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: September 29, 2007

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 xNoo

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
filerxNon-accelerated
filero

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 October 29, 2007, 14,025,632 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)

|                                          |  |                     |         |                    |   |                     |  |   |         | 
|----------------------------------------- |  | ------------------- | ------- | ------------------ | - | ------------------- |  | - | ------- | 
|                                          |  | September 29,
 2007 |         | December 30,
 2006 |   | September 30,
 2006 | 
|                                          |  |                     |         |                    |   |                     | 
|ASSETS                                    |  |                     |         |                    |   |                     |  |   |         | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Current assets:                           |  |                     |         |                    |   |                     |  |   |         | 
|Cash and cash
 equivalents                |  | $                   | 370     |                    | $ | 875                 |  | $ | 429     | 
|Accounts
 receivable, net                 |  |                     | 106,599 |                    |   | 52,059              |  |   | 121,360 | 
|Inventories                               |  |                     | 101,249 |                    |   | 101,925             |  |   | 127,950 | 
|Deferred taxes                            |  |                     | 18,363  |                    |   | 13,896              |  |   | 13,375  | 
|Income tax
 receivable                    |  |                     | 10,488  |                    |   | 956                 |  |   | 5,370   | 
|Other current
 assets                     |  |                     | 8,104   |                    |   | 9,306               |  |   | 11,609  | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Total current
 assets                     |  |                     | 245,173 |                    |   | 179,017             |  |   | 280,093 | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Property and
 equipment, net              |  |                     | 41,445  |                    |   | 49,471              |  |   | 70,300  | 
|Assets held for
 sale                     |  |                     |        |                    |   |                    |  |   | 5,508   | 
|Goodwill                                  |  |                     |        |                    |   |                    |  |   | 18,195  | 
|Trademarks, net                           |  |                     | 119,092 |                    |   | 119,439             |  |   | 122,718 | 
|Other
 intangibles, net                   |  |                     | 12,501  |                    |   | 14,135              |  |   | 14,715  | 
|Marketable
 securities                    |  |                     | 75      |                    |   | 2,098               |  |   | 1,963   | 
|Other assets                              |  |                     | 11,811  |                    |   | 9,637               |  |   | 10,207  | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|                                          |  | $                   | 430,097 |                    | $ | 373,797             |  | $ | 523,699 | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|LIABILITIES
 AND STOCKHOLDERS EQUITY     |  |                     |         |                    |   |                     |  |   |         | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Current
 liabilities:                     |  |                     |         |                    |   |                     |  |   |         | 
|Current portion of long-term debt         |  | $                   | 1,000   |                    | $ | 49,056              |  | $ | 9,155   | 
|Borrowings on revolving credit facility   |  |                     | 89,851  |                    |   | 47,510              |  |   | 128,644 | 
|Accounts payable                          |  |                     | 29,962  |                    |   | 35,248              |  |   | 55,158  | 
|Accrued compensation and benefits payable |  |                     | 7,240   |                    |   | 6,428               |  |   | 11,135  | 
|Severance and restructuring reserves      |  |                     | 5,655   |                    |   | 1,939               |  |   | 3,809   | 
|Other current liabilities                 |  |                     | 8,881   |                    |   | 8,576               |  |   | 4,830   | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Total current liabilities                 |  |                     | 142,589 |                    |   | 148,757             |  |   | 212,731 | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|Deferred compensation obligation          |  |                     | 55      |                    |   | 2,085               |  |   | 1,984   | 
|Pension obligations                       |  |                     | 22,709  |                    |   | 30,664              |  |   | 77,997  | 
|Postretirement obligations                |  |                     | 15,392  |                    |   | 15,853              |  |   | 29,304  | 
|Deferred taxes                            |  |                     | 17,108  |                    |   | 18,297              |  |   | 233     | 
|Long-term debt                            |  |                     | 98,750  |                    |   |                    |  |   | 74,203  | 
|Deferred gain on sale-leaseback           |  |                     | 3,639   |                    |   | 3,845               |  |   |        | 
|Other noncurrent liabilities              |  |                     | 9,715   |                    |   | 12,617              |  |   | 6,812   | 
|Commitments and contingencies (Note 12)   |  |                     |         |                    |   |                     |  |   |         | 
|Stockholders equity                      |  |                     | 120,140 |                    |   | 141,679             |  |   | 120,435 | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 
|                                          |  | $                   | 430,097 |                    | $ | 373,797             |  | $ | 523,699 | 
|                                          |  |                     |         |                    |   |                     |  |   |         | 

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 
 September 29,
 2007 |         | 13 Weeks
 Ended
 September 30,
 2006 |   | 39 Weeks
 Ended
 September 29,
 2007 |   | 39 Weeks
 Ended
 September 30,
 2006 |        
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |        
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|NET SALES                                        |  | $                                     | 137,783 |                                      | $ | 154,268                              |   | $                                    | 317,149 |   | $ | 343,441 |  
|COST OF SALES                                    |  |                                       | 71,948  |                                      |   | 80,834                               |   |                                      | 171,387 |   |   | 172,914 |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|GROSS PROFIT                                     |  |                                       | 65,835  |                                      |   | 73,434                               |   |                                      | 145,762 |   |   | 170,527 |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|OPERATING EXPENSES                               |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|Selling, general
 and administrative             |  |                                       | 53,166  |                                      |   | 60,473                               |   |                                      | 156,273 |   |   | 171,107 |  
|Restructuring
 charges                           |  |                                       | 2,015   |                                      |   |                                     |   |                                      | 8,882   |   |   |        |  
|Goodwill
 impairment                             |  |                                       |        |                                      |   |                                     |   |                                      |        |   |   | 37,074  |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|OPERATING INCOME (LOSS)                          |  |                                       | 10,654  |                                      |   | 12,961                               |   |                                      | (19,393 | ) |   | (37,654 | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|OTHER EXPENSE (INCOME)                           |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|Interest expense                                 |  |                                       | 4,746   |                                      |   | 4,800                                |   |                                      | 11,646  |   |   | 11,810  |  
|Loss on refinancing of debt                      |  |                                       |        |                                      |   |                                     |   |                                      | 5,940   |   |   |        |  
|Other, net                                       |  |                                       | (163    | )                                    |   | (2                                   | ) |                                      | (268    | ) |   | (75     | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|INCOME (LOSS) BEFORE INCOME TAXES                |  |                                       | 6,071   |                                      |   | 8,163                                |   |                                      | (36,711 | ) |   | (49,389 | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|INCOME TAX EXPENSE (BENEFIT)                     |  |                                       | 1,949   |                                      |   | 2,776                                |   |                                      | (16,528 | ) |   | (6,508  | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|NET INCOME (LOSS)                                |  | $                                     | 4,122   |                                      | $ | 5,387                                |   | $                                    | (20,184 | ) | $ | (42,881 | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE  BASIC              |  | $                                     | 0.30    |                                      | $ | 0.39                                 |   | $                                    | (1.46   | ) | $ | (3.12   | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE
  ASSUMING DILUTION |  | $                                     | 0.29    |                                      | $ | 0.39                                 |   | $                                    | (1.46   | ) | $ | (3.12   | )
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|                                                 |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|WEIGHTED AVERAGE SHARES OUTSTANDING              |  |                                       |         |                                      |   |                                      |   |                                      |         |   |   |         |  
|BASIC                                            |  |                                       | 13,826  |                                      |   | 13,758                               |   |                                      | 13,808  |   |   | 13,743  |  
|ASSUMING
 DILUTION                               |  |                                       | 14,019  |                                      |   | 13,795                               |   |                                      | 13,808  |   |   | 13,743  |  

See notes to
condensed consolidated financial statements.

3

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LENOX
GROUP INC. AND SUBSIDIARIES

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

|                                                                   |  |                                    |         |                                    |   |          |  
|------------------------------------------------------------------ |  | ---------------------------------- | ------- | ---------------------------------- | - | -------- | -
|                                                                   |  | 39 Weeks Ended
 September 29, 2007 |         | 39 Weeks Ended
 September 30, 2006 |  
|                                                                   |  |                                    |         |                                    |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |  |                                    |         |                                    |   |          |  
|Net cash used in operating activities                              |  | $                                  | (89,224 | )                                  | $ | (100,633 | )
|Net cash used in operating activities from
discontinued operations |  |                                    |        |                                    |   | (32      | )
|                                                                   |  |                                    |         |                                    |   |          |  
|Net cash used in operating activities                              |  |                                    | (89,224 | )                                  |   | (100,665 | )
|                                                                   |  |                                    |         |                                    |   |          |  
|                                                                   |  |                                    |         |                                    |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                              |  |                                    |         |                                    |   |          |  
|Purchases of property and equipment                                |  |                                    | (2,871  | )                                  |   | (8,678   | )
|Proceeds from sale of assets                                       |  |                                    | 8,677   |                                    |   | 10,340   |  
|Acquisitions                                                       |  |                                    | (385    | )                                  |   | (2,990   | )
|                                                                   |  |                                    |         |                                    |   |          |  
|Net cash provided (used) by investing
activities                   |  |                                    | 5,421   |                                    |   | (1,328   | )
|                                                                   |  |                                    |         |                                    |   |          |  
|                                                                   |  |                                    |         |                                    |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |  |                                    |         |                                    |   |          |  
|Proceeds from the exercise of common stock
options                 |  |                                    |        |                                    |   | 340      |  
|Payments of debt amendment and refinancing
costs                   |  |                                    | (9,685  | )                                  |   | (397     | )
|Excess tax benefits from stock-based
compensation                  |  |                                    | (7      | )                                  |   | 7        |  
|Borrowings on revolving credit facility                            |  |                                    | 42,341  |                                    |   | 118,176  |  
|Purchases of treasury stock                                        |  |                                    | (30     | )                                  |   |         |  
|Principal payments on capital leases                               |  |                                    | (15     | )                                  |   | (91      | )
|Borrowings (payments) on long-term debt                            |  |                                    | 50,694  |                                    |   | (16,892  | )
|                                                                   |  |                                    |         |                                    |   |          |  
|Net cash provided by financing activities                          |  |                                    | 83,298  |                                    |   | 101,143  |  
|                                                                   |  |                                    |         |                                    |   |          |  
|                                                                   |  |                                    |         |                                    |   |          |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                          |  |                                    | (505    | )                                  |   | (850     | )
|                                                                   |  |                                    |         |                                    |   |          |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                   |  |                                    | 875     |                                    |   | 1,279    |  
|                                                                   |  |                                    |         |                                    |   |          |  
|                                                                   |  |                                    |         |                                    |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                         |  | $                                  | 370     |                                    | $ | 429      |  
|                                                                   |  |                                    |         |                                    |   |          |  
|                                                                   |  |                                    |         |                                    |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                  |  |                                    |         |                                    |   |          |  
|Depreciation expense                                               |  | $                                  | 9,220   |                                    | $ | 9,269    |  
|Intangible amortization expense                                    |  |                                    | 1,634   |                                    |   | 2,322    |  
|Accrued capital expenditure purchases                              |  |                                    | 294     |                                    |   | 330      |  
|                                                                   |  |                                    |         |                                    |   |          |  
|Cash paid (received) for:                                          |  |                                    |         |                                    |   |          |  
|Interest                                                           |  |                                    | 8,302   |                                    |   | 10,614   |  
|Income taxes                                                       |  |                                    | (55     | )                                  |   | 2,227    |  

See notes to
condensed consolidated financial statements.

4

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LENOX GROUP INC. AND SUBSIDIARIES

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

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

The Condensed
Consolidated Balance Sheet as of September 29, 2007 and September 30, 2006, the
Condensed Consolidated Statements of Operations for the quarter and 39 weeks
ended September 29, 2007 and September 30, 2006 and the Condensed Consolidated
Statements of Cash Flows for the 39 weeks ended September 29, 2007 and
September 30, 2006 are unaudited.

The Consolidated Balance Sheet as of December
30, 2006 was derived from audited consolidated financial statements, but does
not include all disclosures required by Generally Accepted Accounting
Principles in the United States of America. In the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
statements are included. Adjustments consist only of normal recurring items,
except for any discussed in the notes below. Interim results are not necessarily
indicative of results for a full year. The condensed consolidated financial
statements and notes are presented in accordance with instructions for Form
10-Q, and therefore, do not contain certain information included in our
consolidated annual financial statements and notes. The condensed consolidated
financial statements and notes appearing in this report should be read in
conjunction with the consolidated audited financial statements and related
notes included in the Annual Report on Form 10-K for the year ended December
30, 2006 (2006 Form 10-K) filed by Lenox Group Inc. (the Company) with the
Securities and Exchange Commission (SEC).

The Report of
Independent Registered Public Accounting Firm on the financial statements of
the Company as of and for the fiscal year ended December 30, 2006 included in
the 2006 Form 10-K contained an explanatory paragraph that expressed
substantial doubt about the Companys ability to continue as a going concern
due to its non-compliance with certain financial covenants under its
then-existing credit facilities. As discussed in Note 10, on April 20, 2007,
the Company completed the refinancing of its credit facilities by entering into
amended and restated revolving and term loan facilities.

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

Recently Adopted Accounting Standards

The Company
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN
48) at the beginning of fiscal year 2007. FIN 48 prescribes a recognition
threshold that a tax position is required to meet before being recognized in
the financial statements and provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition issues. As a result of the implementation of FIN 48,
the Company recognized a $1,475 increase to the liabilities for unrecognized
tax benefits, an increase of $1,448 to deferred tax assets and a decrease of
$27 to retained earnings in the first quarter of 2007.

The Company
had unrecognized tax benefits of approximately $3,716 as of December 30, 2006
(excluding related interest and penalties discussed below). The unrecognized
tax benefit decreased

5

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by $2,696 in
the 39 weeks ended September 29, 2007 relating to the expiration of statutes of
limitations in the first and third quarters of 2007, which had a positive
effect on the tax provision. While it is possible that the amounts of the
unrecognized benefits with respect to uncertain tax positions could change
significantly within the next 12 months, such adjustments, if any, are not
expected to have a material effect on our consolidated financial position.

The Company
recognizes interest accrued and penalties related to unrecognized tax benefits
within income tax expense in the Condensed Consolidated Statements of
Operations, which is consistent with the recognition of these items in prior
reporting periods. To the extent these unrecognized tax benefits are ultimately
recognized, there will be an impact on the effective tax rate.

As of January 1, 2007, the Company had
recorded liabilities of approximately $712 and $112, respectively, for the
payment of interest and penalties. The liability for the payment of interest
and penalties decreased by $564 for the 39 weeks ended September 29, 2007 due
to the expiration of the statutes of limitations as noted above.

The Companys
federal income tax returns for 2004 through 2006 are open tax years. The
Company files tax returns in numerous state jurisdictions with varying statutes
of limitation. The Companys unrecognized state tax benefits are primarily
related to state returns open from 2003 through 2006 or 2004 through 2006,
depending on each states statute of limitation.

In March 2006,
FASB Emerging Issues Task Force issued Issue No. 06-03, How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement(EITF
06-03). A consensus was reached that entities may adopt a policy of presenting
sales taxes in the income statement on either a gross or net basis. If taxes
are significant, an entity should disclose its policy of presenting taxes. The
guidance is effective for periods beginning after December 15, 2006. The
Company presents sales net of sales taxes. Adoption of EITF 06-03 on December
31, 2006 did not have an effect on its policy related to sales taxes and
therefore, did not have an effect on its consolidated results of operations and
financial condition.

Recently Issued Accounting Standards

In September
2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements
(SFAS 157) to establish a consistent framework for measuring fair value and
expand disclosures on fair value measurements. The provisions of SFAS 157 are
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the effect that the adoption of SFAS 157 will have on its
consolidated results of operations and financial condition.

In February 2007,
the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (SFAS 159).
SFAS 159 expands opportunities to use fair value measurement in financial
reporting and permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating
the effect that the adoption of SFAS 159 will have on its consolidated results
of operations and financial condition.

6

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

Effective
January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), Share-Based Payment (SFAS 123R), which
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 payment 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
share-based compensation expense was $177 and $401 for the three months ended
September 29, 2007, and September 30, 2006, respectively; and $(580) and $1,139
for the nine months ended September 29, 2007, and September 30, 2006,
respectively. During the three months ended March 31, 2007, forfeiture of
restricted stock with performance conditions that were not met resulted in a
reduction of the associated expense.

During the
three months ended September 29, 2007, no restricted shares of common stock
were issued. For the nine months ended September 29, 2007, 15,500 restricted
shares of common stock were issued to directors. These shares were all issued
in the second quarter and were valued at $7.11 per share, the market price on
the date of the grant. The shares vest three years from the date of the grant.
During the three months ended September 30, 2006, 45,034 restricted shares of
common stock were issued and 81,534 shares of restricted shares were issued
during the nine months ended September 30, 2006. The weighted average per share
price was $5.90 and $8.90, respectively, during the three month and nine month
periods ended September 30, 2006. Shares were priced at the market price on the
date of the grant. Total compensation expense for non-vested restricted stock
during the three months ended September 29, 2007, and September 30, 2006, was
$115 and $333, respectively. For the nine months ended September 29, 2007, and
September 30, 2006, compensation expense for non-vested restricted stock was
$(695) and $1,012, respectively.

During the
three months ended September 29, 2007, no option awards were granted. However,
for the nine months ended September 29, 2007, option awards to acquire 31,000
shares of common stock were granted to directors. All such option awards were
granted during the second quarter. These option awards vest one year from the
date of the grant and have an exercise price equal to the market price of the
Company's common stock on the date of grant. Compensation expense equal to the
grant date fair value is recognized for these awards over the vesting period.
Total compensation expense for stock option awards for the three months ended
September 29, 2007 and September 30, 2006 was $62 and $68, respectively and
$115 and $127 for the nine months ended September 29, 2007 and September 30,
2006.

7

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The Company
estimates the fair value of each option using the Black-Scholes option pricing
model. Assumptions used were:

|                           |  |                                      |      |                                      |  |      |  
|-------------------------- |  | ------------------------------------ | ---- | ------------------------------------ |  | ---- | -
|                           |  | 39 weeks
 ended
 September 29,
 2007 |      | 39 weeks
 ended
 September 30,
 2006 | 
|                           |  |                                      |      |                                      | 
|Risk-free
 interest rate   |  |                                      | 4.6  | %                                    |  | 4.8  | %
|Expected
 dividend yield   |  |                                      | 0.0  | %                                    |  | 0.0  | %
|Expected
 stock volatility |  |                                      | 39.0 | %                                    |  | 49.0 | %
|Expected
 life (in years)  |  |                                      | 5.0  |                                      |  | 6.0  |  

The weighted
average fair value of options granted during the first nine months of 2007 and
2006 was $2.95 and $5.14, respectively.

These
estimates require the Company to make assumptions based on historical results,
observance of trends in its stock price, changes in option exercise behavior,
future expectations, and other relevant factors. If other assumptions had been
used, share-based compensation expense, as calculated and recorded under SFAS
123R, could have been affected.

The Company
based the expected life assumption on historical experience. For purposes of
determining expected volatility, the Company considered a rolling average of
historical volatility measured over a period approximately equal to the
expected option term. The risk free interest rate for periods that coincide
with the expected life of the options is based on U.S. Treasury Department
yield curve in effect at the time of the grant.

|   |                                   
|-- | ----------------------------------
|4. | Net 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. For the 39 weeks ended
September 29, 2007 and September 30, 2006, all stock options and unvested
restricted stock were considered anti-dilutive and excluded from the
computation of common equivalent shares because the Company reported a net
loss.

|   |                                  
|-- | ---------------------------------
|5. | Severance and Restructuring Costs

In connection
with the acquisition of Lenox, Incorporated (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. As of September
29, 2007, the severance and restructuring activities recorded at the time of
the acquisition have been completed. The total amount incurred was $15.0
million of which $14.4 million was recorded to goodwill on the opening
balance sheet and $0.6 million was recorded in Selling, General and
Administrative expense in the Consolidated Statement of Operations in the
fourth quarter of 2006 and was principally recorded in the Companys Corporate
segment.

8

---



During the
first quarter of 2007, the Company engaged Carl Marks Advisory Group LLC to
identify and implement business improvements and operational changes.
Restructuring activities initiated during the first nine months included the
announcement of the planned closing of the Companys distribution center
located in Rogers, MN in late 2007 (with distribution activities to be
transferred to the Companys distribution center located in Hagerstown, MD),
the sale of the Companys sterling silver product line and closure of the
Companys sterling silver manufacturing facility located in Pomona, NJ and
changes in and consolidation of our management and operations structure
(described as general restructuring below). The Company incurred $8.9 million
of severance and restructuring costs related to these activities in the 39
weeks ended September 29, 2007. These costs were included in the restructuring
charges in the Condensed Consolidated Statement of Operations.

The table below
shows a reconciliation of the severance and restructuring reserve activity
through the third quarter of 2007:

|                             |  |                                          |     |                       |   |                |   |       |        |   |   |       |   |   |        |  
|---------------------------- |  | ---------------------------------------- | --- | --------------------- | - | -------------- | - | ----- | ------ | - | - | ----- | - | - | ------ | -
|                             |  | Plant and Distribution 
 Center Closings |     | General Restructuring |   | Total Reserves |  
|                             |  |                                          |     |                       |   |                |  
|                             |  | Severance                                |     | Other                 |   | Severance      |   | Other |        |   |  
|                             |  |                                          |     |                       |   |                |   |       |        |   |  
|Balance,
 December 30, 2006  |  | $                                        | 7   |                       | $ | 1,001          |   | $     | 931    |   | $ |      |   | $ | 1,939  |  
|Costs
 incurred              |  |                                          | 694 |                       |   | 1,743          |   |       | 5,389  |   |   | 1,056 |   |   | 8,882  |  
|Payments and
 other          |  |                                          | (54 | )                     |   | (2,090         | ) |       | (2,856 | ) |   | (166  | ) |   | (5,166 | )
|                             |  |                                          |     |                       |   |                |   |       |        |   |   |       |   |   |        |  
|Balance,
 September 29, 2007 |  | $                                        | 647 |                       | $ | 654            |   | $     | 3,464  |   | $ | 890   |   | $ | 5,655  |  
|                             |  |                                          |     |                       |   |                |   |       |        |   |   |       |   |   |        |  

The Company
believes that the severance and restructuring activities initiated during the
first nine months of 2007 will be substantially completed by March 2008. The
total estimated costs expected to be incurred related to the plant and
distribution center closings and the general restructuring that were initiated
in the first nine months of 2007 including costs incurred during the 13 and 39
weeks ended September 29, 2007, were as follows:

|                                        |  |                       |        |                                     |   |                                     |  |   |       | 
|--------------------------------------- |  | --------------------- | ------ | ----------------------------------- | - | ----------------------------------- |  | - | ----- | 
|                                        |  |                       |        | Costs Incurred                      |  
|                                        |  |                       |        |                                     |  
|                                        |  | Total costs
 expected |        | 13 weeks ended
 September 29,
 2007 |   | 39 weeks ended
 September 29,
 2007 | 
|                                        |  |                       |        |                                     |   |                                     | 
|Plant and
 Distribution Center Closings |  | $                     | 3,486  |                                     | $ | 1,185                               |  | $ | 2,437 | 
|General
 Restructuring                  |  |                       | 6,852  |                                     |   | 830                                 |  |   | 6,445 | 
|                                        |  |                       |        |                                     |   |                                     |  |   |       | 
|                                        |  | $                     | 10,338 |                                     | $ | 2,015                               |  | $ | 8,882 | 
|                                        |  |                       |        |                                     |   |                                     |  |   |       | 

The additional
costs incurred during the 39 weeks ended September 29, 2007 with respect to
Plant and Distribution Center closings were principally severance and exit
costs associated with the closure of the Companys sterling silver
manufacturing facility. The additional general restructuring costs related
primarily to severance and lease termination costs.

9

---



These costs
are allocable to reportable segments as follows:

|          |  |                       |        |                                     |   |                                     |  |   |       | 
|--------- |  | --------------------- | ------ | ----------------------------------- | - | ----------------------------------- |  | - | ----- | 
|          |  |                       |        | Costs Incurred                      |  
|          |  |                       |        |                                     |  
|          |  | Total Costs
 expected |        | 13 weeks ended
 September 29,
 2007 |   | 39 weeks ended
 September 29,
 2007 | 
|          |  |                       |        |                                     |   |                                     | 
|Wholesale |  | $                     | 692    |                                     | $ | 5                                   |  | $ | 692   | 
|Retail    |  |                       | 1,185  |                                     |   | 201                                 |  |   | 1,151 | 
|Direct    |  |                       | 173    |                                     |   | 7                                   |  |   | 173   | 
|Corporate |  |                       | 8,288  |                                     |   | 1,802                               |  |   | 6,866 | 
|          |  |                       |        |                                     |   |                                     |  |   |       | 
|          |  | $                     | 10,338 |                                     | $ | 2,015                               |  | $ | 8,882 | 
|          |  |                       |        |                                     |   |                                     |  |   |       | 

|   |               
|-- | --------------
|6. | Concentrations

At September
29, 2007, one customer accounted for approximately 15% of the Companys total
accounts receivable. For the 13 weeks and 39 weeks ended September 29, 2007,
this same customer accounted for approximately 17% and 16%, respectively, of
the Companys total net sales.

|   |            
|-- | -----------
|7. | Inventories

Inventories
were comprised of:

|                   |  |                     |         |                    |   |                     |  |   |         | 
|------------------ |  | ------------------- | ------- | ------------------ | - | ------------------- |  | - | ------- | 
|                   |  |                     |         |                    |   |                     |  |   |         | 
|                   |  | September 29,
 2007 |         | December 30,
 2006 |   | September 30,
 2006 | 
|                   |  |                     |         |                    |   |                     | 
|Raw
 materials     |  | $                   | 2,763   |                    | $ | 3,925               |  | $ | 4,112   | 
|Work-in-process    |  |                     | 4,602   |                    |   | 4,793               |  |   | 5,224   | 
|Finished
 goods    |  |                     | 93,884  |                    |   | 93,207              |  |   | 118,614 | 
|                   |  |                     |         |                    |   |                     |  |   |         | 
|Total
 inventories |  | $                   | 101,249 |                    | $ | 101,925             |  | $ | 127,950 | 
|                   |  |                     |         |                    |   |                     |  |   |         | 

The Company received notice
from the financial institution with which it had its precious metals
consignment arrangement that such institution was terminating, and did
terminate, the consignment facility, effective May 16, 2007. The Company
purchased the remaining outstanding silver balance at a cost of $4,617 on May
16, 2007. During July 2007 the Company sold its sterling silver product line
and its entire related sterling silver inventory. See note 14 to the Condensed Consolidated Financial Statements.

|   |                            
|-- | ---------------------------
|8. | Comprehensive Income (Loss)

Comprehensive
income (loss) and its components, net of tax, were as follows:

|                                                               |  |                     |       |                     |   |                     |  |                     |         |   |   |         |  
|-------------------------------------------------------------- |  | ------------------- | ----- | ------------------- | - | ------------------- |  | ------------------- | ------- | - | - | ------- | -
|                                                               |  | 13 weeks ended      |       | 39 weeks ended      |  
|                                                               |  |                     |       |                     |  
|                                                               |  | September 29,
 2007 |       | September 30,
 2006 |   | September 29,
 2007 |  | September 30,
 2006 |        
|                                                               |  |                     |       |                     |   |                     |  |                     |        
|Net income
 (loss)                                             |  | $                   | 4,122 |                     | $ | 5,387               |  | $                   | (20,184 | ) | $ | (42,881 | )
|Changes in
 cumulative foreign currency translation adjustment |  |                     | 2     |                     |   |                    |  |                     | (12     | ) |   |        |  
|Adjustment
 to pension and postretirement plan liabilities     |  |                     | (319  | )                   |   |                    |  |                     | (957    | ) |   |        |  
|                                                               |  |                     |       |                     |   |                     |  |                     |         |   |   |         |  
|Comprehensive
 income (loss)                                   |  | $                   | 3,805 |                     | $ | 5,387               |  | $                   | (21,153 | ) | $ | (42,881 | )
|                                                               |  |                     |       |                     |   |                     |  |                     |         |   |   |         |  

10

---



|   |                                     
|-- | ------------------------------------
|9. | Goodwill and Other Intangible Assets

During the
second quarter of 2006, 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 of 2006. 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, Goodwill and Other Intangible Assets
(SFAS 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 present value of expected future cash flows.

During the
fourth quarter of 2006, the Company completed its annual impairment test of
goodwill, originally recorded from the acquisition of Lenox, in accordance with
SFAS 142. The Company recognized a goodwill impairment charge of $18.2 million
as a result of lower than projected sales and profits from the Lenox wholesale
reporting unit as compared to that which was originally projected at the date
of the Lenox Acquisition. The fair value of the Lenox wholesale reporting unit
was estimated using the present value of expected future cash flows.

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

|                                  |  |                         |         |                           |   |                     |   |                         |         |                           |   |         |  |                         |         |                           |   |         |  |   |         |  |   |        |   |   |         | 
|--------------------------------- |  | ----------------------- | ------- | ------------------------- | - | ------------------- | - | ----------------------- | ------- | ------------------------- | - | ------- |  | ----------------------- | ------- | ------------------------- | - | ------- |  | - | ------- |  | - | ------ | - | - | ------- | 
|                                  |  | September
 29, 2007     |         | December
 30, 2006        |   | September
 30, 2006 |  
|                                  |  |                         |         |                           |   |                     |  
|                                  |  | 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  |                           | $ | (3.441              | ) | $                       | 11,859  |                           | $ | 15,300  |  | $                       | (2,202  | )                         | $ | 13,098  |  | $ | 15,300  |  | $ | (1,789 | ) | $ | 13,511  | 
|Favorable lease
 interests        |  |                         | 2,542   |                           |   | (2,170              | ) |                         | 372     |                           |   | 2,542   |  |                         | (1,881  | )                         |   | 661     |  |   | 2,542   |  |   | (1,748 | ) |   | 794     | 
|Non-compete
 agreements           |  |                         | 2,705   |                           |   | (2,435              | ) |                         | 270     |                           |   | 2,705   |  |                         | (2,329  | )                         |   | 376     |  |   | 2,705   |  |   | (2,295 | ) |   | 410     | 
|                                  |  |                         |         |                           |   |                     |   |                         |         |                           |   |         |  |                         |         |                           |   |         |  |   |         |  |   |        |   |   |         | 
|Indefinite-life intangible assets |  |                         |         |                           |   |                     |   |                         |         |                           |   |         |  |                         |         |                           |   |         |  |   |         |  |   |        |   |   |         | 
|Trademarks                        |  |                         | 123,231 |                           |   | (4,139              | ) |                         | 119,092 |                           |   | 123,578 |  |                         | (4,139  | )                         |   | 119,439 |  |   | 126,857 |  |   | (4,139 | ) |   | 122,718 | 
|                                  |  |                         |         |                           |   |                     |   |                         |         |                           |   |         |  |                         |         |                           |   |         |  |   |         |  |   |        |   |   |         | 
|                                 
|Total Intangibles                 |  | $                       | 143,778 |                           | $ | (12,185             | ) | $                       | 131,593 |                           | $ | 144,125 |  | $                       | (10,551 | )                         | $ | 133,574 |  | $ | 147,404 |  | $ | (9,971 | ) | $ | 137,433 | 
|                                  |  |                         |         |                           |   |                     |   |                         |         |                           |   |         |  |                         |         |                           |   |         |  |   |         |  |   |        |   |   |         | 

In the fourth
quarter of 2006, the Company recognized a trademark impairment of $3.7 million
related to lower than projected sales of Dansk and Gorham products from that
estimated at the time of the original purchase price allocation. In determining
the fair value of its trademarks, the Company applied the income approach,
using the relief from the royalty method. These trademark costs were originally
recorded as part of the acquisition of Lenox.

As part of the
initial purchase accounting for the acquisition of Willitts Design
International, Inc. (Willitts), $1.2 million of the cash purchase price was
allocated to indefinite-lived trademarks. During the second quarter of 2007,
the Company finalized the purchase accounting for Willitts and recorded an
additional $0.3 million of indefinite life trademarks.

11

---



During the
second quarter of 2007, as part of the sale of certain of the Gorham sterling
silver assets, the Company evaluated the Gorham trademark. Based on the results
of this evaluation, the Company determined that $0.6 million of indefinite-life
trademarks were to be included as part of the sale transaction that took place in the third quarter. See note 14 to the Condensed Consolidated Financial Statements.

Intangible
asset amortization expense for the third quarter and 39 weeks ended September
29, 2007 was $516 and $1,634 respectively, compared to $582 and $2,322 for the
third quarter and 39 weeks ended September 30, 2006, respectively.

Expected
future amortization expense for finite-lived intangible assets is as follows:

|                  |  |   |        | 
|----------------- |  | - | ------ | 
|2007 (full
 year) |  | $ | 2,149  | 
|2008              |  |   | 1,938  | 
|2009              |  |   | 1,846  | 
|2010              |  |   | 1,560  | 
|2011              |  |   | 1,242  | 
|Thereafter        |  |   | 5,400  | 
|                  |  |   |        | 
|                  |  | $ | 14,135 | 

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

|    |     
|--- | ----
|10. | Debt

Debt and the
average interest rate on debt outstanding is summarized as follows:

|                                                                           |  |                                             |      |                     |   |                    |  |                     |        |  |   |         | 
|-------------------------------------------------------------------------- |  | ------------------------------------------- | ---- | ------------------- | - | ------------------ |  | ------------------- | ------ |  | - | ------- | 
|                                                                           |  | Average
 Interest rate
 September 29,
 2007 |      | September 29,
 2007 |   | December 30,
 2006 |  | September 30,
 2006 |       
|                                                                           |  |                                             |      |                     |   |                    |  |                     |       
|Revolving credit facility                                                  |  |                                             | 7.33 | %                   | $ | 89,851             |  | $                   | 47,510 |  | $ | 128,644 | 
|Note payable to Maryland
 Department of Business and Economic Development1 |  |                                             | 3    | %                   |   | 150                |  |                     | 150    |  |   | 150     | 
|Note payable to the County
 Commissioners of Washington County, Maryland1  |  |                                             | 0    | %                   |   | 100                |  |                     | 100    |  |   | 100     | 
|Term loan facility2                                                        |  |                                             | 9.85 | %                   |   | 99,500             |  |                     | 48,806 |  |   | 83,108  | 
|                                                                           |  |                                             |      |                     |   |                    |  |                     |        |  |   |         | 
|                                                                           |  |                                             |      |                     |   |                    |  |                     |        |  |   |         | 
|Total debt                                                                 |  |                                             |      |                     | $ | 189,601            |  | $                   | 96,566 |  | $ | 212,002 | 
|                                                                           |  |                                             |      |                     |   |                    |  |                     |        |  |   |         | 

1 $0.1
million of total notes payable included in non-current long-term debt at
September 30, 2006.

2 $98.8
million and $74.1 million included in non-current long-term debt at September
29, 2007 and September 30, 2006, respectively.

The note
payable to the Maryland Department of Business and Economic Development is a
conditional promissory note that accrues interest at 3% per year. The principal
and interest payments were deferred until December 31, 2006 and thereafter are
subject to multiple maturity dates determined by the Companys employment
levels at the Hagerstown, MD distribution

12

---



facility. As
of December 30, 2006 and September 29, 2007, the Company had not achieved the
employment levels required to qualify for full or partial debt forgiveness and
therefore has classified the entire note payable as a current liability.

The note
payable to the County Commissioners of Washington County, Maryland is a
conditional grant agreement that bears no interest charges. The principal
payments were deferred until December 31, 2006 and thereafter are subject to
multiple maturity dates determined by the Companys employment levels at the
Hagerstown, MD distribution facility. As of December 30, 2006 and September 29,
2007, the Company had not achieved the employment levels required to qualify
for full or partial debt forgiveness and therefore has classified the entire
note payable as a current liability.

On February 9,
2007, the Company entered into waivers and amendments to its revolving credit
facility and term loan credit facility (the credit facilities) in connection with
the Companys noncompliance with certain financial covenants under the credit
facilities for the period ended December 30, 2006. Pursuant to the waivers and
amendments, the lenders granted the Company a limited waiver of noncompliance
through and including April 30, 2007, and temporarily amended the agreements to
adjust the leverage ratio and interest coverage ratio levels for the first
quarter of 2007. In addition, the amendment to the term loan facility increased
the applicable margin for loans by 0.25% per annum. As consideration for the
amendments, the Company paid amendment fees of $0.2 million.

On April 20,
2007, the Company completed the refinancing of its credit facilities by
entering into amended and restated revolving and term loan facilities. The
amended and restated revolving credit facility, which expires on April 20,
2012, provides for borrowings up to $175 million, which may be in the form of
letters of credit and revolving credit loans to be used for working capital and
general corporate purposes. The amended and restated term loan facility, which
expires on April 20, 2013, provides for term loans in the aggregate principal
amount of up to $100 million. The Company used the proceeds of the amended and
restated term loan facility to refinance the $47.4 million of term debt
outstanding and $42.2 million of the revolver debt outstanding at April 20,
2007, to pay $1.2 million of accrued interest and fees payable under the
existing credit facilities and to pay $9.2 million of fees and expenses in
connection with the refinancing.

Total fees and
expenses incurred by the Company in connection with the refinancing were $9.7
million (inclusive of the $9.2 million paid out of the proceeds of the amended
and restated term loan facility), of which $7.0 million was capitalized and
$2.7 million was included as loss on refinancing of debt during the second
quarter of 2007 in accordance with EITF 98-14, Debtors Accounting for Changes in
Line-of-Credit or Revolving-Debt Arrangements(EITF 98-14), and EITF
96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments(EITF
98-19).
Based on these same criteria, the Company recognized an additional $3.2 million
loss on refinancing of debt during the second quarter of 2007 to write-off
portions of the previously capitalized loan costs.

Borrowings
under the amended and restated 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. As of
September 29, 2007, the Companys borrowing capacity under the amended and
restated revolving credit facility was $133.7 million, of which $37.5 million
was available for additional borrowings or letters of credit at such date.

13

---



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

The amended
and restated revolving credit facility allows the Company to choose between two
interest rate options in connection with its revolving credit loans. The
interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin ranges
from 0% to 0.5% for Alternate Base Rate loans and from 1.75% to 2.25% for
Adjusted LIBOR Rate loans. The amended and restated revolving credit facility
also provides for commitment fees of 0.375% per annum on the daily average of
the unused commitment.

The amended
and restated term loan facility allows the Company to choose between two
interest rate options in connection with its loans under the facility. The
interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin is
3.5% for Alternate Base Rate loans and 4.5% for Adjusted LIBOR Rate loans.

Under the
amended and restated term loan facility, the Company is also obligated to make
mandatory prepayments if certain events occur in the future such as certain
asset sales, additional debt issuances, common and preferred stock issuances,
and excess cash flow generation. Such prepayments will be applied to the term
loan until it is paid in full, except for prepayments occurring upon the sale
of designated revolving loan collateral, which will be applied to the revolving
loan.

The amended and restated credit
facilities contain customary financial conditions and covenants, including
restrictions on additional indebtedness, liens, investments, capital
expenditures, issuances of capital stock and dividends. The amended and
restated credit facilities also require maintenance of minimum levels of fixed
charge coverage and maximum levels of leverage, in each case at the end of each
fiscal quarter. The minimum fixed charge coverage ratio (as defined within the
credit facility agreements) requires the Company to maintain a minimum ratio of
Consolidated EBITDA (as defined within the credit facility agreements) to
Consolidated Fixed Charges (as defined within the credit facility agreements)
over a 12-month period ending on each fiscal quarter. The maximum leverage
ratio (as defined within the term credit facility agreement) requires the
Company to maintain a maximum ratio of debt (as measured at the end of each
fiscal quarter) to Consolidated EBITDA over a 12-month period ending on each
fiscal quarter.

14

---



|    |              
|--- | -------------
|11. | Benefit Plans

During the
quarter ended September 29, 2007, the Company announced that it is
discontinuing post-65 retiree medical and life insurance coverage for all
current participants (except for eight retirees and their dependents which have
individual agreements with the Company) effective September 1, 2007. In
accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions, the Company accounted for this discontinuation as a
negative plan amendment, remeasured its obligation as of August 31, 2007, and
reflected a negative prior service cost which is being amortized into net
periodic benefit cost pursuant to the Companys historical accounting policy.

Components of
net periodic benefit cost for the 13 and 39 weeks ended September 29, 2007 and
September 30, 2006 were as follows:

|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |     | 
|----------------------------------- |  | ---------------- | ------ | ------------------------------------ | - | ------ | - | ---- | ---- | - | - | --- | 
|                                    |  | 13 weeks ended   |       
|                                    |  |                  |       
|                                    |  | Pension Benefits |        | Medical and Life
 Insurance Benefits |  
|                                    |  | 2007             |        | 2006                                 |   | 2007   |   | 2006 |     
|                                    |  |                  |        |                                      |  
|Service cost                        |  | $                |       |                                      | $ | 1,196  |   | $    |     |   | $ | 213 | 
|Interest cost                       |  |                  | 2,263  |                                      |   | 2,379  |   |      | 168  |   |   | 354 | 
|Expected return on assets           |  |                  | (2,667 | )                                    |   | (2,363 | ) |      |     |   |   |    | 
|Amortization of prior
 service cost |  |                  |       |                                      |   |       |   |      | (231 | ) |   |    | 
|Amortization of gain                |  |                  | (298   | )                                    |   | (66    | ) |      | (44  | ) |   |    | 
|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |     | 
|Net periodic benefit cost           |  | $                | (702   | )                                    | $ | 1,146  |   | $    | (107 | ) | $ | 567 | 
|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |     | 

|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |       | 
|----------------------------------- |  | ---------------- | ------ | ------------------------------------ | - | ------ | - | ---- | ---- | - | - | ----- | 
|                                    |  | 39 weeks ended   |       
|                                    |  |                  |       
|                                    |  | Pension Benefits |        | Medical and Life
 Insurance Benefits |  
|                                    |  | 2007             |        | 2006                                 |   | 2007   |   | 2006 |     
|                                    |  |                  |        |                                      |   |        |   |      |     
|Service cost                        |  | $                |       |                                      | $ | 3,588  |   | $    |     |   | $ | 639   | 
|Interest cost                       |  |                  | 6,790  |                                      |   | 7,137  |   |      | 642  |   |   | 1,062 | 
|Expected return on assets           |  |                  | (8,001 | )                                    |   | (7,089 | ) |      |     |   |   |      | 
|Amortization of prior
 service cost |  |                  |       |                                      |   |       |   |      | (581 | ) |   |      | 
|Amortization of gain                |  |                  | (895   | )                                    |   | (198   | ) |      | (126 | ) |   |      | 
|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |       | 
|Net periodic benefit cost           |  | $                | (2,106 | )                                    | $ | 3,438  |   | $    | (65  | ) | $ | 1,701 | 
|                                    |  |                  |        |                                      |   |        |   |      |      |   |   |       | 

|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies

Legal Proceedings

In August
2004, plaintiffs purporting to represent a class of consumers who purchased
tableware sold in the United States filed suit against Federated Department
Stores, the May Department Stores Company, Waterford Wedgwood U.S.A. and Lenox,
Incorporated (Lenox) 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 (hereinafter the Action). 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.

15

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On February
22, 2007, without admitting any violation of any statute or law or any
liability or wrongdoing whatsoever, Lenox entered into a settlement agreement
with the plaintiff class representatives. Pursuant to the terms of the
settlement agreement, Lenox has agreed to pay $0.5 million, in return for which
Lenox and its affiliates will be completely released from any and all claims,
demands and actions concerning the Action and any claims that could have been
alleged in the Action. This settlement agreement is subject to final approval
of the court and a final judgment dismissing the Action with prejudice as to
Lenox. Plaintiffs and Lenox have sought court approval of the settlement
agreement and dismissal of the Action with prejudice and are awaiting the
courts order.

On April 12,
2007, Amanda Curiale filed a complaint in the United States District Court for
the Eastern District of Pennsylvania, which is a purported class action
alleging that the Company willfully violated the Federal Fair and Accurate
Credit Transactions Act (FACTA) by continuing to print after December 1, 2006
the expiration dates on receipts provided to debit card and credit cardholders
transacting business with the Company (hereinafter the FACTA Litigation). The
Company understands that similar complaints have been filed against a large
number of retailers. The plaintiff seeks, on behalf of herself and the class,
statutory damages of not less than one hundred dollars and not more than one
thousand dollars for each violation, as well as unspecified punitive damages,
costs and attorneys fees and a permanent injunction from further engaging in
violations of FACTA.

On September
20, 2007, the parties held an all-day meditation session and reached a
tentative settlement which is subject to the parties signing a definitive
settlement agreement and court approval. Under the terms of the settlement,
Lenox denies all claims as to liability, damages, penalties, interest, fees,
restitution and all other forms of relief sought in the FACTA Litigation.
Pursuant to the terms of the proposed settlement, the Company will pay a
non-material sum for attorneys fees, a charitable contribution and a
plaintiffs incentive fee, and will provide participating claimants with a
coupon off a future purchase or a free product through Company-operated retail
stores. In return, the Company and its affiliates will be completely released
from any and all claims, demands and actions concerning the FACTA Litigation
and any claims that could have been alleged in the FACTA litigation.

In addition to
the above actions, 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.

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

16

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Companys
chief executive officer currently reviews the results of these operations.
Operating income (loss) 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), 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.

|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|------------------------ |  | ------------------------------------ | ------- | ---------------- |  | ------------------------------------ | - | ---------------- | ------- | ------------------------------------ |  | ----------------- | - | ------------------------------------ | ------- | ----------------- |  | --- | - | - | ------- | - |  | --- | -
|                         |  | 13 WEEKS
 ENDED
 SEPTEMBER
 29, 2007 |         | % of
 net
 sales |  | 13 WEEKS
 ENDED
 SEPTEMBER
 30, 2006 |   | % of
 net
 sales |         | 39 WEEKS
 ENDED
 SEPTEMBER
 29, 2007 |  | % of
 net 
 sales |   | 39 WEEKS
 ENDED
 SEPTEMBER
 30, 2006 |         | % of
 net 
 sales | 
|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   | 
|WHOLESALE:               |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|Net sales                |  | $                                    | 105,880 |                  |  | 100                                  |   | $                | 117,958 |                                      |  | 100               |   | $                                    | 223,866 |                   |  | 100 |   | $ | 240,434 |   |  | 100 |  
|Gross profit             |  |                                      | 46,258  |                  |  | 44                                   |   |                  | 50,561  |                                      |  | 43                |   |                                      | 93,186  |                   |  | 42  |   |   | 103,393 |   |  | 43  |  
|Selling expenses         |  |                                      | 10,100  |                  |  | 10                                   |   |                  | 12,424  |                                      |  | 11                |   |                                      | 27,016  |                   |  | 12  |   |   | 32,122  |   |  | 13  |  
|Restructuring charges    |  |                                      | 5       |                  |  |                                     |   |                  |        |                                      |  |                  |   |                                      | 692     |                   |  |    |   |   |        |   |  |    |  
|Goodwill impairment      |  |                                      |        |                  |  |                                     |   |                  |        |                                      |  |                  |   |                                      |        |                   |  |    |   |   | 37,074  |   |  | 15  |  
|Operating income         |  |                                      | 36,153  |                  |  | 34                                   |   |                  | 38,137  |                                      |  | 32                |   |                                      | 65,478  |                   |  | 29  |   |   | 34,197  |   |  | 14  |  
|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|RETAIL (1):              |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|Net sales                |  |                                      | 12,031  |                  |  | 100                                  |   |                  | 14,871  |                                      |  | 100               |   |                                      | 37,581  |                   |  | 100 |   |   | 42,997  |   |  | 100 |  
|Gross profit             |  |                                      | 5,666   |                  |  | 47                                   |   |                  | 7,049   |                                      |  | 47                |   |                                      | 14,266  |                   |  | 38  |   |   | 24,925  |   |  | 58  |  
|Selling expenses         |  |                                      | 7,190   |                  |  | 60                                   |   |                  | 7,582   |                                      |  | 51                |   |                                      | 22,408  |                   |  | 60  |   |   | 23,508  |   |  | 55  |  
|Restructuring charges    |  |                                      | 201     |                  |  | 2                                    |   |                  |        |                                      |  |                  |   |                                      | 1,151   |                   |  | 3   |   |   |        |   |  |    |  
|Operating (loss) income  |  |                                      | (1,725  | )                |  | (14                                  | ) |                  | (533    | )                                    |  | (4                | ) |                                      | (9,293  | )                 |  | (25 | ) |   | 1,417   |   |  | 3   |  
|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|DIRECT (1):              |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|Net sales                |  |                                      | 19,736  |                  |  | 100                                  |   |                  | 21,206  |                                      |  | 100               |   |                                      | 54,678  |                   |  | 100 |   |   | 58,818  |   |  | 100 |  
|Gross profit             |  |                                      | 13,775  |                  |  | 70                                   |   |                  | 15,590  |                                      |  | 74                |   |                                      | 37,286  |                   |  | 68  |   |   | 41,016  |   |  | 70  |  
|Selling expenses         |  |                                      | 11,845  |                  |  | 60                                   |   |                  | 12,135  |                                      |  | 57                |   |                                      | 33,048  |                   |  | 60  |   |   | 31,559  |   |  | 54  |  
|Restructuring charges    |  |                                      | 7       |                  |  |                                     |   |                  |        |                                      |  |                  |   |                                      | 173     |                   |  |    |   |   |        |   |  |    |  
|Operating income         |  |                                      | 1,923   |                  |  | 10                                   |   |                  | 3,455   |                                      |  | 16                |   |                                      | 4,065   |                   |  | 7   |   |   | 9,457   |   |  | 16  |  
|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|CORPORATE:               |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|Unallocated net sales    |  |                                      | 136     |                  |  |                                     |   |                  | 233     |                                      |  |                  |   |                                      | 1,024   |                   |  |    |   |   | 1,192   |   |  |    |  
|Unallocated G&A expenses |  |                                      | 24,031  |                  |  |                                     |   |                  | 28,331  |                                      |  |                  |   |                                      | 73,801  |                   |  |    |   |   | 83,917  |   |  |    |  
|Restructuring charges    |  |                                      | 1,802   |                  |  |                                     |   |                  |        |                                      |  |                  |   |                                      | 6,866   |                   |  |    |   |   |        |   |  |    |  
|Operating loss           |  |                                      | (25,697 | )                |  |                                     |   |                  | (28,098 | )                                    |  |                  |   |                                      | (79,643 | )                 |  |    |   |   | (82,725 | ) |  |    |  
|                         |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|CONSOLIDATED:            |  |                                      |         |                  |  |                                      |   |                  |         |                                      |  |                   |   |                                      |         |                   |  |     |   |   |         |   |  |     |  
|Net sales                |  |                                      | 137,783 |                  |  | 100                                  |   |                  | 154,268 |                                      |  | 100               |   |                                      | 317,149 |                   |  | 100 |   |   | 343,441 |   |  | 100 |  
|Operating income (loss)  |  | $                                    | 10,654  |                  |  | 8                                    |   | $                | 12,961  |                                      |  | 8                 |   | $                                    | (19,393 | )                 |  | (6  | ) | $ | (37,654 | ) |  | (11 | )

(1)
Reclassifications  Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications affected how
certain business operations were reported under the Retail and Direct segments.
These reclassifications had no impact on the consolidated results of operations
or retained earnings.

17

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|    |                                          
|--- | -----------------------------------------
|14. | Sale Agreement with Lifetime Brands, Inc.

On July 19,
2007, the Company entered into an Asset Purchase Agreement (the Sale
Agreement) with Lifetime Brands, Inc. (Lifetime) for the sale of certain
assets of the Companys sterling silver flatware and sterling silver giftware
business conducted primarily under the Gorham and Kirk Stieff brand names.
Simultaneously with the execution of the Sale Agreement by the parties, the
Company closed on this transaction.

The purchase
price paid by Lifetime was $8,775, subject to a post closing adjustment based
on the price and quantity of silver transferred at closing. At closing, the
Company received an initial payment of $8,525 and $250 was transferred to an
escrow account for a six-month period ended January 2008. On August 2, 2007,
the parties agreed to a price adjustment reduction of $255 based on the
quantity of silver actually transferred at closing and the price of silver.
Accordingly, the net purchase price was $8,520. The Company transferred title to
sterling silver finished goods inventory, work in process, raw materials,
samples, selective pieces of machinery and equipment, books and records and
pattern trademarks and copyrights associated with sterling silver products.

In addition,
the Company granted a long-term exclusive license to Lifetime to utilize the
Gorham, Kirk Stieff, Whiting and Durgin brands on and in connection with
sterling silver products. The Company has retained all rights to utilize these
brands on non-sterling silver products.

The Company
recorded a pre-tax gain of $437 which is included in Operating Expenses on the
Condensed Consolidated Statement of Operations. The Company has ceased its
sterling silver operations at its leased space in Pomona, New Jersey and
intends to surrender said space to its landlord by the end of January, 2008.

18

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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 Condensed Consolidated Financial
Statements and the related notes, particularly Note 13 presented earlier in
this report on Form 10-Q. Other components of the Condensed Consolidated
Statement of Operations which are classified below Operating Income (i.e.
interest expense, income tax expense (benefit), etc.) are not allocated by
segment and are discussed separately.

Comparison of Results of Operations for the
Quarter Ended September 29, 2007 to the Quarter Ended September 30, 2006.

Wholesale

Net sales
decreased $12.1 million, or 10%, in the third quarter of 2007 compared with the
same period in 2006 due to declines in all of the Companys major brands and
the $1.3 million effect of the divestiture of the sterling silver product line
in July 2007. The decrease in wholesale sales was anticipated and was a result
of consolidation of department store chains and the continued decline of the
gift and specialty channel.

Gross profit
as a percentage of net sales was 44% and 43% in the third quarter of 2007 and
2006, respectively. The increase in gross profit as a percentage of net sales
was primarily due to manufacturing cost savings and lower variable costs which
combined to have a positive two percentage point impact on the gross margin
percentage. This increase which was partially offset by a higher excess
inventory expense as result of taking less excess Department 56 inventory
through the Companys outlet stores in order to expedite its disposition to
facilitate the consolidation of the Companys wholesale distribution centers.

Selling
expenses were $2.3 million, or 19% lower in the third quarter of 2007 as
compared to the third quarter of 2006, principally due to lower variable
selling expenses and lower compensation expense that resulted from prior
workforce reduction efforts.

Operating
income decreased in the third quarter of 2007 by $1.9 million primarily due to
the decrease in sales volume partially offset by lower selling expenses.

Retail

Net sales
decreased $2.8 million, or 19%, in the third quarter of 2007 compared with the
same period in 2006. This decrease was primarily due to the closure of five stores
in the 1st quarter of 2007, a twelve percent reduction in same-store
sales due to lower store traffic, timing of year over year sales promotions and
the effect of a net reduction of two stores in 2007.

Gross profit
as a percentage of net sales was 47% in both the third quarter of 2007 and
2006. In the third quarter of 2007, the Retail segment was able to reverse the
double-digit decline in gross margin percentage
experienced during the first half of 2007. This reversal was accomplished
through a change in merchandising strategy to include a greater mix of first
quality products in its stores.

19

---



Selling
expenses declined $0.4 million, or 5% in the third quarter of 2007 compared to
the same period in 2006. However, selling expenses increased as a percentage of
net sales to 60% in 2007 from 51% in 2006. This increase in selling expense as
a percentage of net sales was principally due to lower sales and higher
occupancy costs related to three converted All the Hoopla stores which were
opened in the fourth quarter of 2006. These stores carry a significantly higher
rent than the average of the remaining stores and have not had corresponding
levels of revenue.

Restructuring
charges of $0.2 million in the third quarter of 2007 were principally due to
additional lease termination costs related to a tentative settlement reached in
the termination of an All the Hoopla store lease.

Operating loss
was $1.2 million higher in the third quarter of 2007 as compared to the third
quarter of 2006 due to lower sales volumes and higher restructuring charges.

Direct

Net sales
decreased $1.5 million or 7% in the third quarter of 2007 as compared to the
same period in 2006. The decrease was primarily due to lower consumer response
to direct mail advertising campaigns, partially offset by increased internet
sales.

Gross profit
as a percentage of sales was 70% and 74% in the third quarter of 2007 and 2006,
respectively. This four percentage point decline in gross profit as a
percentage of sales was primarily due to increased product costs, a portion of
which includes enhanced packaging intended to improve the long-term image of
the Lenox brand.

Selling
expenses decreased by $0.3 million or 2% in the third quarter of 2007 compared
to the same period in 2006. Selling expense as percentage of net sales
increased 3 percentage points from 57% in 2006 to 60% in 2007. The increase in
selling expense in 2007 as a percentage of net sales was primarily due to a
planned increase in advertising spending to acquire new customers combined
with lower customer response to our direct mail advertising campaigns and
increased bad debt expense in 2007 related to a change in sales and customer
mix.

Operating
income decreased by $1.5 million or 44% in the third quarter of 2007 compared
to the same period in 2006 due primarily to lower sales volume and the negative
impact on gross margin as noted above.

Corporate

Net sales of
$0.1 million represents revenue from the licensing of the Lenox brand and were
$0.1 million lower in the third quarter of 2007 compared to the same period in
2006, which is largely timing related.

General and
administrative expenses decreased by $4.3 million or 15% in the third quarter
of 2007 as compared to the same period in 2006. This decrease was primarily a
result of (i) a $ 2.0 million reduction in post retirement expenses related to
freezing the Companys defined benefit pension plans in the fourth
quarter of 2006 and the discontinuation of offering post retirement health
benefits to current employees in the third quarter of 2007, (ii) $2.0 million
in workforce reductions and (iii) $0.5 million in building consolidation
expenses incurred in 2006 which were not repeated in 2007. A $0.4 million gain
on the sale of the sterling silver product line in 2007 also contributed to the
decrease. Partially offsetting these decreases were $1.7 million in executive
management consulting fees incurred in 2007 and $0.3 of additional rent net of
depreciation resulting from the sale-leaseback of the Hagerstown distribution
center.

20

---



Restructuring
charges of $1.8 million were incurred in the third quarter of 2007. Severance
and manufacturing shutdown costs related to our decision to sell our sterling
silver product line and shutdown our Pomona, New Jersey sterling silver
manufacturing facility, accounted for $1.0 million of these charges. An
additional $0.8 million of severance expense was related to general
restructuring as part of the continued execution of the Companys new business
plan.

Provision for Income
Taxes

The effective
income tax rate was 32% in the third quarter of 2007 compared to 34% in the
third quarter of 2006. The lower 2007 effective income tax rate was principally
due to $0.4 million benefit as a result of the expiration of the statute of
limitations on certain tax positions the company has taken.

Comparison of Results of Operations for the
39 Weeks Ended September 29, 2007 to the 39 Weeks Ended September 30, 2006.

Wholesale

Net sales
decreased $16.6 million, or 7%, during the first nine months of 2007 compared with
the same period in 2006 due to declines in all of the Companys major brands
and the $1.3 million effect of the divestiture of the sterling silver product
line in July 2007.

Gross profit
as a percentage of net sales was 42% and 43% in 2007 and 2006 respectively.
This one percentage point decline in gross profit as a percentage of net sales
was primarily due to higher costs for sourced product and higher sterling
silver manufacturing costs during the first half of 2007 as production volume
declined in the months preceding the divesture of the sterling silver product
line. Partially offsetting the effect of these higher costs was lower excess
inventory expense.

Selling
expenses decreased $5.1 million or 16% in the first nine months of 2007
compared to the same period in 2006 primarily due to lower compensation costs
resulting from workforce reductions. A reduction in variable selling costs as a
result of lower sales volumes also contributed to the decrease.

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.

Restructuring
charges of $0.7 million in the first nine months of 2007 were primarily
severance related charges as a result of the continued execution of the
Companys new business plan.

21

---



Operating
income increased $31.3 million in the first nine months of 2007 as compared to
the same period in 2006
primarily due to fact that 2006 was negatively impacted by the $37.1 million
goodwill impairment charge. Lower fixed selling expenses resulting from
workforce reductions in 2006 and 2007 and lower variable selling expenses due
to lower sales volumes also contributed to the increase. Lower gross margin on
lower sales volume was a partial offset.

Retail

Net sales
decreased $5.4 million, or 13%, in the first nine months of 2007 compared with
the first nine months of 2006. This decrease was primarily due to the closing
of 28 Lenox retail stores during the first quarter of 2006, and the high proportion
of closeout merchandise promoted during 2007.

Gross profit
as a percentage of net sales was 38% and 58% in the first nine months of 2007
and 2006, respectively. Approximately half of this 20 percentage point decrease
was due to a $4.5 million positive purchase accounting adjustment in 2006 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
remaining 10 percentage point decrease in gross profit percentage resulted from
a focus on liquidating second quality and excess inventory at significantly
reduced prices during the first half of 2007.

Selling
expenses of $22.4 million were 60% of net sales in 2007 compared to $23.5
million, or 55% of net sales in 2006. This five percentage point increase in
selling expense as a percentage of net sales was principally due to higher
occupancy costs related to three converted All the Hoopla stores that were
opened in the fourth quarter of 2006 and lower sales volume.

Restructuring
charges of $1.2 million in the first nine months of 2007 were primarily lease
termination costs related to an All the Hoopla store located in Buffalo, NY.
Other store closing costs and severance charges related to general restructuring
were a result of the continued execution of the Companys new business plan.

Operating loss
was $9.3 million for first nine months of 2007 compared to operating income of
$1.4 million for the same period in 2006. The $10.7 million difference was due
primarily to the purchase accounting adjustment which benefited the first nine
months of 2006, along with the decline in net sales and gross profit due to the
use of aggressive promotions to liquidate inventory and higher restructuring
expenses.

Direct

Net sales
decreased $4.1 million or 7% in the first nine months of 2007 as compared to
the same period in 2006, as lower consumer response to our direct mail
advertising campaigns in 2007 were partially offset by higher internet sales.

Gross profit
as a percentage of sales was 68% and 70% in the first nine months of 2007 and
2006 respectively. The gross profit percentage in 2006 was negatively impacted
by a $1.2 million purchase accounting fair market value adjustment related to
the write-up of inventory to its estimated selling price less cost of disposal
under the purchase method of accounting on the opening balance sheet date. The
decrease in the gross profit percentage in 2007, when compared to the gross
profit percentage in 2006, adjusted to exclude the purchase accounting impact
above, was primarily due to increased product costs and an increase in excess
inventory expense.

22

---



Selling
expenses increased by $1.5 million or 5% in the first nine months of 2007
compared to the first nine months of 2006. Selling expense as percentage of net
sales also increased six percentage points from 54% in 2006 to 60% in 2007.
This increase in selling expense as a percentage of net sales was primarily due
to a planned increase in advertising spending in 2007 to acquire new customers
combined with lower customer response to our direct mail advertising campaigns
and increased bad debt expense in 2007 related to a change in sales and
customer mix.

Restructuring
charges of $0.2 million in the first nine months of 2007 were severance related
charges as a result of the continued execution of the Companys new business
plan.

Operating
income decreased by $5.4 million in the first nine months of 2007 compared to
the same period in 2006 due primarily to the decrease in net sales, the
purchase accounting adjustment which benefited the first nine months of 2006,
and higher selling expenses as noted above.

Corporate

Net sales of
$1.0 million in the first nine months of 2007 represents revenue from the
licensing of the Lenox brand and was down $0.2 million compared with the first
nine months of 2006.

General and
administrative expenses decreased by $10.1 million or 12% in the first nine
months of 2007 as compared to the same period in 2006, primarily due to $6.1
million reduction in postretirement expenses. This reduction was related to our
decision in the fourth quarter of 2006 to freeze the Companys defined benefit
pension plans and to discontinue offering post retirement health benefits to
current employees. Workforce reductions of $4.0 million, $0.5 million in
building consolidation expenses incurred in 2006 and not repeated in 2007, and
a $0.4 million gain on the 2007 sale of the sterling silver product line also
contributed to the decrease. Partially offsetting these cost reductions was
$4.4 million in executive management consulting fees incurred in 2007 and $1.0
million in additional rent net of depreciation related to the sale-leaseback of
the Hagerstown distribution center and the Pomona facility.

Restructuring
charges of $6.9 million in the first nine months of 2007 were principally
severance expense related to the Companys previous chief executive officer,
lease buyout expense related to the shutdown of the Companys Rogers
distribution facility, severance and exit costs related to the shutdown of
Companys sterling manufacturing facility and general severance and other costs
associated with organizational changes implemented as part of the Companys new
business plan.

Loss on refinancing of debt

The Company
incurred a $5.9 million loss related to the refinancing of its term and
revolver loans in the second quarter of 2007. This loss consisted of $2.7
million of costs incurred in the quarter related to the refinancing as well as
the write-off of $3.2 million of previously capitalized loan costs (see Note 10
to the Condensed Consolidated Financial Statements).

Provision for Income
Taxes

The effective
income tax rate was a 45% benefit in the first nine months of 2007 compared to
13% benefit in the first nine months of 2006. The low 2006 effective income tax
rate was principally due to the goodwill impairment (which is primarily non-tax
deductible). Additionally, the 2007 tax benefit was increased due to the
recognition of $2.2 million of previously unrecognized tax benefits, net of
adjustments to deferred tax assets, due to the expiration of the statute of
limitations on certain tax positions in
the first nine months of 2007.

23

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SEASONALITY

The Companys business 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 nine months 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s
primary sources of cash are the funds generated from operations and its
revolving credit facility, which is available for working capital and
investment needs.

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.

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 products on a routine basis to ensure adequate
borrowing base capacity exists to fund its current working capital needs. The
Company expects its capacity to increase in the upcoming months, which will
provide adequate availability through the holiday season. Based on this and
current forecasted levels of operations, the Company believes its current cash
and liquidity available under its amended and restated revolving credit
facility (as described below) will be sufficient to finance working capital
needs, capital expenditures and contractual obligations for the remainder of
fiscal 2007.

24

---



Cash
Flows from Operations

In the first nine months of 2007, operations consumed $89.2 million in
cash compared to $100.7 million in the first nine months of 2006. The operating
cash flow in the first nine months of both years reflects the seasonal working
capital requirements of the business as noted above. The $11.5 million decrease
in cash used in operating activities was principally due to lower working
capital requirements in the first nine months of 2007 compared to the same
period in 2006.

Cash
Flows from Investing Activities

In the first
nine months of 2007, the Company had net cash provided of $5.4 million from
investing activities, due principally from the proceeds received from the sale
of the sterling silver product line that was partially offset by capital
spending on facilities and technology infrastructure. For the first nine months
of 2006, investing activities used $1.3 million in cash as a result of the
acquisition of Willitts, capital spending on the new corporate office space in
Bristol, PA and the Retail expansion of the All the Hoopla stores. These cash
outflows were partially offset by the proceeds received from the sale of the
Langhorne, PA facility.

Cash
Flows from Financing Activities

The Companys net cash provided by financing activities in the first
nine months of 2007 decreased $17.8 million as compared to same period in 2006.
This decrease was primarily due to lower net borrowings under its revolving
credit and term loan facilities as a result of lower working capital requirements
and lower capital spending.

On February 9, 2007, the Company entered into waivers and amendments to
its revolving credit facility and term loan credit facility (the credit
facilities) in connection with the Companys noncompliance with certain
financial covenants under the credit facilities for the period ended December
30, 2006. Pursuant to the waivers and amendments, the lenders granted the
Company a limited waiver of noncompliance through and including April 30, 2007,
and temporarily amended the agreements to adjust the leverage ratio and
interest coverage ratio levels for the first quarter of 2007. In addition, the
amendment to the term loan facility increased the applicable margin for loans
by 0.25% per annum. As consideration for the amendments, the Company paid
amendment fees of $0.2 million.

On April 20,
2007, the Company completed the refinancing of its credit facilities by
entering into amended and restated revolving and term loan facilities. The
amended and restated revolving credit facility, which expires on April 20,
2012, provides for borrowings up to $175 million, which may be in the form of
letters of credit and revolving credit loans to be used for working capital and
general corporate purposes. The amended and restated term loan facility, which
expires on April 20, 2013, provides for term loans in the aggregate principal
amount of up to $100 million. The Company used the proceeds of the amended and
restated term loan facility to refinance the $47.4 million of term debt
outstanding and $42.2 million of the revolver debt outstanding at April 20,
2007, to pay $1.2 million of accrued interest and fees payable under the existing
credit facilities and to pay $9.2 million of fees and expenses in connection
with the refinancing.

Total fees and
expenses incurred by the Company in connection with the refinancing were $9.7
million (inclusive of the $9.2 million paid out of the proceeds of the amended
and restated term loan facility), of which $7.0 million was capitalized and
$2.7 million was included as loss on refinancing of debt during the second
quarter of 2007 in accordance with EITF 98-14, Debtors Accounting for Changes in Line-of-Credit or
Revolving-Debt Arrangements(EITF 98-14), and EITF
96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments(EITF
96-19). Based on these same criteria, the Company recognized an additional $3.2
million of loss on early extinguishment of debt during the second quarter of
2007 to write-off portions of the previously capitalized loan costs.

25

---



Borrowings
under the amended and restated 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. As of
September 29, 2007, the Companys borrowing capacity under the amended and
restated revolving credit facility was $133.7 million, of which $37.5 million
was available for additional borrowings or letters of credit at such date.

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

The amended
and restated revolving credit facility allows the Company to choose between two
interest rate options in connection with its revolving credit loans. The
interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin ranges
from 0% to 0.5% for Alternate Base Rate loans and from 1.75% to 2.25% for
Adjusted LIBOR Rate loans. The amended and restated revolving credit facility
also provides for commitment fees of 0.375% per annum on the daily average of
the unused commitment.

The amended
and restated term loan facility allows the Company to choose between two
interest rate options in connection with its loans under the facility. The
interest rate options are the Alternate Base Rate (as defined) or the Adjusted
LIBOR Rate (as defined) plus an applicable margin. The applicable margin is
3.5% for Alternate Base Rate loans and 4.5% for Adjusted LIBOR Rate loans.

Under the
amended and restated term loan facility, the Company is also obligated to make
mandatory prepayments if certain events occur in the future such as certain
asset sales, additional debt issuances, common and preferred stock issuances,
and excess cash flow generation. Such prepayments will be applied to the term
loan until it is paid in full, except for prepayments occurring upon the sale
of designated revolving loan collateral, which will be applied to the revolving
loan.

The amended
and restated credit facilities contain customary financial conditions and
covenants, including restrictions on additional indebtedness, liens,
investments, capital expenditures, issuances of capital stock and dividends.
The amended and restated credit facilities also require maintenance of minimum
levels of fixed charge coverage and maximum levels of leverage, in each case at
the end of each fiscal quarter. The minimum fixed charge coverage ratio (as
defined within the credit facility agreements) requires the Company to maintain
a minimum ratio of Consolidated EBITDA (as defined within the credit facility
agreements) to Consolidated Fixed Charges (as defined within the credit
facility agreements) over a 12-month period ending on each fiscal quarter. The
maximum leverage ratio (as defined within the term credit facility agreement)

26

---



requires the
Company to maintain a maximum ratio of debt (as measured at the end of each
fiscal quarter) to Consolidated EBITDA over a 12-month period ending on each
fiscal quarter.

OFF-BALANCE
SHEET ARRANGEMENTS

The Company
does not have off-balance sheet arrangements.

CONTRACTUAL
OBLIGATIONS

As of
September 29, 2007, the Company is obligated to make cash payments in
connection with its debt obligations, operating leases, purchase commitments, capital
leases, environmental remediation costs and royalty guarantees in the amounts
listed below. The contractual obligation table below excludes the Companys FIN
48 liabilities of $1,279 because the Company cannot make a reasonable estimate
of the timing of the related cash payment. The Company has no unrecorded
obligations other than the items noted in the following table:

|                             |  |                              |        |      |   |        |  |      |        |      |   |            |  |       |       |  |   |         |  |   |         | 
|---------------------------- |  | ---------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ----- |  | - | ------- |  | - | ------- | 
|                             |  | Payments
 due (in thousands) |       
|                            
|                             |  | 2007
 (Q4)                   |        | 2008 |   | 2009   |  | 2010 |        | 2011 |   | Thereafter |  | Total |      
|                            
|Revolving Credit Facility1,2 |  | $                            |       |      | $ |       |  | $    |       |      | $ |           |  | $     |      |  | $ | 89,851  |  | $ | 89,851  | 
|Long-term Debt2,3            |  |                              | 250    |      |   | 1,250  |  |      | 1,000  |      |   | 1,000      |  |       | 1,000 |  |   | 95,250  |  |   | 99,750  | 
|Operating Leases             |  |                              | 3,982  |      |   | 13,475 |  |      | 11,665 |      |   | 10,245     |  |       | 8,671 |  |   | 50,652  |  |   | 98,690  | 
|Purchase Commitments4        |  |                              | 32,034 |      |   |       |  |      |       |      |   |           |  |       |      |  |   |        |  |   | 32,034  | 
|Capital leases               |  |                              | 5      |      |   | 10     |  |      |       |      |   |           |  |       |      |  |   |        |  |   | 15      | 
|Environmental Costs5         |  |                              | 222    |      |   | 213    |  |      | 209    |      |   | 205        |  |       | 200   |  |   | 1,401   |  |   | 2,450   | 
|Royalty Guarantees6          |  |                              | 91     |      |   | 416    |  |      | 243    |      |   | 173        |  |       | 25    |  |   |        |  |   | 948     | 
|                             |  |                             
|Total                        |  | $                            | 36,584 |      | $ | 15,364 |  | $    | 13,117 |      | $ | 11,623     |  | $     | 9,896 |  | $ | 237,154 |  | $ | 323,738 | 
|                             |  |                             

|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 September 29, 2007 of 7.33% and 9.85%,
 respectively.     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|3 | Long-term
 debt also includes the $150 in principal amount of the conditional notes
 payable to the Maryland Department of Business and Economic Development and
 the $100 in principal amount of conditional notes payable to the County
 Commissioners of Washington County, Maryland. In addition to these principal
 amounts, the Company will incur interest expense at rates of 3% and 0%,
 respectively.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|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 responsible for the cleanup and/or monitoring of two environmental sites
 located in New Jersey.                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                
|6 | 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 2006 Form 10-K.

27

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CRITICAL
ACCOUNTING POLICIES

There were no material changes in the Companys critical accounting
policies from those described in the Companys 2006 Annual report of Form 10-K.

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, within the meaning of the Private Securities
Litigation Reform Act of 1995, 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 certain Lenox and Department 56
operations, including the consolidation and transfer of all financial
responsibilities and controls into one company-wide finance department to be
located in the Companys Bristol, Pennsylvania offices; (2) achieve revenue or
cost synergies; (3) generate cash flow to pay off outstanding debt and remain
in compliance with the terms of its new credit facilities; (4) successfully
complete its operational improvements, including improving inventory management
and making the supply chain more efficient; (5) retain key employees; (6)
maintain and develop cost effective relationships with foreign manufacturing
sources; (7) maintain the confidence of and service effectively key wholesale
customers; (8) manage currency exchange risk and interest rate changes on the
Companys variable debt; (9) identify, hire and retain quality designers,
sculptors and artistic talent to design and develop products which appeal to
changing consumer preferences; and (10) manage litigation risk in a cost
effective manner. 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. Also, please read the bases, assumptions and factors set out in
Item 1A in the Companys 2006 Form 10-K filed under the Securities Exchange Act
of 1934, all of which is incorporated herein by reference and applicable to the
forward-looking statements set forth herein.

Item 3.     Quantitative
and Qualitative Disclosures about Market Risk

There has been
no significant change in the Companys exposure to market risk since the end of
fiscal 2006. The Companys market risks relate primarily to changes in interest
rates and currency exchange rates. See Item 7A in the Companys 2006 Form 10-K
for a discussion of these market risks.

Item 4.     Controls and
Procedures

Disclosure Controls and Procedures

Lenox Group
Inc. management is responsible for establishing and maintaining effective
disclosure controls and procedures, as defined under Rule 13a-15(e) of the
Securities Exchange Act of 1934.

28

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As of the end
of the period covered by this report, the Company performed an evaluation,
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 Companys disclosure controls and procedures. Based upon,
and as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Companys disclosure controls and
procedures were effective to ensure that information required to be disclosed
by the Company in the reports that it files or submits to the Securities and
Exchange Commission under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information
is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

Internal Controls Over Financial Reporting

No changes were made to the
Companys internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) during the last fiscal
quarter that materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.

29

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PART II - OTHER INFORMATION

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

In August
2004, plaintiffs purporting to represent a class of consumers who purchased
tableware sold in the United States filed suit against Federated Department
Stores, the May Department Stores Company, Waterford Wedgwood U.S.A. and Lenox,
Incorporated (Lenox) 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 (hereinafter the Action).
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.

On February
22, 2007, without admitting any violation of any statute or law or any
liability or wrongdoing whatsoever, Lenox entered into a settlement agreement
with the plaintiff class representatives. Pursuant to the terms of the
settlement agreement, Lenox has agreed to pay $0.5 million, in return for which
Lenox and its affiliates will be completely released from any and all claims,
demands and actions concerning the Action and any claims that could have been
alleged in the Action. This settlement agreement is subject to final approval
of the court and a final judgment dismissing the Action with prejudice as to Lenox.
Plaintiffs and Lenox have sought court approval of the settlement agreement and
dismissal of the Action with prejudice, and are awaiting the courts order.

On April 12,
2007, Amanda Curiale filed a complaint in the United States District Court for
the Eastern District of Pennsylvania, which is a purported class action
alleging that the Company willfully violated the federal Fair and Accurate
Credit Transactions Act (FACTA) by continuing to print after December 1, 2006
the expiration dates on receipts provided to debit card and credit cardholders
transacting business with the Company (hereinafter the FACTA Litigation). The
Company understands that similar complaints have been filed against a large
number of retailers. The plaintiff seeks, on behalf of herself and the class,
statutory damages of not less than one hundred dollars and not more than one
thousand dollars for each violation, as well as unspecified punitive damages,
costs and attorneys fees and a permanent injunction from further engaging in
violations of FACTA.

On September
20, 2007, the parties held an all-day meditation session and reached a
tentative settlement which is subject to the parties signing a definitive
settlement agreement and court approval. Under the terms of the settlement,
Lenox denies all claims as to liability, damages, penalties, interest, fees,
restitution and all other forms of relief sought in the FACTA Litigation.
Pursuant to the terms of the proposed settlement, the Company will pay a
non-material sum for attorneys fees, a charitable contribution and a
plaintiffs incentive fee, and will provide participating claimants with a
coupon off a future purchase or a free product through Company-operated retail
stores. In return, the Company and its affiliates will be completely released
from any and all claims, demands and actions concerning the FACTA Litigation
and any claims that could have been alleged in the FACTA litigation.

In addition to
the above actions, the Company is involved in various legal proceedings, claims
and

30

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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.

31

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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 2006 Annual Report on
Form 10-K, which could have a material impact on the Companys business,
financial condition or results of operations. The risks described in the
Companys 2006 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

None

32

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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 Company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 Companys
 Amendment No. 1, dated May 12, 1997, to Registration Statement on Form 8-A,
 dated April 23, 1997. SEC File No. 1-11908.)
|
| | 10.1 | Asset Purchase Agreement,
 dated July 19, 2007, by and among Lenox Group Inc., Lenox, Incorporated and
 Lifetime Brands, Inc. (Incorporated herein by reference to Exhibit 10.1 of
 Companys Current Report on Form 8-K dated July 24, 2007. SEC File No.
 1-11908.)                                         
|
| | 11.1 | Computation of net income
 (loss) per share*                                                                                                                                                                                                                                                                  
|
| | 31.1 | Certification of Chief
 Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *                                                                                                                                                                                                         
|
| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302of the
 Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                           
|
| | 32.1 | Officer Certification pursuant to Section
 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                             

* Filed herewith

 Management contract or
compensatory plan

33

---



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: November 8,
 2007 |  | /s/ Marc L.
 Pfefferle 
|                        |  |                         |  |                         
|                        |  |                         |  | Marc L.
 Pfefferle      
|                        |  |                         |  | Chief
 Executive Officer
|                        |  |                         |  |                         
|Date: November 8,
 2007 |  | /s/ Timothy
 J. Schugel
|                        |  |                         |  |                         
|                        |  |                         |  | Timothy J.
 Schugel     
|                        |  |                         |  | Chief
 Financial Officer

34

---



EXHIBIT INDEX

|                 |  |                                                                                                    
|---------------- |  | ---------------------------------------------------------------------------------------------------
|Exhibit 
 Number |  | Description                                                                                        
|                 |  |                                                                                                    
|                
|11.1             |  | Computation of net income (loss) per share                                                         
|                 |  |                                                                                                    
|31.1             |  | Certification of Chief Executive Officer pursuant to Section 302 of
 the Sarbanes-Oxley Act of 2002
|                 |  |                                                                                                    
|31.2             |  | Certification of Chief Financial Officer pursuant to Section 302 of
 the Sarbanes-Oxley Act of 2002
|                 |  |                                                                                                    
|32.1             |  | Officer Certification pursuant to Section 906 of the Sarbanes-Oxley
 Act of 2002                   

35

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