customer relationships            |  | $                       | 15,300  |                           | $ | (1,377       | ) | $                      | 13,923  |                          | $ | 15,300  |  | $                      | (551   | )                        | $ | 14,749  |  |   |       |  |   |       |   |   |       | 
|Favorable lease interests         |  |                         | 2,542   |                           |   | (1,614       | ) |                        | 928     |                          |   | 2,542   |  |                        | (770   | )                        |   | 1,772   |  |   |       |  |   |       |   |   |       | 
|Non-compete agreements            |  |                         | 2,705   |                           |   | (2,259       | ) |                        | 446     |                          |   | 2,705   |  |                        | (2,189 | )                        |   | 516     |  | $ | 2,705  |  | $ | (2,119 | ) | $ | 586    | 
|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|Indefinite-life intangible assets |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|Trademarks                        |  |                         | 126,857 |                           |   | (4,139       | ) |                        | 122,718 |                          |   | 126,110 |  |                        | (4,139 | )                        |   | 121,971 |  |   | 17,900 |  |   | (4,139 | ) |   | 13,761 | 
|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 
|Total Intangibles                 |  | $                       | 147,404 |                           | $ | (9,389       | ) | $                      | 138,015 |                          | $ | 146,657 |  | $                      | (7,649 | )                        | $ | 139,008 |  | $ | 20,605 |  | $ | (6,258 | ) | $ | 14,347 | 
|                                  |  |                         |         |                           |   |              |   |                        |         |                          |   |         |  |                        |        |                          |   |         |  |   |        |  |   |        |   |   |        | 

13

---

Intangible asset amortization expense for the second quarter and 26
weeks ended July 1, 2006 was $725 and $1,741, respectively, compared to $35 and
$70 for the second quarter and 26 weeks ended July 2, 2005, respectively. The
increase in amortization expense for the second quarter and 26 weeks ended July
1, 2006 was the result of the Lenox acquisition. Expected future amortization
expense for finite-lived intangible assets is as follows:

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

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

|    |              
|--- | -------------
|12. | Benefit Plans

Components
of net periodic benefit cost for the second quarter ended July 1, 2006 were as
follows:

|                               |  |                  |        |                                     |   |     | 
|------------------------------ |  | ---------------- | ------ | ----------------------------------- | - | --- | 
|                               |  | Pension
Benefits |        | Medical
and Life
Insurance Benefits |  
|                               |  |                  |        |                                     |  
|                              
|Service cost                   |  | $                | 1,196  |                                     | $ | 213 | 
|Interest cost                  |  |                  | 2,379  |                                     |   | 354 | 
|Expected return on assets      |  |                  | (2,363 | )                                   |   |    | 
|Amortization of gain           |  |                  | (66    | )                                   |   |    | 
|                               |  |                  |        |                                     |   |     | 
|Net periodic pension
  expense |  | $                | 1,146  |                                     | $ | 567 | 
|                               |  |                  |        |                                     |   |     | 

Components of net periodic
benefit cost for the 26 weeks ended July 1, 2006 were as follows:

|                               |  |                  |        |                                     |   |       | 
|------------------------------ |  | ---------------- | ------ | ----------------------------------- | - | ----- | 
|                               |  | Pension
Benefits |        | Medical
and Life
Insurance Benefits |  
|                               |  |                  |        |                                     |  
|                               |  |                  |        |                                     |   |       | 
|Service cost                   |  | $                | 2,392  |                                     | $ | 426   | 
|Interest cost                  |  |                  | 4,758  |                                     |   | 708   | 
|Expected return on assets      |  |                  | (4,726 | )                                   |   |      | 
|Amortization of gain           |  |                  | (132   | )                                   |   |      | 
|                               |  |                  |        |                                     |   |       | 
|Net periodic pension
  expense |  | $                | 2,292  |                                     | $ | 1,134 | 
|                               |  |                  |        |                                     |   |       | 

14

---

|    |              
|--- | -------------
|13. | Contingencies

On May 26, 2004, Ashley Seaberg filed a product liability suit against
Department 56, Inc. and Time to Celebrate in United States District Court for
the District of Oregon, claiming that a strand of lights from defendant Time to
Celebrate started a house fire. On May 16, 2005, the court granted plaintiffs
motion to amend the complaint to add a claim for $10 million in punitive
damages. On June 12, 2006, the Court dismissed the case, with prejudice, based
upon the parties agreement to resolve the matter. Under the terms of the
settlement agreement, the Company did not admit any liability and the Companys
insurance carrier agreed to pay plaintiff $60,000 in consideration of a
complete general release.

In August 2004, plaintiffs purporting to represent a class of consumers
who purchased tableware sold in the United States filed suit against Federated
Department Stores, the May Department Stores Company, Waterford Wedgwood U.S.A.
and Lenox, Incorporated in United States District Court for the Northern
District of California. In November 2004, plaintiffs filed a consolidated
amended complaint alleging that for the period beginning at least as early as
May 1, 2001 through the filing of the amended complaint on November 12, 2004,
defendants violated Section 1 of the Sherman Act by conspiring to fix prices
and to boycott sales to Bed, Bath & Beyond. Plaintiffs seek to recover an
undisclosed amount of damages, trebled in accordance with antitrust laws, as
well as costs, attorneys fees and injunctive relief. This matter is currently
in the pre-trial discovery phase. The Court has set April 9, 2007 as the trial
date.

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

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

15

---

|    |                                                
|--- | -----------------------------------------------
|14. | Segments of the
Company and Related Information

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

|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|-------------------------------------------------- |  | ----------------------------------- | ------- | ------------------ |  | ----------------------------------- | - | ------------------ | ------ | ------------------------------------- |  | ------------------ | - | --------------------------------- | ------- | ------------------ |  | --- | - | - | ------ | - |  | --- | -
|(In thousands)                                     |  | 13
  WEEKS
  ENDED
  JULY 1,
  2006 |         | %
  of
  Net Sales |  | 13
  WEEKS
  ENDED
  JULY 2,
  2005 |   | %
  of
  Net Sales |        | 26
  WEEKS 
  ENDED 
  JULY 1,
  2006 |  | %
  of
  Net Sales |   | 26
  WEEKSENDED 
  JULY 2,
  2005 |         | %
  of
  Net Sales | 
|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    | 
|                                                  
|WHOLESALE:                                         |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|Net sales                                          |  | $                                   | 70,655  |                    |  | 100                                 |   | $                  | 34,799 |                                       |  | 100                |   | $                                 | 122,476 |                    |  | 100 |   | $ | 53,073 |   |  | 100 |  
|Gross profit                                       |  |                                     | 28,730  |                    |  | 41                                  |   |                    | 16,481 |                                       |  | 47                 |   |                                   | 51,001  |                    |  | 42  |   |   | 24,513 |   |  | 46  |  
|Selling expenses                                   |  |                                     | 9,281   |                    |  | 13                                  |   |                    | 3,427  |                                       |  | 10                 |   |                                   | 18,760  |                    |  | 15  |   |   | 6,812  |   |  | 13  |  
|Goodwill impairment                                |  |                                     | 37,074  |                    |  | 53                                  |   |                    |       |                                       |  |                    |   |                                   | 37,074  |                    |  | 30  |   |   |       |   |  |     |  
|Operating (loss) income fromcontinuing operations  |  |                                     | (17,625 | )                  |  | (25                                 | ) |                    | 13,054 |                                       |  | 38                 |   |                                   | (4,833  | )                  |  | (4  | ) |   | 17,701 |   |  | 33  |  
|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|RETAIL:                                            |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|Net sales                                          |  | $                                   | 10,510  |                    |  | 100                                 |   | $                  | 1,556  |                                       |  | 100                |   | $                                 | 26,706  |                    |  | 100 |   | $ | 2,901  |   |  | 100 |  
|Gross profit                                       |  |                                     | 6,541   |                    |  | 62                                  |   |                    | 1,036  |                                       |  | 67                 |   |                                   | 18,143  |                    |  | 68  |   |   | 1,933  |   |  | 67  |  
|Selling expenses                                   |  |                                     | 7,045   |                    |  | 67                                  |   |                    | 1,295  |                                       |  | 83                 |   |                                   | 16,406  |                    |  | 61  |   |   | 3,008  |   |  | 104 |  
|Operating (loss) income from continuing
operations |  |                                     | (504    | )                  |  | (5                                  | ) |                    | (259   | )                                     |  | (17                | ) |                                   | 1,737   |                    |  | 7   |   |   | (1,075 | ) |  | (37 | )
|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|DIRECT:                                            |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|Net sales                                          |  | $                                   | 16,663  |                    |  | 100                                 |   | $                  |       |                                       |  |                    |   | $                                 | 39,032  |                    |  | 100 |   | $ |       |   |  |     |  
|Gross profit                                       |  |                                     | 11,183  |                    |  | 67                                  |   |                    |       |                                       |  |                    |   |                                   | 25,774  |                    |  | 66  |   |   |       |   |  |     |  
|Selling expenses                                   |  |                                     | 9,428   |                    |  | 57                                  |   |                    |       |                                       |  |                    |   |                                   | 19,561  |                    |  | 50  |   |   |       |   |  |     |  
|Operating income from continuing
operations        |  |                                     | 1,755   |                    |  | 11                                  |   |                    |       |                                       |  |                    |   |                                   | 6,213   |                    |  | 16  |   |   |       |   |  |     |  
|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|CORPORATE:                                         |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|Unallocated general and administrative
expenses    |  | $                                   | 25,903  |                    |  |                                     |   | $                  | 5,851  |                                       |  |                    |   | $                                 | 53,733  |                    |  |     |   | $ | 13,262 |   |  |     |  
|                                                   |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|CONSOLIDATED:                                      |  |                                     |         |                    |  |                                     |   |                    |        |                                       |  |                    |   |                                   |         |                    |  |     |   |   |        |   |  |     |  
|Net sales                                          |  | $                                   | 97,828  |                    |  | 100                                 |   | $                  | 36,355 |                                       |  | 100                |   | $                                 | 188,214 |                    |  | 100 |   | $ | 55,974 |   |  | 100 |  
|Operating (loss) income from continuing
operations |  |                                     | (42,277 | )                  |  | (43                                 | ) |                    | 6,944  |                                       |  | 19                 |   |                                   | (50,616 | )                  |  | (27 | ) |   | 3,364  |   |  | 6   |  

16

---

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

RESULTS OF OPERATIONS

This Item
should be read in conjunction with the segment financial table presented in
Note 14 to the Condensed Consolidated Financial Statements. Other components of
the Condensed Consolidated Statement of Operations which are classified below
income from operations (i.e. interest expense, provision for income taxes,
etc.) are not allocated by segment and are discussed separately.

Comparison of Results of Operations for the
Quarter Ended July 1, 2006 to the Quarter Ended July 2, 2005.

Wholesale

Net sales
increased $35.9 million, or 103%, to $70.7 million in the second quarter of
2006 from $34.8 million in the second quarter of 2005. The increase in revenue
was principally due to the acquisition of Lenox in September 2005 (the
Acquisition) offset by a decrease in Department 56 branded sales of $9.0
million. The decrease in Department 56 branded sales was principally due to the
timing of receipt of product from manufacturers overseas as well as the
continued softness experienced in the Gift and Specialty channel.

Gross profit
as a percentage of net sales was 41% and 47% in the second quarter of 2006 and
2005, respectively. The decrease in gross profit as a percentage of net sales
was principally due to the Acquisition as the Lenox wholesale business
typically generates lower gross margin percentages because it primarily sells
to national customers.

Selling
expenses were $9.3 million or 13% of sales in the second quarter of 2006
compared to $3.4 million or 10% of sales in the second quarter of 2005. The
increase in selling expenses was principally due to the Acquisition.

In the second
quarter of 2006, a goodwill impairment charge of $37.1 million was recorded to
write-down the goodwill related to the Department 56 wholesale reporting unit.
See Note 11 to the Condensed Consolidated Financial Statements.

Operating loss
from continuing operations was $17.6 million in the second quarter of 2006
compared to operating income from continuing operations of $13.1 million in the
second quarter of 2005. The decrease in operating income from continuing
operations was principally due to the $37.1 million goodwill impairment offset
by increased operating income due to the Acquisition as described above.

17

---

Retail

Net sales
increased $8.9 million to $10.5 million in the second quarter of 2006 from $1.6
million in the second quarter of 2005, reflecting the impact of the
Acquisition. Same-store sales (including stores added as a result of the
Acquisition which are compared against pre-acquisition results) increased by
0.5%.

Gross profit
as a percentage of net sales was 62% and 67% in the second quarter of 2006 and
2005, respectively, reflecting the impact of the Acquisition as stores operated
under the Lenox
trade name typically carry lower gross profit percentages because they are
principally outlet stores.

Selling
expenses were $7.0 million or 67% of sales in the second quarter of 2006
compared to $1.3 million or 83% of sales in the second quarter of 2005. The
increase in selling expenses was primarily due to the Acquisition.

Operating loss
from continuing operations was $0.5 million in the second quarter of 2006
compared to operating loss from continuing operations of $0.3 million in the
second quarter of 2005.

Direct

The Direct
business was acquired as part of the Acquisition. Net sales from the Direct
business were $16.7 million for the second quarter of 2006 and the gross profit
percentage was 67%. Selling expenses were $9.4 million, or 57% of sales.

Corporate

General and
administrative expenses were $25.9 million in the second quarter of 2006
compared to $5.9 million in 2005, reflecting the impact of the Acquisition.

Provision for Income Taxes

The effective
income tax rate was 11% in the second quarter of 2006 compared to 36% in the
second quarter of 2005. The decrease in the effective income tax rate was
principally due to the goodwill impairment (which is primarily non-tax
deductible), partially offset by the impact of the Acquisition, as Lenox, Inc.
(the acquired entity) has an effective state tax rate that is higher than
Department 56, Inc. (the legacy company).

18

---

Comparison of Results of Operations for the
26 Weeks Ended July 1, 2006 to the 26 Weeks Ended July 2, 2005.

Wholesale

Net sales
increased $69.4 million, or 131%, to $122.5 million in 2006 from $53.1 million
in 2005. The increase in revenue was principally due to the Acquisition offset
by a decrease in Department 56 branded sales of $14.0 million. The decrease in
Department 56 branded sales was principally due to the timing of receipt of
product from manufacturers overseas as well as the continued softness
experienced in the Gift and Specialty channel.

Gross profit
as a percentage of net sales was 42% and 46% in the first half of 2006 and
2005, respectively. The decrease in gross profit as a percentage of net sales
was principally due to the Acquisition as the wholesale business typically
generates lower gross margin percentages because it primarily sells to national
customers.

Selling
expenses were $18.8 million or 15% of sales in 2006 compared to $6.8 million or
13% of sales in 2005. The increase in selling expenses was principally due to
the Acquisition.

In the second
quarter of 2006, a goodwill impairment charge of $37.1 million was recorded to
write-down the goodwill related to the Department 56 wholesale reporting unit.
See Note 11 to the Condensed Consolidated Financial Statements.

Operating loss
from continuing operations was $4.8 million in the first half of 2006 compared
to operating income from continuing operations of $17.7 million in the first
half of 2005. The decrease in operating income from continuing operations to an
operating loss was principally due to the $37.1 million goodwill impairment offset
by increased operating income due to the Acquisition as described above.

Retail

Net sales
increased $23.8 million to $26.7 million in 2006 from $2.9 million in 2005,
reflecting the impact of the Acquisition. Same-store sales (including stores
added as a result of the Acquisition which are compared against pre-acquisition
results) increased by 0.4%.

19

---

Gross profit
as a percentage of net sales was 68% and 67% in the first half of 2006 and
2005, respectively, reflecting the impact of the Acquisition. In the first
quarter of 2006, the Company closed 31 stores operated under the Lenox
trade name and liquidated excess product acquired as part of the Acquisition.
The impact of this activity normally would have resulted in lower gross margins
for the Lenox retail business; however, this was offset by the requirement to
value Lenox inventory at its estimated selling price less cost of disposal
under the purchase method of accounting on the opening balance sheet date. The
impact of this purchase accounting adjustment was approximately $4.8 million,
which increased gross profit as a percentage of sales by 18 percentage points
for the first six months of 2006. Gross profit as a percentage of net sales was
negatively impacted by the store closings and liquidation of excess product
indicated above, but primarily reflects the fact that outlet stores operated
under the Lenox
trade name typically carry lower gross profit percentages than the stores
operated under the Department 56 trade name.

Selling
expenses were $16.4 million or 61% of sales in 2006 compared to $3.0 million or
104% of sales in 2005. The increase in selling expenses was primarily due to
the Acquisition.

Operating
income from continuing operations was $1.7 million in 2006 compared to a loss
from continuing operations of $1.1 million in 2005. The increase in operating
income from continuing operations was principally due to the Acquisition as
described above.

Direct

The Direct
business was acquired as part of the Acquisition. Net sales from the Direct business
were $39.0 million in the first half of 2006. The gross profit percentage was
66%. The gross profit percentage of 66% was negatively impacted by a purchase
accounting fair market value adjustment related to the write up of inventory to
its estimated selling price less cost of disposal under the purchase method of
accounting on the opening balance sheet date. The impact of this purchase
accounting adjustment was $1.2 million, which decreased gross profit as a
percentage of sales by three percentage points for the first quarter of 2006.
Selling expenses were $19.6 million, or 50% of sales.

Corporate

General and
administrative expenses were $53.7 million in 2006 compared to $13.3 million in
2005, reflecting the impact of the Acquisition.

Provision for Income Taxes

The effective
income tax rate was 16% in the first half of 2006 compared to 36% in the first
half of 2005. The decrease in the effective income tax rate was principally due
to the goodwill impairment (which is primarily non-tax deductible), partially
offset by the impact of the Acquisition, as Lenox, Inc. (the acquired entity)
has an effective state tax rate that is higher than Department 56, Inc. (the
legacy company).

20

---

SEASONALITY

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

LIQUIDITY AND CAPITAL
RESOURCES

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



Although the Company uses significant amounts of
cash from operations during the first nine months of its fiscal year, it generates positive cash from operations on an annual
basis (after significant amounts of cash are collected in the fourth quarter as described above). The timing of cash payments to
suppliers of inventory, the ability to ship inventory to its customers, and the timing of cash receipts from its customers will
impact the Companys borrowing base capacity.  The Company monitors accounts receivable, inventory levels and shipment
of product on a routine basis to ensure adequate borrowing base capacity exists to fund its current working capital needs. Based
on current forecasted levels of operations, the Company believes its funds generated from operations and its revolving credit
facility will be sufficient to finance any future working capital needs, capital expenditures or contractual obligations through
the end of the fiscal year.

Cash Flows from
Operations

Net cash used in operating activities increased $32.9 million from
$25.1 million used during the first half of 2005 to $58.0 million used during
the first half of 2006. The increase in cash used in operating activities was
principally due to the seasonal working capital requirements of the acquired
Lenox business and $7.2 million in payments of severance and restructuring
costs accrued as part of the Acquisition. See Note 8 to the Condensed
Consolidated Financial Statements.

Cash Flows from
Investing Activities

Net cash
provided by investing activities was $0.7 million during the first half of 2005
compared to $2.3 million provided during the first half of 2006. The increase
was principally due to receiving $9.9 million in proceeds from the sale of the
Langhorne, Pennsylvania facility partially offset by incremental purchases of
property and equipment of $4.4 million principally related to the consolidation
of the Lenox wholesale and direct businesses into a newly renovated office
facility in Bristol, Pennsylvania and also offset by the purchase of Willitts
Design International Inc. for $3.0 million.

21

---

Cash Flows from
Financing Activities

Under the terms of its credit facility, the Company is required to use
the proceeds of any asset sales to pay down long-term debt. As a result, the
Company used the proceeds from the sale of its facility in Langhorne,
Pennsylvania to pay down $9.9 million in long-term debt. In addition, the
Company made contractual scheduled payments on its long-term debt of $2.5 and
$2.2 million in the first and second quarters, respectively. The Company also borrowed
$69.5 million under its revolving credit facility in the first half of 2006 to
fund its operating and investing activities.

The revolving
credit facility provides for borrowings up to $175.0 million, which may be in
the form of letters of credit and revolving credit loans. Borrowings under the
revolving credit facility are subject to certain borrowing base limitations,
and the Companys borrowing capacity fluctuates during the year based upon
accounts receivable and inventory levels. The Companys borrowing capacity
under the revolving credit facility as of July 1, 2006, was $96.0 million, of
which $9.9 million was available for additional borrowings or letters of
credit.

During the
second quarter of 2006, the Company entered into amendments to its revolving
credit facility and term loan facility. The amendments were entered into in
connection with the Companys intention to sell its manufacturing facility
located in Pomona, New Jersey and its distribution/office facility located in
Langhorne, Pennsylvania. Pursuant to the amendments, the lenders granted the
Company limited consent to sell the facilities, provided that 100% of the net
cash proceeds of such sales are used to repay a portion of the indebtedness
with respect to the term loan facility. The amendments also adjusted the
maximum leverage ratios and interest coverage ratios set forth in the credit
facility agreements and required the payment of an amendment fee of $397. In
addition, the amendment to the term loan facility increased the applicable
margin by 0.25% to 2.75% for Alternate Base Rate loans and to 3.75% for
Adjusted LIBOR Rate loans.

The credit
facilities (as amended) also require maintenance of minimum levels of interest
coverage and maximum levels of leverage, in each case at the end of each fiscal
quarter. The minimum interest coverage ratio (as defined within the credit
facility agreements) requires the Company to maintain a minimum ratio of
earnings before interest, income taxes, depreciation and amortization (EBITDA)
to interest expense over a 12-month period ending on each fiscal quarter. The
minimum ratio to be maintained at each quarter-end over the term of the
facilities is defined within the credit facility agreements and ranges from
2.35:1.0 to 3.75:1.0. The maximum leverage ratio (as defined within the credit
facility agreements) requires the Company to maintain a maximum ratio of debt
(as measured at the end of each fiscal quarter) to EBITDA over a 12-month
period ending on each fiscal quarter. The maximum leverage ratio to be
maintained at each quarter-end over the term of the facilities is defined
within the credit facility agreements and ranges from 2.0:1.0 to 5.75:1.0. As
of July 1, 2006, the Company was in compliance with all material conditions and
covenants under the credit facilities. The goodwill impairment charge recorded
in the second quarter of 2006 was non-cash in nature and did not affect the
Companys liquidity or result in non-compliance with respect to any of its
credit facility covenants.

The Company utilized
its cash on hand during the first half of 2005 to fund its operating and
investing activities during that period.

22

---

OFF-BALANCE SHEET
ARRANGEMENTS

The Company
does not have off-balance sheet arrangements.

CONTRACTUAL
OBLIGATIONS

As of July 1,
2006, the Company is obligated to make cash payments in connection with its
debt obligations, operating leases, purchase obligations and royalty guarantees
in the amounts listed below. The Company has no unrecorded obligations other
than the items noted in the following table:

|                             |  |                               |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 
|---------------------------- |  | ----------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------ |  | - | ------- | 
|                             |  | Payments
  Due (in thousands) |       
|                             |  |                               |        |      |   |        |  |      |        |      |   |            |  |       |       
|                             |  | 2006 (Q3-Q4)                  |        | 2007 |   | 2008   |  | 2009 |        | 2010 |   | Thereafter |  | Total |       
|                             |  |                               |        |      |   |        |  |      |        |      |   |            |  |       |       
|                            
|Revolving Credit Facility1,2 |  |                               |       |      |   |       |  |      |       |      |   |           |  | $     | 79,947 |  |   |       |  | $ | 79,947  | 
|Long-term Debt2,3            |  | $                             | 4,492  |      | $ | 8,985  |  | $    | 8,985  |      | $ | 8,985      |  |       | 8,985  |  | $ | 44,923 |  |   | 85,355  | 
|Operating Leases             |  |                               | 7,747  |      |   | 12,612 |  |      | 10,832 |      |   | 9,514      |  |       | 7,206  |  |   | 29,966 |  |   | 77,877  | 
|Purchase Commitments4        |  |                               | 66,745 |      |   |       |  |      |       |      |   |           |  |       |       |  |   |       |  |   | 66,745  | 
|Royalty Guarantees5          |  |                               | 641    |      |   | 618    |  |      | 136    |      |   | 30         |  |       |       |  |   |       |  |   | 1,425   | 
|                             |  |                               |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 
|Total                        |  | $                             | 79,625 |      | $ | 22,215 |  | $    | 19,953 |      | $ | 18,529     |  | $     | 96,138 |  | $ | 74,889 |  | $ | 311,349 | 
|                             |  |                               |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |         | 

|  |                                                                                                                                                                                                                                                                                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The Companys borrowings under the revolving credit facility are
classified as current liabilities on the Consolidated Balance Sheets in accordance with Emerging Issues Task Force Issue No.
95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement.                  
|  |                                                                                                                                                                                                                                                                                                                                                                                               
|2 | In addition to the principal payments on debt included in the summary of
significant contractual obligations, the Company will incur interest expense on outstanding variable rate debt. All amounts
outstanding under the revolving and term loan credit facilities are variable interest rate debt with weighted average interest
rates as of July 1, 2006 of 7.51% and 9.10%, respectively.
|  |                                                                                                                                                                                                                                                                                                                                                                                               
|3 | Long term debt does not include the conditional notes payable to the Maryland
Department of Business and Economic Development and the County Commissioners of Washington County, Maryland as the principal of
these notes may be fully or partially forgiven if the Company meets certain levels of employment at the Hagerstown, Maryland
distribution facility.                             
|  |                                                                                                                                                                                                                                                                                                                                                                                               
|4 | The Company is committed to pay suppliers of product under the terms of open
purchase orders issued in the normal course of business.                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                               
|5 | The Company
  is committed to pay licensors under the terms of license agreements entered
  into in the normal course of business.                                                                                                                                                                                                                                                            

Other than noted in the above table, there were no other material
changes in contractual obligations from those disclosed in the Companys 2005
Annual Report on Form 10-K.

CRITICAL ACCOUNTING
POLICIES

Our Condensed 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, the Company is
required to make assumptions, make estimates and apply judgment that affect the
reported amounts of assets, liabilities, revenue, expenses and related
disclosures. The Company bases its assumptions, estimates and judgments on
historical experience, current trends and other factors that management believes
to be relevant at the time the Condensed Consolidated Financial Statements are
prepared. On a regular basis, management reviews the accounting policies,
assumptions, estimates and judgments to ensure that the Companys 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 the Companys
assumptions and estimates, and such differences could be material.

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

23

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

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.

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

Valuation
of Long-Lived Assets  The Company reviews its long-lived
assets, consisting primarily of property, plant and equipment and intangible
assets with finite lives, for impairment in accordance with SFAS No. 144. In
analyzing potential impairment, the Company uses projections of future
undiscounted cash flows from the assets. These projections are based on the
Companys view of growth rates for the related business, anticipated future
economic conditions, the appropriate discount rates relative to risk and
estimates of residual values. The Company believes that its estimates are
consistent with assumptions that marketplace participants would use in their
estimates of fair value. If changes in growth rates, future economic
conditions, discount rates or estimates of residual values were to occur,
long-lived assets may become impaired.

24

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Valuation
of Goodwill, Trademarks and Other Intangible Assets  The
Company reviews goodwill and other indefinite-lived intangible assets for
impairment based on the requirements of SFAS No. 142. Goodwill is tested for
impairment at the reporting unit level on an annual basis in the fourth quarter
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. These
events or circumstances would include a significant change in the business
climate, legal factors, operating performance indicators, competition, sale or
disposition of a significant portion of the business or other factors. In analyzing
goodwill for potential impairment, the Company uses projections of future cash
flows from the reporting units. These projections are based on the Companys
view of growth rates, anticipated future economic conditions, the appropriate
discount rates relative to risk and estimates of residual values. The Company
believes that its estimates are consistent with assumptions that marketplace
participants would use in their estimates of fair value. If changes in growth
rates, future economic conditions, discount rates or estimates of residual
value were to occur, goodwill may become impaired.

Additionally, impairment tests for indefinite-lived
intangible assets, consisting of trademarks, are required to be performed on an
annual basis or on an interim basis if an event occurs or circumstances change
that would indicate the asset might be impaired. The impairment test for
indefinite-lived intangible assets consists of a comparison of the fair value
of the intangible asset with its carrying value. If the carrying value of the
intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess. The estimates of fair value of indefinite-lived
intangible assets are determined using various discounted cash flow valuation
methodologies. The most common among these is a relief from royalty
methodology, which is used in estimating the fair value of the Companys
trademarks. Significant assumptions inherent in the methodology employed
include estimates of royalty rates and discount rates. Discount rate
assumptions are based on an assessment of the risk inherent in the respective
intangible assets. Assumptions about royalty rates are based on the rates at
which similar trademarks are being licensed in the marketplace.

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

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

25

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

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. Such risks and
uncertainties that could affect performance include, but are not limited to,
the ability of the Company to: (1) integrate Lenox into its business; (2)
achieve revenue and cost synergies; (3) obtain sufficient financing for working capital needs; and (4) generate cash flow to pay off debt.
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
risk factors set out in Item 1A and Item 7 in the Companys 2005 Annual Report
on Form 10-K, which are incorporated herein by reference and applicable to the
forward-looking statements set forth herein.

26

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Item 3. Quantitative and Qualitative Disclosures about Market
Risk

There has been no significant change in the Companys
exposure to market risk since the end of fiscal 2005. The Companys market
risks relate primarily to changes in interest rates and currency exchange
rates. See Item 7A in the Companys 2005 Annual Report on Form 10-K for a
discussion of these market risks.

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 (the Exchange Act)). 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 are reasonably likely to
materially affect, the Companys internal control over financial reporting.

27

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PART
II - OTHER INFORMATION

|        |                  
|------- | -----------------
|Item 1. | Legal
Proceedings

On May 26, 2004, Ashley Seaberg filed a product
liability suit against Department 56, Inc. and Time to Celebrate in United
States District Court for the District of Oregon, claiming that a strand of
lights from defendant Time to Celebrate started a house fire. On May 16, 2005,
the court granted plaintiffs motion to amend the complaint to add a claim for
$10 million in punitive damages. On June 12, 2006, the Court dismissed the
case, with prejudice, based upon the parties agreement to resolve the matter.
Under the terms of the settlement agreement, the Company did not admit any
liability and the Companys insurance carrier agreed to pay plaintiff $60,000
in consideration of a complete general release.

In August 2004, plaintiffs purporting to represent a
class of consumers who purchased tableware sold in the United States filed suit
against Federated Department Stores, the May Department Stores Company,
Waterford Wedgwood U.S.A. and Lenox, Incorporated in United States District
Court for the Northern District of California. In November 2004, plaintiffs
filed a consolidated amended complaint alleging that for the period beginning
at least as early as May 1, 2001 through the filing of the amended complaint on
November 12, 2004, defendants violated Section 1 of the Sherman Act by
conspiring to fix prices and to boycott sales to Bed, Bath & Beyond.
Plaintiffs seek to recover an undisclosed amount of damages, trebled in
accordance with antitrust laws, as well as costs, attorneys fees and
injunctive relief. This matter is currently in the pre-trial discovery phase.
The Court has set April 9, 2007 as the trial date.

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

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

28

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|         |             
|-------- | ------------
|Item 1A. | Risk Factors

In addition to the other information set forth in this
report, you should carefully consider the factors discussed in Part I, Item 1A
of the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2005, which could have a material impact on the Companys business,
financial condition or results of operations. The risks described in the
Companys Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not presently known to the Company or that
the Company currently believes to be immaterial may also adversely affect the
Companys business, financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were submitted to a vote of
security holders during the Companys Annual Meeting of Stockholders held on
May 17, 2006.

Description
of Matter:

|   |                      
|-- | ---------------------
|1. | Election of Directors

| |                    |  |  |                  |  |  |                      | 
| | ------------------ |  |  | ---------------- |  |  | -------------------- | 
| | Director           |  |  | Votes Cast
  For |  |  | Authority
  Withheld | 
| |                    |  |  |                  |  |  |                      | 
| |                    |  |  |                  |  |  |                      | 
| | Susan E. Engel     |  |  | 12,936,157       |  |  | 125,196              | 
| | James E. Bloom     |  |  | 12,943,270       |  |  | 118,083              | 
| | Charles N. Hayssen |  |  | 12,940,574       |  |  | 120,779              | 
| | Stewart M. Kasen   |  |  | 12,683,669       |  |  | 377,684              | 
| | Reatha Clark King  |  |  | 12,727,878       |  |  | 333,475              | 
| | Vin Weber          |  |  | 12,418,066       |  |  | 643,287              | 
| |                    |  |  |                  |  |  |                      | 

|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|2. | Ratification of Deloitte & Touche LLP as
  independent registered public accounting firm.

|           |  |  |         |  |  |         |  |  |                     | 
|---------- |  |  | ------- |  |  | ------- |  |  | ------------------- | 
|For        |  |  | Against |  |  | Abstain |  |  | Broker 
  Non-Votes | 
|           |  |  |         |  |  |         |  |  |                     | 
|12,990,062 |  |  | 68,224  |  |  | 3,067   |  |  | 0                   | 

29

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|          |          |                                                                                                                                                                                                                                                                                                                                                     
|--------- | -------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item
  6. | Exhibits
|          |          |                                                                                                                                                                                                                                                                                                                                                     
|          | 3.1      | Restated Certificate of Incorporation of the
  Company. (Incorporated herein by reference to Exhibit 3.1 of Registrants
  Annual Report on Form 10-K for the fiscal year ended December 31, 2005. SEC
  File No. 1-11908.)                                                                                                                         
|          |          |                                                                                                                                                                                                                                                                                                                                                     
|          | 3.2      | Certificate of Designation, Preferences and Rights
  of Series A Junior Participating Preferred Stock of the Company.
  (Incorporated herein by reference to Exhibit 1.1 of 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 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 Registrants Annual Report on Form 10-K for the fiscal year ended January
  1, 2005. SEC File No. 1-11908.)                        

30

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| |      |                                                                                                      
| | ---- | -----------------------------------------------------------------------------------------------------
| | 11.1 | Computation of net (loss) income 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*                    

* Filed herewith

31

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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.

|      |                 |                                                     | 
|----- | --------------- | --------------------------------------------------- | 
|      |                 | LENOX GROUP INC                                     | 
|      |                 |                                                     | 
|Date: | August 10, 2006 | /s/ Susan E. Engel                                  | 
|      |                 |                                                     | 
|      |                 | Susan E. Engel                                      | 
|      |                 | Chairwoman of the Board and Chief Executive Officer | 
|      |                 | (Principal Executive Officer)                       | 
|      |                 |                                                     | 
|Date: | August 10, 2006 | /s/ Timothy J. Schugel                              | 
|      |                 |                                                     | 
|      |                 | Timothy J. Schugel                                  | 
|      |                 | Chief Financial Officer and Chief Operating Officer | 
|      |                 | (Principal Financial Officer)                       | 

32

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EXHIBIT INDEX

|                 |  |             |                                                                                                     
|---------------- |  | ----------- | ----------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description
|                 |  |            
|                 |  |            
|11.1             |  |             | Computation of net (loss) income 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                   

33

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