UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---

# FORM 10-Q

---

# Quarterly Report Pursuant to Section 13 or 15(d) of the
 Securities Exchange Act of 1934

For the quarterly period ended: October 1, 2005

Commission File Number: 1-11908

---

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

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

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

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

 Yes  x    No  o

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

 Yes  o    No  x

As of November 4, 2005,
13,905,651 shares of the registrants common stock, par value $.01 per share, were outstanding.





---

# PART I  FINANCIAL INFORMATION

# Item 1.   Financial Statements

# DEPARTMENT 56, INC. AND SUBSIDIARIES

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

# ASSETS

|                                          |  | OCTOBER 1,2005 |   | JANUARY 1,2005 |  | OCTOBER 2,2004
|----------------------------------------- |  | -------------- | - | -------------- |  | --------------
|
|CURRENT ASSETS:                           |  |                |   |                |  |               
|Cash and cash equivalents                 |  |                | $ | 1,772          |  | $             
|Short-term investments                    |  |                |   |               |  |               
|Accounts receivable, net                  |  |                |   | 128,801        |  |               
|Inventories                               |  |                |   | 141,136        |  |               
|Deferred taxes                            |  |                |   | 8,168          |  |               
|Other current assets                      |  |                |   | 13,613         |  |               
|                                          |  |                |   |                |  |               
|Total current assets                      |  |                |   | 293,490        |  |               
|                                         
|PROPERTY AND EQUIPMENT, net               |  |                |   | 90,889         |  |               
|GOODWILL, net                             |  |                |   | 58,183         |  |               
|TRADEMARKS, net                           |  |                |   | 109,951        |  |               
|OTHER INTANGIBLES, net                    |  |                |   | 18,338         |  |               
|MARKETABLE SECURITIES                     |  |                |   | 2,349          |  |               
|DEFERRED TAXES                            |  |                |   | 4,818          |  |               
|OTHER ASSETS                              |  |                |   | 12,164         |  |               
|                                          |  |                |   |                |  |               
|                                          |  |                | $ | 590,182        |  | $             
|                                          |  |                |   |                |  |               
|                                         
|LIABILITIES AND STOCKHOLDERS EQUITY      |  |               
|                                         
|CURRENT LIABILITIES:                      |  |               
|Current maturities of long term debt      |  |                | $ | 7,500          |  |               
|Borrowings on revolving credit facility   |  |                |   | 121,500        |  |               
|Accounts payable                          |  |                |   | 39,043         |  | $             
|Accrued compensation and benefits payable |  |                |   | 17,092         |  |               
|Income tax payable                        |  |                |   | 11,598         |  |               
|Severance and restructuring reserves      |  |                |   | 14,503         |  |               
|Other current liabilities                 |  |                |   | 6,334          |  |               
|                                          |  |                |   |                |  |               
|Total current liabilities                 |  |                |   | 217,570        |  |               
|                                         
|DEFERRED COMPENSATION OBLIGATION          |  |                |   | 2,353          |  |               
|PENSION OBLIGATIONS                       |  |                |   | 85,476         |  |               
|POSTRETIREMENT OBLIGATIONS                |  |                |   | 28,218         |  |               
|DEFERRED TAXES                            |  |                |   |               |  |               
|LONG TERM DEBT                            |  |                |   | 92,750         |  |               
|OTHER NONCURRENT LIABILITIES              |  |                |   | 5,014          |  |               
|STOCKHOLDERS EQUITY                      |  |                |   | 158,801        |  |               
|                                          |  |                |   |                |  |               
|                                          |  |                | $ | 590,182        |  | $             
|                                          |  |                |   |                |  |               

See notes to condensed consolidated financial statements.

2

---

# DEPARTMENT 56, INC. AND SUBSIDIARIES

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

|                                                      |  | 13 WEEKSENDEDOCTOBER 1,2005 |   | 13 WEEKSENDEDOCTOBER 2,2004
|----------------------------------------------------- |  | --------------------------- | - | ---------------------------
|                                                      |  |                             |   |                            
|NET SALES                                             |  |                             | $ | 99,879                     
|COST OF SALES                                         |  |                             |   | 51,493                     
|                                                      |  |                             |   |                            
|Gross profit                                          |  |                             |   | 48,386                     
|                                                     
|OPERATING EXPENSES:                                   |  |                            
|Selling, general, and administrative                  |  |                             |   | 29,781                     
|                                                      |  |                             |   |                            
|                                                     
|OPERATING INCOME FROM CONTINUING OPERATIONS           |  |                             |   | 18,605                     
|                                                     
|OTHER EXPENSE (INCOME):                               |  |                            
|Interest expense                                      |  |                             |   | 1,670                      
|Other, net                                            |  |                             |   | (468                       
|                                                      |  |                             |   |                            
|                                                     
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                             |   | 17,403                     
|                                                     
|INCOME TAX EXPENSE                                    |  |                             |   | 6,341                      
|                                                      |  |                             |   |                            
|                                                     
|INCOME FROM CONTINUING OPERATIONS                     |  |                             |   | 11,062                     
|                                                      |  |                             |   |                            
|                                                     
|INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX       |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME                                            |  |                             | $ | 11,062                     
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  BASIC:                         |  |                            
|INCOME PER SHARE FROM CONTINUING OPERATIONS           |  |                             | $ | 0.81                       
|INCOME PER SHARE FROM DISCONTINUED OPERATIONS         |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  BASIC                          |  |                             | $ | 0.81                       
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  ASSUMING DILUTION:             |  |                            
|INCOME PER SHARE FROM CONTINUING OPERATIONS           |  |                             | $ | 0.81                       
|INCOME PER SHARE FROM DISCONTINUED OPERATIONS         |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  ASSUMING DILUTION              |  |                             | $ | 0.81                       
|                                                      |  |                             |   |                            
|                                                     
|WEIGHTED AVERAGE SHARES OUTSTANDING:                  |  |                            
|BASIC                                                 |  |                             |   | 13,688                     
|ASSUMING DILUTION                                     |  |                             |   | 13,713                     

See notes to condensed consolidated financial statements.

3

---

# DEPARTMENT 56, INC. AND SUBSIDIARIES

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

|                                                      |  | 39 WEEKSENDEDOCTOBER 1,2005 |   | 39 WEEKSENDEDOCTOBER 2,2004
|----------------------------------------------------- |  | --------------------------- | - | ---------------------------
|                                                      |  |                             |   |                            
|NET SALES                                             |  |                             | $ | 156,804                    
|COST OF SALES                                         |  |                             |   | 81,872                     
|                                                      |  |                             |   |                            
|Gross profit                                          |  |                             |   | 74,932                     
|                                                     
|OPERATING EXPENSES:                                   |  |                            
|Selling, general, and administrative                  |  |                             |   | 54,066                     
|                                                      |  |                             |   |                            
|                                                     
|OPERATING INCOME FROM CONTINUING OPERATIONS           |  |                             |   | 20,866                     
|                                                     
|OTHER EXPENSE (INCOME):                               |  |                            
|Interest expense                                      |  |                             |   | 1,881                      
|Litigation settlement                                 |  |                             |   |                           
|Other, net                                            |  |                             |   | (746                       
|                                                      |  |                             |   |                            
|                                                     
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |  |                             |   | 19,731                     
|                                                     
|INCOME TAX EXPENSE                                    |  |                             |   | 7,179                      
|                                                      |  |                             |   |                            
|                                                     
|INCOME FROM CONTINUING OPERATIONS                     |  |                             |   | 12,552                     
|                                                      |  |                             |   |                            
|                                                     
|LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX         |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME                                            |  |                             | $ | 12,552                     
|                                                      |  |                             |   |                            
|                                                     
|INCOME PER SHARE  BASIC:                             |  |                            
|INCOME PER SHARE FROM CONTINUING OPERATIONS           |  |                             | $ | 0.92                       
|LOSS PER SHARE FROM DISCONTINUED OPERATIONS           |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  BASIC                          |  |                             | $ | 0.92                       
|                                                      |  |                             |   |                            
|                                                     
|INCOME PER SHARE  ASSUMING DILUTION:                 |  |                            
|INCOME PER SHARE FROM CONTINUING OPERATIONS           |  |                             | $ | 0.91                       
|LOSS PER SHARE FROM DISCONTINUED OPERATIONS           |  |                             |   |                           
|                                                      |  |                             |   |                            
|                                                     
|NET INCOME PER SHARE  ASSUMING DILUTION              |  |                             | $ | 0.91                       
|                                                      |  |                             |   |                            
|                                                     
|WEIGHTED AVERAGE SHARES OUTSTANDING:                  |  |                            
|BASIC                                                 |  |                             |   | 13,661                     
|ASSUMING DILUTION                                     |  |                             |   | 13,786                     

See notes to condensed consolidated financial statements.

4

---

# DEPARTMENT 56, INC. AND SUBSIDIARIES

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

|                                                                     |  | 39 WEEKSENDEDOCTOBER 1,2005 |   | 39 WEEKSENDEDOCTOBER 2,2004
|-------------------------------------------------------------------- |  | --------------------------- | - | ---------------------------
|                                                                     |  |                             |   |                            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |  |                             |   |                            
|Net cash used in operating activities                                |  |                             | $ | (51,023                    
|                                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                                |  |                            
|Purchases of property and equipment                                  |  |                             |   | (1,090                     
|Proceeds from sale of assets                                         |  |                             |   | 110                        
|Net sale of available-for-sale securities                            |  |                             |   | 11,150                     
|Acquisition                                                          |  |                             |   | (204,036                   
|                                                                     |  |                             |   |                            
|Net cash (used in) provided by investing activities                  |  |                             |   | (193,866                   
|                                                                     |  |                             |   |                            
|                                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |  |                            
|Proceeds from the exercise of common stock options                   |  |                             |   | 1,538                      
|Payments of deferred financing fees                                  |  |                             |   | (10,125                    
|Borrowings on revolving credit facility                              |  |                             |   | 121,500                    
|Purchases of treasury stock                                          |  |                             |   | (8                         
|Borrowings on long-term debt                                         |  |                             |   | 100,000                    
|                                                                     |  |                             |   |                            
|Net cash provided by financing activities                            |  |                             |   | 212,905                    
|                                                                     |  |                             |   |                            
|                                                                    
|Net cash provided by operating activities of discontinued operations |  |                             |   |                           
|                                                                     |  |                             |   |                            
|                                                                    
|NET DECREASE IN CASH AND CASH EQUIVALENTS                            |  |                             |   | (31,984                    
|                                                                    
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                     |  |                             |   | 33,756                     
|                                                                     |  |                             |   |                            
|                                                                    
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                           |  |                             | $ | 1,772                      
|                                                                     |  |                             |   |                            
|                                                                    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                   |  |                            
|Depreciation expense                                                 |  |                             | $ | 3,510                      
|Amortization expense                                                 |  |                             |   | 287                        
|Cash paid (received) for:                                            |  |                            
|Interest                                                             |  |                             |   | 570                        
|Income taxes                                                         |  |                             |   | (765                       

See notes to condensed consolidated financial statements.

5

---

# DEPARTMENT 56, INC. AND SUBSIDIARIES

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

# 1.      Summary of Significant Accounting Policies

Business Department 56, Inc. and its subsidiaries (the Company)
is a leading designer, distributor, wholesaler and retailer of fine quality tabletop, collectibles and other giftware products.
The Company sells its product through gift, home accessory and specialty retailers, department stores, general merchandise chains,
Big Box specialty chains, Company-owned retail stores, as well as direct to the consumer through catalogs, direct
mail, the internet, and home shows. The Company markets its products principally under the Department 56, Lenox, Dansk and Gorham
brand names. The majority of the Companys products are developed and designed by the Companys in-house creative team
and are manufactured for the Company by independently owned foreign manufacturers located primarily in the Peoples Republic
of China. The Company also owns and operates two domestic manufacturing facilities that produce certain of its product.
Approximately 3% of total revenue is derived from customers outside the United States and all long-lived assets are located within
the United States.

Principles of Consolidation  The condensed consolidated
financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Fiscal Year End  The Companys policy is to end its fiscal
year on the Saturday closest to December 31.

Management Estimates The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Cash Equivalents  All highly liquid debt instruments with
original maturities of three months or less are considered to be cash equivalents. These investments are carried at cost, which
approximates market value.

Short-Term Investments The Companys short-term
investments consist of Auction Rate Securities which represent funds available for current operations. In accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, these short-term investments are classified as
available-for-sale and are carried at cost, or par value which approximates the fair market value. These securities have stated
maturities beyond three months but are priced and traded as short-term instruments due to the liquidity provided through the
interest rate mechanism of 28 to 49 days.

Marketable Securities The Company classifies the marketable
securities designated to fund its deferred compensation plan as trading securities under SFAS No. 115. In accordance
with the provisions of this statement, the investment balance is stated at fair market value, based on quoted market prices.
Realized and unrealized gains and losses are reflected in earnings. As the assets designated to fund the deferred compensation
plan reflect amounts due to employees (but available for general creditors of the Company in the event the Company becomes
insolvent), the Company has recorded the investment balance as a non-current asset and has established a corresponding other
long-term liability entitled Deferred Compensation Obligation on the Condensed Consolidated Balance Sheets.

6

---

Allowance for Doubtful Accounts  The Company records an
allowance for estimated uncollectible accounts receivable based on an evaluation of its accounts receivable balance. This
evaluation includes a number of factors including the age of the receivable, the financial condition of the customer, the current
business environment, and the historical collection experience for customers of similar background and nature.

Inventories  Inventories consist of raw materials, work in
process and finished goods and are stated at the lower of average cost, which approximates first-in, first-out cost, or net
realizable value. For product sourced from independent manufacturers, the Company records inventory at the date of taking title,
which typically occurs when product is delivered to a foreign port. As a result, at certain times during the year, the Company has
significant in-transit quantities, as inventory is sourced primarily from the Peoples Republic of China and other Pacific
Rim countries. Each period, the Company adjusts identified excess and slow-moving inventory to its net realizable value.

Property and Equipment Property and equipment are stated at
cost. Depreciation is computed on a straight-line method over the estimated useful lives of the assets (or in the case of
leasehold improvements, the shorter of the estimated useful lives or lease terms). Estimated useful lives of the Companys
property and equipment are as follows:

|                               | 
|------------------------------ | 
|Leasehold improvements         | 
|Furniture and fixtures         | 
|Computer hardware and software | 
|Tooling                        | 
|Other equipment                | 
|Building and improvements      | 

Major improvements and replacements of property are capitalized. Maintenance,
repairs, and minor improvements are expensed.

Long-Lived Assets  The Companys principal long-lived
assets are its property and equipment which consists of its corporate headquarter buildings, its manufacturing facilities, its
distribution centers, and the computer equipment, furniture and fixtures, machinery, and leasehold improvements at its corporate
headquarter buildings, distribution centers, showrooms and retail stores. The Company annually reviews its long-lived assets for
impairment.

Goodwill, Trademarks, and Other Intangible Assets  Goodwill
represents the excess of the acquisition costs over the fair value of the net assets acquired. The Companys recorded
goodwill results from the 1992 purchase of the Company by Forstmann Little and the 2005 acquisition of Lenox, Inc. (Lenox) by the
Company. The Company annually reviews its goodwill, trademarks, and other intangible assets for impairment.

7

---

Deferred Financing Fees  The Company amortizes deferred
financing fees over the life of the related debt agreement. Deferred financing fee amortization is
included in interest expense in the Companys Condensed Consolidated Statements of Operations.

Revenue Recognition  The Company sells its products through
wholesale channels, through Company-owned retail stores, and directly to consumers. Revenue from sales to wholesale customers and
from sales direct to the consumer is recognized when shipped while revenue from sales of merchandise to retail customers is
recognized at the time of sale. The Company believes that these are the times when persuasive evidence of an arrangement exists,
delivery has occurred, the Companys price is fixed and collectibility is reasonably assured. Revenue is recognized net of
any applicable discounts and allowances. Customers, whether wholesale, retail or direct, do have the right to return product in
certain limited situations. Such rights of return have not precluded revenue recognition because the Company has a long history
with such returns on which it constructs a reserve.

Cost of Sales  The Companys cost of sales principally
includes the cost of product purchased from manufacturers, cost of manufactured product, inbound and outbound freight cost,
duties, royalties, provisions for excess and obsolete product, and certain costs to develop new product samples, sculpt product,
purchase and receive product, inspect product and warehouse product.

Selling, General and Administrative Expense  The Companys
selling, general and administrative expenses principally consist of sales force expense, compensation and benefit expense,
facilities expense, bad debt expense, marketing and advertising expense, and other general and administrative expenses.

Advertising Expense  The Company records advertising expense in
accordance with Statement of Position No. 93-7. Advertising expense is principally expensed when incurred. Certain direct response
advertising costs are capitalized and amortized over periods not exceeding one year. Capitalized direct response advertising
costs, included on the Companys Condensed Consolidated Balance Sheets in other current assets for October 1, 2005, January
1, 2005, and October 2, 2004 were $4,073, $0, and $0, respectively. Advertising expense (including amortization of direct response
advertising costs and Payments to Customers described below) for the three months ended October 1, 2005 and the nine
months ended October 1, 2005 was $4,175 and $4,305, respectively; compared to the three months ended October 2, 2004 and nine
months ended October 2, 2004 of $111 and $294, respectively. These amounts are included in selling, general and administrative
expense within the Companys Condensed Consolidated Statements of Operations.

Payments to Customers  The Company reimburses certain customers
for cooperative advertising up to a predetermined percentage of the amount of product shipped to the customer. Cooperative
advertising costs under this program are expensed when the product is shipped to the customer. Cooperative advertising expense for
the three months ended October 1, 2005 and nine months ended October 1, 2005 was $86 and $143, respectively; compared to the three
months ended October 2, 2004 and nine months ended October 2, 2004 of $108 and $286, respectively.

8

---

The Company also enters into agreements with select national retailers to
participate in the cost of advertising, displaying, or marketing of the Companys product (referred to as, direct
account support). These direct account support costs are expensed when the advertising, display or marketing costs are
incurred. Direct account support expense for the three months ended October 1, 2005 and the nine months ended October 1, 2005 was
$866 and $858, respectively; compared to the three months ended October 2, 2004 and nine months ended October 2, 2004 of $0 and
$26, respectively.

Product Development Expense  The Companys product
development costs consist principally of salaries for internal creative talent, royalties paid to outside artists, and costs
incurred in developing product samples. The Company expenses as incurred the salaries of creative talent and records it in
selling, general and administrative expense. The Company capitalizes into inventory the cost of royalties paid to outside artists
and records it in cost of sales as the product is sold. The cost to develop product samples is expensed as incurred.

Freight Expense  Freight expenses for products shipped to
customers (freight-out) are included in the cost of products sold, in accordance with Emerging Issues Task Force Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs.

Pre-Opening Costs  Non-capital expenditures associated with
opening new Company-operated retail stores are expensed as incurred.

Income Taxes  Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts
at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected
to affect taxable income.

Foreign Currency Exchange Rate Gains and Losses  The Company
imports most of its products and, while the majority of these purchases are denominated in United States dollars, some of the
purchases are denominated in foreign currency. In addition, the Companys sales to Canadian customers are denominated in
Canadian dollars. Foreign exchange rate gains and losses are included in other expense (income) within the accompanying Condensed
Consolidated Statements of Operations. For the three and nine month periods ended October 1, 2005, the Company has benefited from
the appreciation of the Canadian dollar relative to the United States dollar and recognized gains in foreign currency of $389 and
$95, respectively; compared to a gain of $266 for the three months ended October 2, 2004 and a loss of $6 for the nine months
ended October 2, 2004. The Company may periodically enter into foreign exchange contracts or build foreign currency deposits as a
partial hedge against currency fluctuations. The Company has not entered into any foreign exchange contracts during fiscal 2005.

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

9

---

Fair Value of Financial Instruments The Companys
financial instruments are cash, short-term investments, marketable securities, accounts receivable, accounts payable, borrowings
on revolving credit facility and long-term debt. The recorded amounts of cash, marketable securities, accounts receivable,
accounts payable and borrowings on revolving credit facility approximate their fair value based on their short term nature. The
recorded value of long term-debt approximates its fair market value as the Companys interest rates are variable and
approximate market rates.

# 2.      Basis of Presentation

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

Effective September 1, 2005, the Company completed the acquisition of Lenox.
These financial statements and footnotes reflect the Lenox assets acquired, liabilities assumed, and results of operations of
Lenox from the acquisition date of September 1, 2005. See Note 8.

The results of operations for the quarter and 39 weeks ended October 1, 2005
are not necessarily indicative of the results for the full fiscal year. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and notes thereto included in the 2004 Annual Report to Stockholders and
Annual Report on Form 10-K as filed by the Company with the Securities and Exchange Commission (SEC). Comprehensive income for the
periods ended October 1, 2005 and October 2, 2004 was equivalent to reported net income.

Reclassifications  Certain prior year amounts have been
reclassified to conform to the current year presentation. These reclassifications had no impact on net income or retained earnings
as presented.

Auction rate securities, previously classified as cash and cash equivalents,
are now classified as short-term investments for all periods presented. The Company classifies these short-term investments as
available-for-sale securities under SFAS No. 115. As of October 1, 2005, January 1, 2005, and October 2, 2004, auction
rate securities were $0, $11,150, and $0, respectively.

# 3.      New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R (revised 2004), Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. On April 14, 2005, the SEC announced a
deferral of the effective date of SFAS 123(R) which will require the Companys adoption in the first quarter of 2006. SFAS
No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 no longer
will be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate
fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption
options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested
stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods
would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated.
The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a
material impact on its consolidated results of operations and earnings per share. The Company has not yet determined the method of
adoption. See Note 4.

10

---

In November 2004, the FASB issued SFAS No. 151,Inventory Costs  an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage).
Among other things, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current period charges regardless of whether they meet the criterion of so abnormal
as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning
after June 15, 2005 and is required to be adopted by the Company on January 1, 2006. The Company is currently evaluating the
effect that the adoption of SFAS No. 151 will have on its consolidated results of operations and financial condition but does not
expect SFAS No. 151 to have a material impact.

# 4.      Stock-Based Compensation

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

|                                                     | 13 WEEKSENDEDOCTOBER 1,2005 |  | 13 WEEKSENDEDOCTOBER 2,2004 |        | 39 WEEKSENDEDOCTOBER 1,2005 |   | 39 WEEKSENDEDOCTOBER 2,2004 |  
|---------------------------------------------------- | --------------------------- |  | --------------------------- | ------ | --------------------------- | - | --------------------------- | -
|Net income:                                          |                             |  |                             |        |                             |   |                             |  
|As reported                                          |                             |  | $                           | 11,062 |                             | $ | 9,209                       |  
|Stock-based compensation, net of related tax effects |                             |  |                             | (295   | )                           |   | (194                        | )
|                                                     |                             |  |                             |        |                             |   |                             |  
|Pro forma                                            |                             |  | $                           | 10,767 |                             | $ | 9,015                       |  
|                                                     |                             |  |                             |        |                             |   |                             |  
|                                                    
|Net income per common share  basic:                
|As reported                                          |                             |  | $                           | 0.81   |                             | $ | 0.69                        |  
|Pro forma                                            |                             |  |                             | 0.79   |                             |   | 0.67                        |  
|                                                    
|Net income per common share  assuming dilution:    
|As reported                                          |                             |  | $                           | 0.81   |                             | $ | 0.68                        |  
|Pro forma                                            |                             |  |                             | 0.79   |                             |   | 0.66                        |  

11

---

# 5.      Income per Common Share

Net income per common share is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Net income per common share assuming dilution reflects per share
amounts that would have resulted had the Companys dilutive outstanding stock options been converted to common stock.
Restricted stock is considered outstanding on the date the stock becomes vested when computing net income per common share 
basic. Restricted stock, to the extent it is probable that the stock will become vested, is considered outstanding on the grant
date when computing net income per common share  assuming dilution.

# 6.      Litigation Settlement

On May 5, 2004, the Company agreed to settle tort and warranty claims it
brought against a third party. Under the settlement, the Company received net cash proceeds (before income taxes) of $6,871.

# 7.      Discontinued Operations

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

# 8.      Acquisition

Effective September 1, 2005, the Company completed the acquisition of all of
the capital stock of Lenox from Brown Forman, Inc. (Brown Forman) for $204.0 million, which included transaction costs of $7.6
million. The acquisition was effected pursuant to a Stock Purchase Agreement, dated July 21, 2005, between the Company and Brown
Forman. The purchase price included a $6.5 million estimated working capital adjustment which will be finalized in the
Companys fourth quarter. Any additional payment of funds to Brown Forman as a result of finalizing the working capital
adjustment will increase the recorded amount of goodwill. Similarly, any receipt of funds as a result of finalizing the working
capital adjustment will decrease the recorded amount of goodwill.

The acquisition of Lenox, which sells product under the Lenox, Dansk, and
Gorham brand names, added strong, market-leading brands and complementary product lines and distribution channels to the
Companys portfolio. The Company funded the payment of the purchase price and related transaction costs of the Lenox
acquisition with a $275 million senior secured credit facility consisting of a $175 million revolving credit facility and a $100
million term loan.

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

12

---

The initial purchase price for Lenox has been allocated based on
managements estimates and independent appraisals as follows:

|                                     | EstimatedFair Value
|------------------------------------ | -------------------
|Accounts receivable                  |                    
|Inventories                          |                    
|Current deferred taxes               |                    
|Other current assets                 |                    
|Property, plant and equipment        |                    
|Goodwill                             |                    
|Trademarks                           |                    
|Other intangible assets              |                    
|Noncurrent deferred taxes            |                    
|Other noncurrent assets              |                    
|                                     |                    
|Total assets acquired                |                    
|                                     |                    
|                                    
|Severance and restructuring reserves |                    
|Other current liabilities            |                    
|Pension obligations                  |                    
|Postretirement obligations           |                    
|Long-term debt                       |                    
|Other noncurrent liabilities         |                    
|                                     |                    
|Total liabilities assumed            |                    
|                                     |                    
|                                    
|Net assets acquired                  |                    
|                                     |                    

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

|                                  | Weighted AverageAmortizationPeriod |  | Fair Value
|--------------------------------- | ---------------------------------- |  | ----------
|Finite-life intangible assets     |                                    |  |           
|Customer relationships            |                                    |  | 9.9 Years 
|Favorable lease interests         |                                    |  | 2.0 Years 
|                                  |                                    |  |           
|                                  |                                    |  |           
|                                  |                                    |  |           
|                                 
|Indefinite-life intangible assets
|Trademarks and trade names        |                                    |  | N/A       
|Goodwill                          |                                    |  | N/A       
|                                  |                                    |  |           
|                                 
|                                  |                                    |  |           
|                                  |                                    |  |           
|*There is no tax goodwill.       

13

---

The following pro forma condensed consolidated financial results of
operations are presented as if the acquisition described above had been completed at the beginning of each period presented.

|                                            | Three months ended |  | Nine months ended
|------------------------------------------- | ------------------ |  | -----------------
|
|Pro forma net sales                         |                    |  | $                
|Pro forma income from continuing operations |                    |  |                  
|Pro forma net income                        |                    |  |                  
|                                           
|Pro forma income per share from             |                    | 
|continuing operations                       |                    | 
|Basic                                       |                    |  | $                
|Assuming dilution                           |                    |  |                  
|                                           
|Weighted average shares outstanding        
|Basic                                       |                    |  |                  
|Assuming dilution                           |                    |  |                  

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

# 9.      Severance and Restructuring Costs

In connection with the acquisition of Lenox from Brown Forman, the Company
assumed severance reserves of $0.8 million related to plant closings, retail store closings and general restructurings that took
place prior to the Companys acquisition of Lenox. At September 1, 2005, the acquisition date, the Company accrued an
additional $13.8 million related to an additional plant closing, retail store closings, and general restructurings that were planned
as part of the acquisition. This additional charge increased goodwill recorded from the acquisition of Lenox.

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

The table below shows a reconciliation of the severance and restructuring
reserve activity for the three months ended October 1, 2005:

|                             | PlantClosings |  | Retail StoreClosings |       | GeneralRestructuring |   | TotalReserves
|---------------------------- | ------------- |  | -------------------- | ----- | -------------------- | - | -------------
|
|Assumed at acquisition date  |               |  |                      |      |                      |   |             
|                            
|Recorded at acquisition date |               | 
|And charged to goodwill      |               |  | $                    | 4,804 |                      | $ | 2,790        
|                            
|Incurred                     |               |  |                      |      |                      |   |             
|                             |               |  |                      |       |                      |   |              
|                            
|Balance, October 1, 2005     |               |  | $                    | 4,804 |                      | $ | 2,790        
|                             |               |  |                      |       |                      |   |              

14

---

# 10.     Concentrations

At October 1, 2005, one customer accounted for approximately 15% of the
Companys total accounts receivable. For the three months and nine months ended October 1, 2005, this same customer accounted
for approximately 14% and 10% of the Companys total net sales, respectively.

# 11.     Inventories

Inventories from continuing operations were comprised of:

|                  | October 1,2005 |  | January 1,2005 |         | October 2,2004
|----------------- | -------------- |  | -------------- | ------- | --------------
|Raw materials     |                |  | $              | 5,676   |               
|Work-in-process   |                |  |                | 11,823  |               
|Finished goods    |                |  |                | 123,637 |               
|                  |                |  |                |         |               
|Total inventories |                |  | $              | 141,136 |               
|                  |                |  |                |         |               

# 12.     Property and Equipment

Property and equipment consist of the following:

|                               | October 1,2005 |  | January 1,2005 |         | October 2,2004
|------------------------------ | -------------- |  | -------------- | ------- | --------------
|Land                           |                |  | $              | 5,866   |               
|Leasehold improvements         |                |  |                | 10,534  |               
|Furniture and fixtures         |                |  |                | 8,323   |               
|Computer hardware and software |                |  |                | 17,080  |               
|Tooling                        |                |  |                | 682     |               
|Other equipment                |                |  |                | 21,893  |               
|Building and improvements      |                |  |                | 45,138  |               
|Construction in process        |                |  |                | 4,033   |               
|                               |                |  |                |         |               
|                               |                |  |                | 113,549 |               
|Less accumulated depreciation  |                |  |                | 22,660  |               
|                               |                |  |                |         |               
|Total property and equipment   |                |  | $              | 90,889  |               
|                               |                |  |                |         |               

# 13.     Goodwill and Other
Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended October
1, 2005 were as follows:

|Balance at January 1, 2005 |  |  | $ | 37,074 | 
|-------------------------- |  |  | - | ------ | 
|Acquired                   |  |  |   | 21,109 | 
|                           |  | 
|Balance at October 1, 2005 |  |  | $ | 58,183 | 
|                           |  | 

15

---

The acquired goodwill listed above was from the Companys acquisition of
Lenox. See Note 8.

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

|                                  | October 1, 2005 |  | January 1, 2005 |         | October 2, 2004
|--------------------------------- | --------------- |  | --------------- | ------- | ---------------
|
|Finite-life intangible assets     |                 |  |                 |         |                
|Customer relationships            |                 |  | $               | 15,300  |                
|Favorable lease interests         |                 |  |                 | 2,669   |                
|Non-compete agreements            |                 |  |                 | 2,705   |                
|                                 
|Indefinite-life intangible assets
|Trademarks                        |                 |  |                 | 114,090 |                
|                                  |                 |  |                 |         |                
|                                 
|Total Intangibles                 |                 |  | $               | 134,764 |                
|                                  |                 |  |                 |         |                

The Company has determined that its trademarks are indefinite-lived
intangible assets. In accordance with and effective upon its adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, at the beginning of fiscal year 2002 the Company ceased amortization of its indefinite-lived intangible assets. The
Company continues to amortize its finite-lived intangible assets. Amortization expense for the three months ended and nine months
ended October 1, 2005 was $217 and $287, respectively; compared to the three months ended and nine months ended October 2, 2004 of
$35 and $105, respectively. Expected future amortization expense for finite-lived intangible assets is as follows:

|           | 
|---------- | 
|2005 Q4    | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

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

16

---

# 14.     Debt

Debt is comprised of the following:

|                                                               | Averageinterest rateOctober 1, 2005 |  | October 1,2005 |      | January 1,2005 |   | October 2,2004
|-------------------------------------------------------------- | ----------------------------------- |  | -------------- | ---- | -------------- | - | --------------
|Note payable to Maryland Department of Business                |                                     |  |                |      |                |   |               
|and Economic Development                                       |                                     |  |                | 3    | %              | $ | 150           
|Note payable to the County Commissioners of                   
|Washington County, Maryland                                    |                                     |  |                | 0    | %              |   | 100           
|Term loan facility*                                            |                                     |  |                | 7.18 | %              |   | 100,000       
|                                                               |                                     |  |                |      |                |   |               
|Long-term debt                                                 |                                     |  |                |      |                |   | 100,250       
|Revolving credit facility                                      |                                     |  |                | 5.94 | %              |   | 121,500       
|                                                               |                                     |  |                |      |                |   |               
|Total debt                                                     |                                     |  |                |      |                | $ | 221,750       
|                                                               |                                     |  |                |      |                |   |               
|*  Includes current portion of long-term debt of $7.5 million.

The note payable to the Maryland Department of Business and Economic
Development is a conditional promissory note that accrues interest at 3% per year. The principal and interest payments are
deferred until December 31, 2006 and thereafter are subject to multiple maturity dates determined by the Companys employment
levels at the Hagerstown, Maryland distribution facility. If the Company meets certain employment levels at December 31, 2006,
2007, and 2008 as defined by the terms of the agreement, the note may be fully or partially forgiven. As of October 1, 2005, the
Company had not achieved levels required to qualify for full or partial debt forgiveness.

The note payable to the County Commissioners of Washington County, Maryland
is a conditional grant agreement that bears no interest charges. The principal payments are deferred until December 31, 2006 and
thereafter are subject to multiple maturity dates determined by the Companys employment levels at the Hagerstown, Maryland
distribution facility. If the Company meets certain employment levels at December 31, 2006, 2007, and 2008 as defined by the terms
of the agreement, the note may be fully or partially forgiven. As of October 1, 2005, the Company had not achieved levels required
to qualify for full or partial debt forgiveness.

In September 2005, the Company acquired Lenox from Brown Forman for $204.0
million, including transaction and related fees. To finance the acquisition of Lenox, the Company entered into a new revolving
credit facility and a term loan facility. The credit facilities are available to finance the purchase of Lenox, to payoff existing
indebtedness under the Companys old revolving credit facility, and to finance working capital needs. In connection with the
new credit facilities, the Company recorded $10.1 million in deferred financing fees, which is included in other assets on the
Condensed Consolidated Balance Sheets and is being amortized over the lives of the credit facilities. The revolving credit
facility expires on September 1, 2010 and the term loan facility expires on September 1, 2011.

The credit facilities contain customary financial conditions and covenants,
including restrictions on additional indebtedness, liens, investments, capital expenditures, issuances of capital stock and
dividends. The credit facilities also require maintenance of minimum levels of interest coverage and maximum levels of leverage,
in each case at the end of each fiscal quarter. As of October 1, 2005, the Company was in compliance with all material conditions
and covenants under the credit facilities.

17

---

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

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

Borrowings under the revolving credit facility are subject to certain
borrowing base limitations. The Companys borrowing capacity under the revolving credit facility as of October 1, 2005, was
$160.5 million and fluctuates based on accounts receivable and inventory levels. The revolving credit facility provides for
commitment fees of 0.375% per annum on the daily average of the unused commitment.

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

The contractual debt maturity of the long-term debt outstanding on October 1,
2005 is as follows:

|Year    | ContractualMaturities
|------- | ---------------------
|2005 Q4 |                      
|2006    |                      
|2007    |                      
|2008    |                      
|2009    |                      
|2010    |                      
|2011    |                      

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

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

18

---

# 15.     Benefit Plans

In connection with the acquisition of Lenox from Brown Forman, the Company
assumed various defined benefit pension plans and postretirement health care plans providing retirement and health care benefits
(and related assets associated with the plans). The following table shows the funded status of the plans and the amounts the
Company recognized in its financial statements at the date of the acquisition on September 1, 2005.

Funded Status  The funded status of a plan refers to the
difference between its assets and its obligations. The table below shows the funded status of the plans as of the acquisition date
on September 1, 2005.

|                                           | PensionBenefits |  | Post-retirementHealth CareBenefits
|------------------------------------------ | --------------- |  | ----------------------------------
|Assets                                     |                 |  | $                                 
|Obligations                                |                 |  |                                   
|                                           |                 |  |                                   
|Net amount recognized on the balance sheet
|As of the acquisition date                 |                 |  | $                                 
|                                           |                 |  |                                   

The Company incurred one month of pension and post-retirement health care
expense during the third quarter ended October 1, 2005 of $544 and $157, respectively, which is recorded in selling, general and
administrative expense in the Condensed Consolidated Statement of Operations. The Company expects to incur approximately $1,632
and $470, respectively, of pension and post-retirement health care expense in the fourth quarter.

The Company contributed $4,481 to its pension plans and $14 to its
post-retirement health care plans in the third quarter ended October 1, 2005. The Company expects to contribute $100 to its
pension plans and $100 to its postretirement health care plans in the fourth quarter ended December 31, 2005.

19

---

# 16.     Deferred Taxes

The components of the deferred taxes are as follows:

|                                       | October 1,2005 |  | January 1,2005 |         | October 2,2004
|-------------------------------------- | -------------- |  | -------------- | ------- | --------------
|Deferred tax assets:                   |                |  |                |         |               
|Defined benefit pension obligation     |                |  | $              | 31,209  |               
|Severance and restructuring reserves   |                |  |                | 6,265   |               
|Asset valuation reserves               |                |  |                | 3,491   |               
|Loss on minority investment            |                |  |                | 1,520   |               
|Deferred compensation                  |                |  |                | 778     |               
|Accrued liabilities                    |                |  |                | 1,042   |               
|Other                                  |                |  |                | 843     |               
|Less: Deferred tax valuation allowance |                |  |                | (1,520  | )             
|                                       |                |  |                |         |               
|Total deferred tax assets              |                |  |                | 43,628  |               
|                                      
|Deferred tax liabilities:             
|Intangible assets                      |                |  |                | (21,126 | )             
|Property and equipment depreciation    |                |  |                | (5,955  | )             
|Prepaid and other                      |                |  |                | (3,561  | )             
|                                       |                |  |                |         |               
|Total deferred tax liabilities         |                |  |                | (30,642 | )             
|                                       |                |  |                |         |               
|                                       |                |  | $              | 12,986  |               
|                                       |                |  |                |         |               

The $12,986 net deferred tax asset at October 1, 2005 is presented as a net
deferred current asset of $8,168 and a net deferred noncurrent asset of $4,818. The $1,121 net deferred tax liability at January
1, 2005 is presented as a net deferred current asset of $4,304 and a net deferred noncurrent liability of $5,425. The $267 net
deferred tax liability at October 2, 2004 is presented as a net deferred current asset of $4,487 and a net deferred noncurrent
liability of $4,754.

# 17.     Commitments and Contingencies

# Operating Leases

The Company leases warehouse, office and retail store space, vehicles,
equipment, and showroom display facilities under renewable operating leases. In addition to the base rent, the Company pays its
proportionate share of taxes, special assessments, and operating expenses of the warehouse and retail store space and showroom
facilities.

20

---

The following is a schedule of future annual minimum lease payments for
noncancelable operating leases as of October 1, 2005:

|Year       | MinimumLeasePayments
|---------- | --------------------
|2005 Q4    |                     
|2006       |                     
|2007       |                     
|2008       |                     
|2009       |                     
|Thereafter |                     
|           |                     
|           |                     
|           |                     

Certain of the Companys leases contain pre-determined rent increases
over the life of the lease. These rent increases are included in the above-referenced minimum lease table in the year in which the
rent increase occurs. When recording rent expense, the Company amortizes the total amount of the rent payments on a straight-line
basis over the term of the lease. When the Company receives leasehold improvement funding as an incentive to enter into a lease,
the Company amortizes these incentives against rent expense on a straight line basis over the term of the lease. The
Companys rent expense for the three months ended October 1, 2005 and nine months ended October 1, 2005 was $1,970 and
$3,906, respectively; compared to the three months ended October 2, 2004 and nine months ended October 2, 2004 of $974 and $3,100,
respectively.

# Legal Proceedings

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

On May 26, 2004, Ashley Seaberg filed a product liability suit against
Department 56, Inc. and Time to Celebrate in U.S. District Court, District of Oregon, claiming that a strand of flicker lights
from defendant Time to Celebrate started a house fire. On May 16, 2005, the court granted plaintiffs motion to amend the
complaint to add a claim for $10 million in punitive damages. Trial is set for May 2006.

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

21

---

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

# 18.     Segments of the Company and
Related Information

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

|(In thousands)             | 13 WEEKSENDEDOCTOBER 1,2005 |  | % ofNet Sales |        | 13 WEEKSENDEDOCTOBER 2,2004 |  | % ofNet Sales |  | 39 WEEKSENDEDOCTOBER 1,2005 |        | % ofNet Sales |  | 39 WEEKSENDEDOCTOBER 2,2004 |   | % ofNet Sales
|-------------------------- | --------------------------- |  | ------------- | ------ | --------------------------- |  | ------------- |  | --------------------------- | ------ | ------------- |  | --------------------------- | - | -------------
|WHOLESALE:                 |                             |  |               |        |                             |  |               |  |                             |        |               |  |                             |   |              
|Net sales                  |                             |  | $             | 78,898 |                             |  | 100           |  | $                           | 50,279 |               |  | 100                         |   | $            
|Gross margin               |                             |  |               | 35,062 |                             |  | 44            |  |                             | 26,775 |               |  | 53                          |   |              
|Selling expenses           |                             |  |               | 6,369  |                             |  | 8             |  |                             | 4,206  |               |  | 8                           |   |              
|Operating income          
|from continuing operations |                             |  |               | 28,693 |                             |  | 36            |  |                             | 22,569 |               |  | 45                          |   |              
|                          
|RETAIL:                    |                             | 
|Net sales                  |                             |  | $             | 12,265 |                             |  | 100           |  | $                           | 2,872  |               |  | 100                         |   | $            
|Gross margin               |                             |  |               | 7,658  |                             |  | 62            |  |                             | 1,717  |               |  | 60                          |   |              
|Selling expenses           |                             |  |               | 5,157  |                             |  | 42            |  |                             | 2,137  |               |  | 74                          |   |              
|Operating income (loss)    |                             | 
|from continuing operations |                             |  |               | 2,501  |                             |  | 20            |  |                             | (420   | )             |  | (15                         | ) |              
|                          
|DIRECT:                   
|Net sales                  |                             |  | $             | 8,716  |                             |  | 100           |  | $                           |       |               |  |                             |   | $            
|Gross margin               |                             |  |               | 5,667  |                             |  | 65            |  |                             |       |               |  |                             |   |              
|Selling expenses           |                             |  |               | 4,185  |                             |  | 48            |  |                             |       |               |  |                             |   |              
|Operating income          
|from continuing operations |                             |  |               | 1,482  |                             |  | 17            |  |                             |       |               |  |                             |   |              
|                          
|CORPORATE:                 |                             | 
|Unallocated general and   
|administrative expenses    |                             |  | $             | 14,071 |                             |  |               |  | $                           | 7,818  |               |  |                             |   | $            
|                          
|CONSOLIDATED:              |                             | 
|Net sales                  |                             |  | $             | 99,879 |                             |  | 100           |  | $                           | 53,151 |               |  | 100                         |   | $            
|Operating income from      |                             | 
|continuing operations      |                             |  |               | 18,605 |                             |  | 19            |  |                             | 14,331 |               |  | 27                          |   |              

22

---

# 19.     Environmental Matters

As a result of the acquisition of Lenox, the Company is responsible for the
cleanup of two environmental sites in New Jersey pursuant to an Administrative Consent Order and Memorandum of Understanding with
the New Jersey Department of Environmental Protection. The Company accrues for losses associated with environmental cleanup
obligations when such losses are probable and can be reasonably estimated. At one of these sites there are other potentially
responsible parties who bear part of the cost of the cleanup, in which case the Companys accrual is based on the
Companys share of the total costs. Also, a portion of the cleanup costs with respect to these two sites is paid by
insurance. The estimated recovery of cleanup costs is recorded as an asset when receipt is deemed probable.

As of October 1, 2005, the Company estimated, based on engineering studies,
total remediation and ongoing monitoring costs to be made in the future to be $4.7 million, including the effects of inflation.
Accordingly, the Company recorded a liability of approximately $3.2 million in other noncurrent liabilities, which represents the
net present value of the estimated future costs discounted at 6%. The estimated insurance recovery assets as of October 1, 2005
was $1.7 million and is included in other assets.

# 20.     Subsequent Event

In October 2005, the Company committed to a plan to cease operations of its
Time to Celebrate business. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company will record Time to Celebrates results in continuing operations
until the run-off of operations is complete, which is expected to be in the fourth quarter of 2005. When the run-off is complete,
the Time to Celebrate results will be reclassified into discontinued operations for all periods presented.

23

---

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

# RESULTS OF OPERATIONS

Effective September 1, 2005, the Company completed the acquisition of Lenox
from Brown Forman. The significant increase in assets and liabilities shown on the Condensed Consolidated Balance Sheets are the
result of this acquisition. See Note 8 to the condensed consolidated financial statements. The results of operations explained
below include the results of operations of Lenox from the acquisition date of September 1, 2005. The discussion below also reports
results of operations excluding the acquisition which are non-GAAP measures. Management believes these non-GAAP measures provide
useful information to investors regarding the Companys results from continuing operations because it provides a more
meaningful comparison and understanding of the Companys operating performance compared to last year. These non-GAAP measures
should not be considered an alternative to the results from operations which are determined in accordance with GAAP.

This Item should be read in conjunction with the segment financial table
presented in Note 18 to the condensed consolidated financial statements and the reconciliation of non-GAAP financial measures
presented below. Other components of the Condensed Consolidated Statement of Operations which are classified below income from
operations (i.e. interest expense, provision for income taxes, etc.) are not allocated by segment and are discussed separately.

24

---

Reconciliation of Non-GAAP Financial Measures
(in millions except per share amounts)

|                                     | Quarter EndedOctober 1, 2005 |  | 39 Weeks EndedOctober 1, 2005
|------------------------------------ | ---------------------------- |  | -----------------------------
|
|WHOLESALE:                           |                              |  |                              
|Net sales                            |                              |  | $                            
|Gross margin                         |                              |  |                              
|Gross margin as a % of net sales     |                              |  |                              
|Selling expenses                     |                              |  |                              
|Selling expenses as a % of net sales |                              |  |                              
|Income from operations               |                              |  |                              
|                                    
|RETAIL:                              |                              | 
|Net sales                            |                              |  | $                            
|Gross margin                         |                              |  |                              
|Gross margin as a % of net sales     |                              |  |                              
|Selling expenses                     |                              |  |                              
|Selling expenses as a % of net sales |                              |  |                              
|Income (loss) from operations        |                              |  |                              
|                                    
|DIRECT:                             
|Net sales                            |                              |  | $                            
|Gross margin                         |                              |  |                              
|Gross margin as a % of net sales     |                              |  |                              
|Selling expenses                     |                              |  |                              
|Selling expenses as a % of net sales |                              |  |                              
|Income from operations               |                              |  |                              
|                                    
|CORPORATE:                           |                              | 
|Unallocated general and             
|administrative expenses              |                              |  | $                            
|                                    
|CONSOLIDATED:                        |                              | 
|Net sales                            |                              |  | $                            
|Operating income from                |                              | 
|continuing operations                |                              |  |                              
|                                    
|Operating Expense (Income):         
|Interest expense                     |                              |  |                              
|Other, net                           |                              |  |                              
|                                    
|Income Tax expense                   |                              |  |                              
|                                    
|Income from continuing operations    |                              |  | $                            
|                                    
|Income from continuing operations    |                              | 
|per share  assuming dilution        |                              |  | $                            

# Comparison of Results of Operations for the Quarter Ended
October 1, 2005 to the Quarter Ended October 2, 2004.

Wholesale

Net sales increased $28.6 million, or 57%, to $78.9 million in 2005 from
$50.3 million in 2004 reflecting the impact of the acquisition. Excluding the acquisition, net sales decreased 5% to $47.6
million. The decrease was principally due to a reduction in product shipments as a result of the continued cautious buying
patterns and the continued attrition among the Companys dealers.

25

---

Gross profit as a percentage of net sales was 44% and 53% in the third
quarter of 2005 and 2004, respectively. Excluding the acquisition, the gross profit percentage was 46%. The decrease in the gross
profit percentage was principally due to the Companys more aggressive pricing of many of its new items and its decision not
to pass on cost increases on some of its existing items.

Selling expenses were $6.4 million or 8% of sales in 2005 compared to $4.2
million or 8% of sales in 2004. The increase in selling expenses reflected the impact of the acquisition. Excluding the
acquisition, selling expenses were $4.1 million, or 9% of sales.

Operating income from continuing operations increased to $28.7 million in
2005 from $22.6 million in 2004. The increase in operating income reflected the impact of the acquisition. Excluding the
acquisition, operating income decreased to $17.7 million, with the decrease principally due to the reduction in product shipments
as explained above.

Retail

Net sales increased $9.4 million, or 327%, to $12.3 million in 2005 from $2.9
million in 2004 reflecting the impact of the acquisition. Excluding the acquisition, net sales were up 7% to $3.1 million. The
increase was principally due to a same-store sales increase of 10%, partially offset by a 13% decrease in Time to Celebrate sales.

Gross profit as a percentage of net sales was 62% and 60% in the third
quarter of 2005 and 2004, respectively. Excluding the acquisition, the gross profit percentage was 64%. The increase in the gross
margin percentage was principally due to a write-down of excess Time to Celebrate inventory of $0.3 million in 2004.

Selling expenses were $5.2 million in 2005 compared to $2.1 million in 2004
reflecting the impact of the acquisition. Excluding the acquisition, selling expense was $1.7 million. The decrease in selling
expenses were primarily due to a gain related to the lease buyout and relocation of one of the Companys retail stores.

Operating income from continuing operations increased from a loss of $0.4
million in 2004 to income of $2.5 million in 2005. Excluding the acquisition, operating income increased to $0.3 million in 2005.
The increase in income from continuing operations was principally due to lower selling expenses as explained above.

Direct

Net sales from the direct business acquired as part of the Lenox acquisition
were $8.7 million. The gross profit percentage was 65%. Selling expenses were $4.2 million, or 48% of sales, and operating income
from continuing operations was $1.5 million.

Corporate

Unallocated general and administrative expense was $14.1 million in the third
quarter of 2005 compared to $7.8 million in 2004 reflecting the impact of the acquisition. Excluding the acquisition, unallocated
general and administrative expense was $6.6 million. The decrease was principally due to lower employee benefit expense.

26

---

Provision for Income Taxes

The effective income tax rate was 36.4% and 36.0% during the third quarter of
2005 and 2004, respectively. Excluding the acquisition, the effective income tax rate for the third quarter of 2005 was 33.2%,
reflecting a $0.3 million adjustment for the reversal of prior year tax accruals that were no longer necessary.

Comparison of Results of Operations for the 39 Weeks Ended October 1,
2005 to the 39 Weeks Ended October 2, 2004.

Wholesale

Net sales increased $15.7 million, or 13%, to $132.0 million in 2005 from
$116.3 million in 2004 reflecting the impact of the acquisition. Excluding the acquisition, net sales were down 13% to $100.7
million. The decrease was principally due to a reduction in product shipments as a result of the continued cautious buying
patterns and the continued attrition among the Companys dealers.

Gross profit as a percentage of net sales was 45% and 53% in the first nine
months of 2005 and 2004, respectively. Excluding the acquisition, the gross profit percentage was 46%. The decrease was primarily
due to the Companys more aggressive pricing of many of its new items and its decision not to pass on cost increases on some
of its existing items.

Selling expenses were $12.8 million or 10% of sales in 2005 compared to $10.8
million or 9% of sales in 2004. The increase in selling expenses reflected the impact of the acquisition. Excluding the
acquisition, selling expenses were $10.5 million, or 10% of sales.

Operating income from continuing operations decreased to $46.8 million in
2005 from $51.1 million in 2004. Excluding the acquisition, operating income decreased to $35.8 million, with the decrease
principally due to the reduction in product shipments and decrease in gross profit percentage as explained above.

Retail

Net sales increased $10.1 million, or 167%, to $16.1 million in 2005 from
$6.0 million in 2004 reflecting the impact of the acquisition. Excluding the acquisition, revenues were up 14% to $6.9 million.
The increase was principally due to a same-store sales increase of 6%, and the opening of a new retail store in June 2004 (which
operated during the first nine months of 2005, but only a portion of the first nine months of 2004).

Gross profit as a percentage of net sales was 60% in the first nine months of
both 2005 and 2004. Excluding the acquisition, the gross profit percentage was 58%. The decrease in the gross profit percentage
was principally due to the Companys more aggressive pricing of many of its new items as discussed under the Wholesale
segment above.

27

---

Selling expenses were $8.9 million in 2005 compared to $5.9 million in 2004
reflecting the impact of the acquisition. Excluding the acquisition, selling expenses were $5.4 million. The decrease in selling
expenses was primarily due to a gain related to the lease buyout and relocation of one of the Companys retail stores.

Operating income from continuing operations increased from a loss of $2.2
million in 2004 to income of $0.8 million in 2005. Excluding the acquisition, the operating loss decreased to $1.4 million in
2005. The decrease in the loss from continuing operations was principally due to lower selling expenses as explained above.

Direct

Net sales from the direct business acquired as part of the Lenox acquisition
were $8.7 million. The gross profit percentage was 65%. Selling expenses were $4.2 million, or 48% of sales, and operating income
from continuing operations was $1.5 million.

Corporate

Unallocated general and administrative expense was $28.2 million in the first
nine months of 2005 compared to $22.6 in the first nine months of 2004 reflecting the impact of the acquisition. Excluding the
acquisition, unallocated general and administrative expense was $20.7 million. The decrease was principally due to lower employee
benefit expense.

Provision for Income Taxes

The effective income tax rate was 36.4% and 36.0% during the first nine
months of 2005 and 2004, respectively. Excluding the acquisition, the effective income tax rate for the first nine months of 2005
was 33.7%, reflecting a $0.3 million adjustment for the reversal of prior year tax accruals that were no longer necessary.

Loss from Discontinued Operations, Net of Tax

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

# SEASONALITY

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

28

---

# LIQUIDITY AND CAPITAL RESOURCES

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

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

# Cash Flows from Operations

Net cash used in operating activities increased $12.3 million during the
first nine months of 2005 compared to the first nine months of 2004 principally due to the seasonal working capital requirements
of the acquired Lenox business.

# Cash Flows from Investing Activities

Effective September 1, 2005, the Company completed the acquisition of all of
the capital stock of Lenox from Brown Forman for $204.0 million, which included transaction costs of $7.6 million. See Note 8 to
the condensed consolidated financial statements.

# Cash Flows from Financing Activities

To finance the acquisition of Lenox (see Cash Flows from Investing Activities
above), the Company entered into a new credit facility which includes a revolving credit facility and a term loan facility. See
Note 14 to the condensed consolidated financial statements.

# OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have off-balance sheet arrangements.

29

---

# CONTRACTUAL OBLIGATIONS

As of October 1, 2005, the Company is obligated to make cash payments in
connection with its debt obligations, operating leases, purchase obligations, and royalty guarantees in the amounts listed below.
The Company has no unrecorded obligations other than the items noted in the following table:

|           | Payments Due (in thousands)
|---------- | ---------------------------
|
|2005 Q4    |                            
|2006       |                            
|2007       |                            
|2008       |                            
|2009       |                            
|2010       |                            
|Thereafter |                            
|           |                            
|           |                            
|           |                            

|1 | The
Companys borrowings under the revolving credit facility are classified as current
liabilities on the Condensed 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 October 1,
2005 of 5.94% and 7.18%, respectively.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | The
Company is committed to pay suppliers of product under the terms of open purchase orders
issued in the normal course of business.
|- | -------------------------------------------------------------------------------------------------------------------------------------

|4 | The
Company is committed to pay licensors under the terms of license agreements entered into
in the normal course of business.
|- | ------------------------------------------------------------------------------------------------------------------------------

As of October 1, 2005, the Company had unfunded pension and postretirement
benefit obligations of $113,658. Because the specific periods in which those obligations will be funded are not known at this time, no
amounts related to those obligations are reflected in the above table.

# CREDIT AND RETURN POLICIES

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

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

# CRITICAL ACCOUNTING POLICIES

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

30

---

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

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

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

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

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

31

---

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

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

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

Notes concerning forward-looking statements:

Any conclusions or expectations expressed in, or drawn from, the statements in this filing concerning matters that are not
historical corporate financial results are forward-looking statements that involve risks and uncertainties. These
statements are based on managements estimates, assumptions and projections as of today and are not guarantees of future
performance. Such risks and uncertainties that could affect performance include, but are not limited to, the ability of
Department 56 to: (1) integrate Lenox into its business; (2) achieve revenue or cost synergies; and (3) generate cash flow to
pay off debt. Actual results may vary materially from forward-looking statements and the assumptions on which they are based. The
Company undertakes no obligation to update or publish in the future any forward-looking statements. Please read the bases,
assumptions and factors set out in Item 7 in the Companys 2004 Annual Report on Form 10-K filed with the SEC, all of which
is incorporated herein by reference and applicable to the forward-looking statements set forth herein.

32

---

# Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Effective September 1, 2005, the Company completed the acquisition of all of
the capital stock of Lenox from Brown Forman for $204.0 million, which included transaction costs of $7.6 million. The Company
funded this acquisition principally through variable interest rate debt obtained under its new credit facility. As a result of
this additional variable interest rate debt, the Companys market risk related to interest rate changes has increased. Based
on debt outstanding at October 1, 2005, a one percentage point increase or decrease in current market interest rates would have an
impact of approximately $2.2 million on an annual basis.

There have been no other significant changes in the Companys exposure
to market risk since January 1, 2005.

# Item 4.   Controls and Procedures

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

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

33

---

# 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 in United States District
Court for the Northern District of California.  In November 2004, plaintiffs filed a consolidated amended complaint alleging
that for the period beginning at least as early as May 1, 2001 through the filing of the amended complaint on November 12, 2004,
defendants violated Section 1 of the Sherman Act by conspiring to fix prices and to boycott sales to Bed, Bath & Beyond. 
Plaintiffs seek to recover an undisclosed amount of damages, trebled in accord with anti-trust laws, as well as costs, attorney
fees and injunctive relief.

On May 26, 2004, Ashley
Seaberg filed a product liability suit against Department 56, Inc. and Time to Celebrate in U.S. District Court, District of
Oregon, claiming that a strand of flicker lights from defendant Time to Celebrate started a house fire. On May 16, 2005, the court
granted plaintiffs motion to amend the complaint to add a claim for $10 million in punitive damages. Trial is set for May
2006.

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

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

34

---

# Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides
information about repurchases by the Company of the Companys common stock during the quarter ended October 1, 2005.

|Period                |  |  | Total Number ofShares Purchased (1) |     | Average Price PaidPer Share |  | Total Number ofShares Purchased asPart of PubliclyAnnounced Plans or Programs (2) |  | Approximate DollarValue of Shares ThatMay Yet be PurchasedUnder the Plans or Programs
|--------------------- |  |  | ----------------------------------- | --- | --------------------------- |  | --------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|7/3/2005 - 7/30/2005  |  |  |                                     |    |                             |  |                                                                                  |  |                                                                                      
|                      |  |  |                                     |     |                             |  |                                                                                   | 
|7/31/2005 - 8/27/2005 |  |  |                                     | 563 |                             |  | 13.95                                                                             |  |                                                                                      
|                      |  |  |                                     |     |                             |  |                                                                                   | 
|8/28/2005 - 10/1/2005 |  |  |                                     |    |                             |  |                                                                                  |  |                                                                                      
|                      |  |  |                                     |     |                             |  |                                                                                   | 
|Total                 |  |  |                                     | 563 |                             |  | 13.95                                                                             |  |                                                                                      
|                      |  |  |                                     |     |                             |  |                                                                                   | 

|(1) |  | The total number of shares purchased represents the
number of shares tendered to cover the withholding taxes due upon vesting of shares of restricted stock.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The Company does not currently have a repurchase
program.
|--- |  | ---------------------------------------------------------

# Item 6.   Exhibits

| |  | 3.1 |  | Restated Certificate of Incorporation of the Company.
(Incorporated herein by reference to Exhibit 3.1 of Registrants Quarterly Report on Form 10-Q for the quarter
ended July 3, 1993. SEC File No. 1-11908.)
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.2 |  | Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of the Company. (Incorporated herein by reference to Exhibit 1.1 of
Registrants Amendment No. 1, dated May 12, 1997, to Registration Statement on Form 8-A, dated April 23,
1997. SEC File No. 1-11908.)
| |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 3.3 |  | Restated By-Laws of the Company. (Incorporated herein by reference
to Exhibit 3.2 of Registrants Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2
of Registrants Current Report on Form 8-K dated February 15, 1996. SEC File No. 1-11908.)
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.1 |  | Specimen Form of Companys Stock Certificate
| |  | --- |  | --------------------------------------------

| |  | 4.2 |  | Rights Agreement (including Exhibits A, B and C thereto)
dated as of April 23, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated
herein by reference to Exhibit 1 of Registrants Registration Statement on Form 8-A, dated April 23, 1997. SEC
File No. 1-11908.)
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35

---

| |  | 4.3 |  | First Amendment dated as of March 13, 1998, to Rights
Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to
Exhibit 1 to Registrants Amendment No. 2, dated March 16, 1998, to Registration Statement on Form 8-A,
dated April 23, 1997. SEC File No. 1-11908.)
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.4 |  | Amendment No. 2 to Rights Agreement, dated as of
February 25, 1999, between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
reference to Exhibit 99.2 of Registrants Current Report on Form 8-K dated February 26, 1999. SEC File
No. 1-11908.)
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4.5 |  | Letter Agreement Adopting the Rights Agreement, dated as of
March 14, 2005, between the Company and Wells Fargo Shareholder Services, as Rights Agent. (Incorporated herein by reference
to Exhibit 4.5 of Registrants Annual Report on Form 10-K for the fiscal year ended January 1, 2005. SEC File
No. 1-11908.)
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.1 |  | Stock Purchase Agreement, dated as of July 21, 2005, by and
between Department 56, Inc. and Brown-Forman Corporation. (Incorporated herein by reference to Exhibit 10.1 of
Registrants Current Report on Form 8-K, filed on July 25, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.2 |  | Revolving Credit Agreement dated as of September 1, 2005,
among D 56, Inc., Department 56 Retail, Inc., Time to Celebrate Inc. and Lenox, Incorporated, as Borrowers,
Department 56, Inc. and the other Guarantors party thereto, as Guarantors, the Lenders party thereto, UBS Securities LLC, as
Arranger and Co-Syndication Agent, UBS AG, Stamford Branch, as Issuing Bank and Administrative Agent, UBS Loan Finance LLC, as
Swingline Lender, JP Morgan Chase Bank, N.A., as Collateral Agent and Co-Syndication Agent, and Wells Fargo Foothill, LLC and Bank
of America, N.A. as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.1 of Registrants Current
Report on Form 8-K, filed on September 6, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.3 |  | Term Loan Credit Agreement dated as of September 1, 2005,
among D 56, Inc., Department 56 Retail, Inc., Time to Celebrate, Inc. and Lenox, Incorporated, as Borrowers,
Department 56, Inc. and the other Guarantors party thereto, as Guarantors, the Lenders party thereto, UBS Securities LLC, as
Sole Arranger and Syndication Agent, UBS AG, Stamford Branc, as Administrative Agent and Collateral Agent, and Wells Fargo
Foothill, LLC, as Documentation Agent. (Incorporated herein by reference to Exhibit 10.2 of Registrants Current Report
on Form 8-K, filed on September 6, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

| |  | 10.4 |  | Security Agreement, relating to the Revolving Credit Agreement, by
D 56, Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox, Incorporated, as Borrowers,
Department 56, Inc., and the other Guarantors party thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative
Agent, dated as of September 1, 2005. (Incorporated herein by reference to Exhibit 10.3 of Registrants Current
Report on Form 8-K, filed on September 6, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.5 |  | Security Agreement, relating to the Term Loan Agreement, by
D 56, Inc., Department 56 Retail, Inc., Time To Celebrate, Inc. and Lenox, Incorporated, as Borrowers,
Department 56, Inc., and the other Guarantors party thereto, as Guarantors and UBS AG, Stamford Branch, as Administrative
Agent, dated as of September 1, 2005. (Incorporated herein by reference to Exhibit 10.4 of Registrants Current
Report on Form 8-K, filed on September 6, 2005, SEC File No. 1-11908.)
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.6 |  | Letter
Agreement, dated September 26, 2005, between Linda Jones Miller and Department 56, Inc. (Incorporated herein by
reference to Exhibit 10.1 of Registrants Current Report on Form 8-K, filed on October 4, 2005, SEC File
No. 1-11908.)
| |  | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.7 |  | Form of Retention Agreement between Lenox, Inc. and
certain executive officers. (Incorporated herein by reference to Exhibit 10.1 of Registrants Current Report on
Form 8-K, filed on November 2, 2005, SEC File No. 1-11908.)
| |  | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.8 |  | Form of Letter Agreement between Department 56, Inc. and
certain executive officers. (Incorporated herein by reference to Exhibit 10.2 of Registrants Current Report on
Form 8-K, filed on November 2, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.9 |  | Form of Registered Stock Agreement between Department
56, Inc. and certain executive officers. (Incorporated herein by reference to Exhibit 10.3 of Registrants Current
Report on Form 8-K, filed on November 2, 2005, SEC File No. 1-11908.)
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 10.10 |  | Restricted Stock Agreement, dated as of September 30, 2005,
between Linda Jones Miller and Department 56, Inc.
| |  | ----- |  | --------------------------------------------------------------------------------------------------------------

| |  | 11.1 |  | Computation of net income per share
| |  | ---- |  | -----------------------------------

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

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

| |  | 32.1 |  | Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
| |  | ---- |  | -------------------------------------------------------------------------------

37

---

# SIGNATURES

Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|      | DEPARTMENT 56, INC.                                                              
|----- | ---------------------------------------------------------------------------------
|     
|     
|Date: | November 10, 2005                                                                
|      | Susan E. Engel                                                                   
|      | Chairwoman of the Board and Chief Executive Officer
(Principal Executive Officer)

|      |                                                                    
|----- | -------------------------------------------------------------------
|     
|     
|Date: | November 10, 2005                                                  
|      | Timothy J. Schugel                                                 
|      | Chief Financial and Operating Officer
(Principal Financial Officer)

38

---

# EXHIBIT INDEX

|ExhibitNumber |  | Description
|------------- |  | -----------

|4.1 |  |  | Specimen
Form of Companys Stock Certificate
|--- |  |  | --------------------------------------------

|10.10 |  |  | Restricted Stock Agreement, dated as of September 30, 2005, between Linda Jones Miller and
Department 56, Inc.
|----- |  |  | --------------------------------------------------------------------------------------------------------------

|11.1 |  |  | Computation
of net income per share
|---- |  |  | -----------------------------------

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

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

|32.1 |  |  | Officer
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  |  | -------------------------------------------------------------------------------

39

---