UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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### FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934



|For the quarterly period ended:September 30, 2006
|-------------------------------------------------



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



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

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

One Village Place, 6436 City West Parkway, Eden Prairie, MN 55344

(Address of principal executive offices)

(Zip Code)



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

Not Applicable

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





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Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes
xNo o

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

Large accelerated filer
oAccelerated filer
xNon-accelerated filer
o

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

Yes oNo x

As of October 27, 2006, 14,125,111 shares of the registrants common
stock, par value $.01 per share, were outstanding.







PART I
-  FINANCIAL INFORMATION

|Item  1. | Financial Statements
|-------- | --------------------

LENOX GROUP INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

|                                               |  |                      |         |                     |   |                   |  |   |         | 
|---------------------------------------------- |  | -------------------- | ------- | ------------------- | - | ----------------- |  | - | ------- | 
|                                               |  | SEPTEMBER 30,
  2006 |         | DECEMBER 31,
  2005 |   | OCTOBER 1,
  2005 | 
|                                               |  |                      |         |                     |   |                   | 
|ASSETS                                         |  |                      |         |                     |   |                   |  |   |         | 
|Current assets:                                |  |                      |         |                     |   |                   |  |   |         | 
|Cash and cash equivalents                      |  | $                    | 429     |                     | $ | 1,279             |  | $ | 1,728   | 
|Accounts receivable, net                       |  |                      | 121,360 |                     |   | 55,563            |  |   | 128,801 | 
|Inventories                                    |  |                      | 127,950 |                     |   | 94,346            |  |   | 138,339 | 
|Deferred taxes                                 |  |                      | 13,375  |                     |   | 13,380            |  |   | 8,168   | 
|Income tax receivable                          |  |                      | 5,370   |                     |   |                  |  |   |        | 
|Other current assets                           |  |                      | 11,609  |                     |   | 8,411             |  |   | 13,613  | 
|Current assets of discontinued operations      |  |                      |        |                     |   |                  |  |   | 2,841   | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|Total current assets                           |  |                      | 280,093 |                     |   | 172,979           |  |   | 293,490 | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|Property and equipment, net                    |  |                      | 70,300  |                     |   | 71,428            |  |   | 90,781  | 
|Assets held for sale                           |  |                      | 5,508   |                     |   | 17,018            |  |   |        | 
|Goodwill                                       |  |                      | 18,195  |                     |   | 53,769            |  |   | 58,183  | 
|Trademarks, net                                |  |                      | 122,718 |                     |   | 121,971           |  |   | 109,951 | 
|Other intangibles, net                         |  |                      | 14,715  |                     |   | 17,037            |  |   | 18,338  | 
|Marketable securities                          |  |                      | 1,963   |                     |   | 2,449             |  |   | 2,349   | 
|Deferred taxes                                 |  |                      |        |                     |   |                  |  |   | 4,818   | 
|Other assets                                   |  |                      | 10,207  |                     |   | 13,277            |  |   | 12,164  | 
|Noncurrent assets of
  discontinued operations |  |                      |        |                     |   |                  |  |   | 108     | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|                                               |  | $                    | 523,699 |                     | $ | 469,928           |  | $ | 590,182 | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY           |  |                      |         |                     |   |                   |  |   |         | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|Current liabilities:                           |  |                      |         |                     |   |                   |  |   |         | 
|Current portion of long-term debt              |  | $                    | 9,155   |                     | $ | 10,000            |  | $ | 7,500   | 
|Borrowings on revolving credit facility        |  |                      | 128,644 |                     |   | 10,468            |  |   | 121,500 | 
|Accounts payable                               |  |                      | 55,158  |                     |   | 31,270            |  |   | 39,043  | 
|Accrued compensation and benefits payable      |  |                      | 11,135  |                     |   | 16,538            |  |   | 17,046  | 
|Income tax payable                             |  |                      |        |                     |   | 6,590             |  |   | 11,598  | 
|Severance and restructuring reserves           |  |                      | 3,809   |                     |   | 12,201            |  |   | 14,503  | 
|Other current liabilities                      |  |                      | 4,830   |                     |   | 6,554             |  |   | 6,306   | 
|Current liabilities of discontinued
operations |  |                      |        |                     |   | 32                |  |   | 74      | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|Total current liabilities                      |  |                      | 212,731 |                     |   | 93,653            |  |   | 217,570 | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|Deferred compensation
  obligation             |  |                      | 1,984   |                     |   | 2,489             |  |   | 2,353   | 
|Pension obligations                            |  |                      | 77,997  |                     |   | 87,014            |  |   | 85,476  | 
|Postretirement obligations                     |  |                      | 29,304  |                     |   | 28,560            |  |   | 28,218  | 
|Deferred taxes                                 |  |                      | 233     |                     |   | 1,424             |  |   |        | 
|Long-term debt                                 |  |                      | 74,203  |                     |   | 90,250            |  |   | 92,750  | 
|Other noncurrent
  liabilities                 |  |                      | 6,812   |                     |   | 4,789             |  |   | 5,014   | 
|Commitments and
  contingencies (Note 13)      |  |                      |         |                     |   |                   |  |   |         | 
|Stockholders equity                           |  |                      | 120,435 |                     |   | 161,749           |  |   | 158,801 | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 
|                                               |  | $                    | 523,699 |                     | $ | 469,928           |  | $ | 590,182 | 
|                                               |  |                      |         |                     |   |                   |  |   |         | 

See notes to condensed consolidated financial statements.

2

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LENOX GROUP INC AND SUBSIDIARIES

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

|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|------------------------------------------------------------ |  | --------------------------------------- | ------- | ------------------------------------ | - | --------------------------------------- | - | ------------------------------------ | ------- | - | - | ------- | -
|                                                             |  | 13 WEEKS
  ENDED
  SEPTEMBER 30,
  2006 |         | 13 WEEKS
  ENDED
  OCTOBER 1,
  2005 |   | 39 WEEKS
  ENDED
  SEPTEMBER 30,
  2006 |   | 39 WEEKS
  ENDED
  OCTOBER 1,
  2005 |        
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |        
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET SALES                                                    |  | $                                       | 154,035 |                                      | $ | 99,471                                  |   | $                                    | 342,249 |   | $ | 155,444 |  
|COST OF SALES                                                |  |                                         | 80,528  |                                      |   | 50,799                                  |   |                                      | 171,977 |   |   | 78,550  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|Gross profit                                                 |  |                                         | 73,507  |                                      |   | 48,672                                  |   |                                      | 170,272 |   |   | 76,894  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|OPERATING EXPENSES:                                          |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|Selling, general and administrative                          |  |                                         | 60,546  |                                      |   | 29,494                                  |   |                                      | 170,852 |   |   | 54,352  |  
|Goodwill impairment                                          |  |                                         |        |                                      |   |                                        |   |                                      | 37,074  |   |   |        |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS           |  |                                         | 12,961  |                                      |   | 19,178                                  |   |                                      | (37,654 | ) |   | 22,542  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|OTHER EXPENSE (INCOME):                                      |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|Interest expense                                             |  |                                         | 4,802   |                                      |   | 1,623                                   |   |                                      | 11,809  |   |   | 1,737   |  
|Other, net                                                   |  |                                         | (4      | )                                    |   | (468                                    | ) |                                      | (75     | ) |   | (746    | )
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES |  |                                         | 8,163   |                                      |   | 18,023                                  |   |                                      | (49,388 | ) |   | 21,551  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|INCOME TAX EXPENSE (BENEFIT)                                 |  |                                         | 2,776   |                                      |   | 6,564                                   |   |                                      | (6,508  | ) |   | 7,834   |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                     |  |                                         | 5,387   |                                      |   | 11,459                                  |   |                                      | (42,880 | ) |   | 13,717  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS NET OF TAX                 |  |                                         |        |                                      |   | (397                                    | ) |                                      |        |   |   | (1,165  | )
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET INCOME (LOSS)                                            |  | $                                       | 5,387   |                                      | $ | 11,062                                  |   | $                                    | (42,880 | ) | $ | 12,552  |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE  BASIC:                         |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|Income (loss) per share from continuing
operations           |  | $                                       | 0.39    |                                      | $ | 0.84                                    |   | $                                    | (3.12   | ) | $ | 1.00    |  
|Loss per share from discontinued
operations                  |  |                                         |        |                                      |   | (0.03                                   | ) |                                      |        |   |   | (0.08   | )
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE  BASIC                          |  | $                                       | 0.39    |                                      | $ | 0.81                                    |   | $                                    | (3.12   | ) | $ | 0.92    |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE  ASSUMING DILUTION:             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|Income (loss) per share from continuing
operations           |  | $                                       | 0.39    |                                      | $ | 0.84                                    |   | $                                    | (3.12   | ) | $ | 0.99    |  
|Loss per share from discontinued
operations                  |  |                                         |        |                                      |   | (0.03                                   | ) |                                      |        |   |   | (0.08   | )
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|NET INCOME (LOSS) PER SHARE  ASSUMING DILUTION              |  | $                                       | 0.39    |                                      | $ | 0.81                                    |   | $                                    | (3.12   | ) | $ | 0.91    |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|                                                             |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|WEIGHTED AVERAGE SHARES OUTSTANDING:                         |  |                                         |         |                                      |   |                                         |   |                                      |         |   |   |         |  
|BASIC                                                        |  |                                         | 13,758  |                                      |   | 13,688                                  |   |                                      | 13,743  |   |   | 13,661  |  
|ASSUMING DILUTION                                            |  |                                         | 13,795  |                                      |   | 13,713                                  |   |                                      | 13,743  |   |   | 13,786  |  

See notes to condensed consolidated financial statements.

3

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LENOX GROUP INC AND SUBSIDIARIES

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

|                                                                   |  |                                         |          |                                      |   |          |  
|------------------------------------------------------------------ |  | --------------------------------------- | -------- | ------------------------------------ | - | -------- | -
|                                                                   |  | 39 WEEKS
  ENDED
  SEPTEMBER 30,
  2006 |          | 39 WEEKS
  ENDED
  OCTOBER 1,
  2005 |  
|                                                                   |  |                                         |          |                                      |  
|                                                                   |  |                                         |          |                                      |   |          |  
|CASH FLOWS FROM OPERATING
  ACTIVITIES:                            |  |                                         |          |                                      |   |          |  
|Net cash used in operating activities                              |  | $                                       | (100,633 | )                                    | $ | (49,608  | )
|Net cash used in operating activities from
discontinued operations |  |                                         | (32      | )                                    |   | (1,446   | )
|                                                                   |  |                                         |          |                                      |   |          |  
|Net cash used in operating activities                              |  |                                         | (100,665 | )                                    |   | (51,054  | )
|                                                                   |  |                                         |          |                                      |   |          |  
|CASH FLOWS FROM INVESTING
  ACTIVITIES:                            |  |                                         |          |                                      |   |          |  
|Purchases of property and equipment                                |  |                                         | (8,678   | )                                    |   | (1,087   | )
|Proceeds from sale of assets                                       |  |                                         | 10,340   |                                      |   | 110      |  
|Sale of available-for-sale securities                              |  |                                         |         |                                      |   | 11,150   |  
|Acquisitions                                                       |  |                                         | (2,990   | )                                    |   | (204,036 | )
|Net cash used in investing activities from
discontinued operations |  |                                         |         |                                      |   | (3       | )
|                                                                   |  |                                         |          |                                      |   |          |  
|Net cash used in investing activities                              |  |                                         | (1,328   | )                                    |   | (193,866 | )
|                                                                   |  |                                         |          |                                      |   |          |  
|                                                                   |  |                                         |          |                                      |   |          |  
|CASH FLOWS FROM FINANCING
  ACTIVITIES:                            |  |                                         |          |                                      |   |          |  
|Proceeds from the exercise of common stock
options                 |  |                                         | 340      |                                      |   | 1,538    |  
|Payments of deferred financing fees                                |  |                                         | (397     | )                                    |   | (10,125  | )
|Excess tax benefits from stock-based
compensation                  |  |                                         | 7        |                                      |   |         |  
|Borrowings on revolving credit facility                            |  |                                         | 118,176  |                                      |   | 121,500  |  
|Principal payments on capital leases                               |  |                                         | (91      | )                                    |   |         |  
|Purchases of treasury stock                                        |  |                                         |         |                                      |   | (8       | )
|Borrowings on long-term debt                                       |  |                                         |         |                                      |   | 100,000  |  
|Payments on long-term debt                                         |  |                                         | (16,892  | )                                    |   |         |  
|                                                                   |  |                                         |          |                                      |   |          |  
|Net cash provided by financing activities                          |  |                                         | 101,143  |                                      |   | 212,905  |  
|                                                                   |  |                                         |          |                                      |   |          |  
|                                                                   |  |                                         |          |                                      |   |          |  
|NET DECREASE IN CASH AND
  CASH EQUIVALENTS                        |  |                                         | (850     | )                                    |   | (32,015  | )
|                                                                   |  |                                         |          |                                      |   |          |  
|CASH AND CASH EQUIVALENTS
  AT BEGINNING OF PERIOD                 |  |                                         | 1,279    |                                      |   | 33,743   |  
|                                                                   |  |                                         |          |                                      |   |          |  
|                                                                   |  |                                         |          |                                      |   |          |  
|CASH AND CASH EQUIVALENTS
  AT END OF PERIOD                       |  | $                                       | 429      |                                      | $ | 1,728    |  
|                                                                   |  |                                         |          |                                      |   |          |  
|                                                                   |  |                                         |          |                                      |   |          |  
|SUPPLEMENTAL DISCLOSURES
  OF CASH FLOW INFORMATION               |  |                                         |          |                                      |   |          |  
|Depreciation expense from continuing
operations                    |  | $                                       | 9,269    |                                      | $ | 3,390    |  
|Intangible amortization expense                                    |  |                                         | 2,322    |                                      |   | 287      |  
|Cash paid (received) for:                                          |  |                                         |          |                                      |   |          |  
|Interest                                                           |  |                                         | 10,614   |                                      |   | 570      |  
|Income taxes                                                       |  |                                         | 2,227    |                                      |   | (765     | )

See notes to condensed consolidated financial
statements.

4

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LENOX GROUP INC AND SUBSIDIARIES

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

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

The
accompanying Condensed Consolidated Balance Sheet as of December 31, 2005 was
derived from the audited consolidated balances as of that date. The remaining
accompanying condensed consolidated financial statements are unaudited and, in
the opinion of management, include all adjustments necessary for a fair
presentation.

The results of
operations for the quarter and 39 weeks ended September 30, 2006 and October 1,
2005, respectively, are not necessarily indicative of the results for the full
fiscal year. It is suggested that these financial statements be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the 2005 Annual Report on Form 10-K filed by Lenox Group Inc (the
Company) with the Securities and Exchange Commission (SEC). Comprehensive
income (loss) for the periods ended September 30, 2006 and October 1, 2005 was
equivalent to reported net income (loss).

Reclassifications 
Certain prior year amounts have been reclassified to conform to the current
year presentation. These reclassifications, as discussed below, had no impact
on net income (loss) or retained earnings.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
  accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
  of the Impairment or Disposal of Long-Lived Assets(SFAS 144), the
  Company reclassified results of the discontinued operations of the Companys
  Time to Celebrate business for all periods presented (see Note 5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                    
| | In
  connection with the process to finalize the purchase accounting for the Lenox
  acquisition (see Note 6), the Company identified certain costs that were
  classified differently on the Statement of Operations by Department 56 (the
  acquiring company) and Lenox (the acquired company). These costs, primarily
  related to costs to develop new product, product samples and sculpt product,
  had historically been recorded in Cost of Sales (in the Wholesale segment) by
  Department 56. In order to have consistent classification across the Company,
  the Company has reclassified these expenses to Selling, General and
  Administrative Expense (with product samples costs included in the Wholesale
  segment as a selling expense and new product development and sculpting costs
  included in the Corporate category as general and administrative expenses are
  generally not allocated to operating segments. See Note 14). As such, the
  Companys disclosure of significant accounting policies as previously
  included in the notes to the Consolidated Financial Statements included in
  the 2005 Annual Report on Form 10-K filed by the Company with the SEC is
  revised as follows:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 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 costs to purchase, receive, inspect and warehouse certain
  product.

5

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Selling, General and Administrative Expense
   The Companys selling, general and administrative expenses principally
  consist of expenses associated with the Companys wholesale sales force and
  retail stores; costs to develop new product, product samples and sculpt
  product; costs to purchase, receive, inspect and warehouse certain product;
  corporate compensation and benefit expense; facilities expense; bad debt
  expense; marketing and advertising expense; and other general and administrative
  expenses.                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Product Development Expense
   The Companys product development costs consist principally of salaries for
  internal creative talent, costs incurred in developing product samples, and
  royalties paid to outside artists. The Company expenses as incurred the
  salaries of creative talent and the cost to develop product samples and
  records these amounts 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.

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

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

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

In September
2006, the FASB issued SFAS No. 158 (SFAS 158), Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106 and 132(R). SFAS 158 (i) requires the
recognition of the funded status of a defined benefit plan in the statement of
financial position, (ii) requires that changes in the funded status be recognized
through comprehensive income and (iii) expands disclosures. The provisions of SFAS
158 are effective for the Company for year-end 2006 financial statements. The
Company is currently evaluating the effect that the adoption of SFAS 158 will
have on its consolidated results of operations and financial condition.

6

---



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

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

Total stock-based
compensation expense from continuing operations during the third quarter and 39
weeks ended September 30, 2006 was $401 and $1,138, respectively. The adoption
of SFAS 123R in 2006 resulted in the recognition of incremental pre-tax
stock-based compensation expense during the third quarter and 39 weeks ended
September 30, 2006 of $68 and $127, respectively, and a decrease in net income
of $43 and an increase in net loss of $80, respectively (the impact on basic
and diluted earnings per share during the third quarter and 39 weeks ended
September 30, 2006 was $0.00 and $0.01, respectively).  The adoption also resulted in a reduction in
cash flows from operating activities of $7 and an increase in cash flows from
financing activities of $7 for the 39 weeks ended September 30, 2006.  Additionally, upon adoption of SFAS 123R,
the Company reclassified unearned compensation on non-vested restricted stock
of $3,469 to additional paid-in capital.
The cumulative effect adjustment for forfeitures related to non-vested
restricted stock and options was not material.

Total
stock-based compensation expense from continuing operations during the third
quarter and 39 weeks ended October 1, 2005 was $349 and $459, respectively
(which are included in the net income as reported figures in the table
below).  Prior to 2006, the Company
applied APB 25 and the disclosure-only provisions of SFAS 123. The following
table illustrates the effect on net income and net income per share if the Company
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensations during the third quarter and 39 weeks ended October 1,
2005.









|                                                       |  |                                      |        |                                      |   |        |  
|------------------------------------------------------ |  | ------------------------------------ | ------ | ------------------------------------ | - | ------ | -
|                                                       |  | 13 WEEKS
  ENDED
  OCTOBER 1,
  2005 |        | 39 WEEKS
  ENDED
  OCTOBER 1,
  2005 |  
|                                                       |  |                                      |        |                                      |  
|Net income:                                            |  |                                      |        |                                      |  
|As reported                                            |  | $                                    | 11,062 |                                      | $ | 12,552 |  
|Stock-based compensation, net
  of related tax effects |  |                                      | (295   | )                                    |   | (1,270 | )
|                                                       |  |                                      |        |                                      |   |        |  
|Pro forma                                              |  | $                                    | 10,767 |                                      | $ | 11,282 |  
|                                                       |  |                                      |        |                                      |   |        |  
|                                                       |  |                                      |        |                                      |   |        |  
|Net income per common share 
  basic:                 |  |                                      |        |                                      |   |        |  
|As reported                                            |  | $                                    | 0.81   |                                      | $ | 0.92   |  
|Pro forma                                              |  |                                      | 0.79   |                                      |   | 0.83   |  
|                                                       |  |                                      |        |                                      |   |        |  
|Net income per common share 
  assuming dilution:     |  |                                      |        |                                      |   |        |  
|As reported                                            |  | $                                    | 0.81   |                                      | $ | 0.91   |  
|Pro forma                                              |  |                                      | 0.79   |                                      |   | 0.82   |  

7

---



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

|                                |  |                                         |             |                                      |  |             | 
|------------------------------- |  | --------------------------------------- | ----------- | ------------------------------------ |  | ----------- | 
|                                |  | 39 WEEKS
  ENDED
  SEPTEMBER 30,
  2006 |             | 39 WEEKS
  ENDED
  OCTOBER 1,
  2005 | 
|                                |  |                                         |             |                                      | 
|Risk-free interest rate         |  |                                         | 4.7% - 5.1% |                                      |  | 3.8% - 3.9% | 
|Expected dividend yield         |  |                                         | 0%          |                                      |  | 0%          | 
|Expected stock price volatility |  |                                         | 49%         |                                      |  | 32%         | 
|Expected life (in years)        |  |                                         | 6           |                                      |  | 6           | 

Stock
Incentive Plans

As of
September 30, 2006, the Company had incentive plans allowing the Company to
grant options, stock appreciation rights, shares or performance units to
employees, directors, officers, consultants and advisors. As of September 30,
2006, 163,827 shares were available for granting under the stock incentive
plans.

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

A summary of
the status of the Companys stock option activity as of September 30, 2006 and
changes during the 39 weeks then ended is presented below:

|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|------------------------------------- |  | ------ | --------- | ------------------------------------- | - | ------------------------------------------------- |  | --------------------------------------- | --- |  | - | -- | 
|                                      |  | 2006   |          
|                                      |  |        |          
|                                      |  | Shares |           | Weighted
  Average
  Exercise
  Price |   | Weighted
  Remaining
  Contractual
  Life (Years) |  | Average
  Aggregate
  Intrinsic
  Value |    
|                                      |  |        |           |                                       |   |                                                   |  |                                         |    
|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|Outstanding at beginning of year      |  |        | 2,207,191 |                                       | $ | 14.32                                             |  |                                         |     |  |   |    | 
|Granted                               |  |        | 102,068   |                                       |   | 9.68                                              |  |                                         |     |  |   |    | 
|Exercised                             |  |        | (33,600   | )                                     |   | 10.08                                             |  |                                         |     |  |   |    | 
|Forfeited                             |  |        | (25,567   | )                                     |   | 15.77                                             |  |                                         |     |  |   |    | 
|Expired or Canceled                   |  |        | (154,314  | )                                     |   | 19.66                                             |  |                                         |     |  |   |    | 
|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|Outstanding at end of quarter         |  |        | 2,095,778 |                                       |   | 13.75                                             |  |                                         | 5.6 |  | $ | 10 | 
|                                      |  |        |           |                                       |   |                                                   |  |                                         |     |  |   |    | 
|Options exercisable at end of quarter |  |        | 1,985,709 |                                       |   | 13.96                                             |  |                                         | 5.4 |  | $ | 0  | 

The
weighted-average grant date fair value of options granted during the 39 weeks
ended September 30, 2006 and October 1, 2005 was estimated to be $5.14 and
$5.29 per share, respectively. The total intrinsic value of options that were
exercised during the 39 weeks ended September 30, 2006 and October 1, 2005 was
$86 and $755, respectively. As of September 30, 2006, the total unrecognized
compensation cost related to stock options was $420 and is expected to be
recognized over a weighted average period of 0.9 years.

8

---



Cash received
from option exercises during the 39 weeks ended September 30, 2006 and October
1, 2005 was $340 and $1,538, respectively. The actual tax benefit realized for
the tax deductions from option exercises totaled $32 and $262 for the 39 weeks
ended September 30, 2006 and October 1, 2005, respectively.

Performance- and Time- Vesting Restricted
Stock  The Company granted 81,534 restricted shares
of common stock to executive officers, directors and employees during the 39
weeks ended September 30, 2006. Under SFAS 123R, these shares are considered to
be nonvested shares, as defined. Of these shares, 31,034 shares were
performance-vesting and 50,500 shares were time-vesting. Performance-vesting
shares may be earned and become vested in a specific percentage depending upon
the extent to which the target performance is met as of the last day of the
performance cycle. Time-vesting shares generally become vested after the
duration of a specified period of time.

A summary of
the status of the Companys nonvested restricted stock activity as of September
30, 2006 and changes during the 39 weeks then ended is presented below:

|                                   |  |        |         |                             |   |       | 
|---------------------------------- |  | ------ | ------- | --------------------------- | - | ----- | 
|                                   |  | 2006   |        
|                                   |  |        |        
|                                   |  | Shares |         | Grant
  Date
  Fair
  Value |  
|                                   |  |        |         |                             |  
|                                   |  |        |         |                             |   |       | 
|Outstanding at beginning of
  year |  |        | 312,282 |                             | $ | 13.72 | 
|Granted                            |  |        | 81,534  |                             |   | 9.05  | 
|Exercised                          |  |        | (10,000 | )                           |   | 12.52 | 
|Forfeited                          |  |        | (27,092 | )                           |   | 13.65 | 
|                                   |  |        |         |                             |   |       | 
|Outstanding at end of
  quarter    |  |        | 356,724 |                             |   | 12.66 | 
|                                   |  |        |         |                             |   |       | 

As of September 30, 2006, the
total unrecognized compensation cost related to non-vested restricted stock
granted was $2.9 million. Of this amount, $1.6 million is expected to be
recognized over a weighted average period of 1.0 years, and the remaining $1.3
million relates to the performance-vesting restricted stock for which target
performance is not expected to be met and therefore the cost is not expected to
be recognized. The total fair value of restricted stock vested during the 39
weeks ended September 30, 2006 and October 1, 2005 was $125 and $31,
respectively.

9

---



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

Net income
(loss) per common share is calculated by dividing net income (loss) by the
weighted average number of shares outstanding during the period. Net income
(loss) per common share assuming dilution reflects per share amounts that would
have resulted had the Companys dilutive outstanding stock options been
converted to common stock. Restricted stock is considered outstanding on the
date the stock becomes vested when computing net income (loss) per common share
 basic. Restricted stock, to the extent it is probable that the stock will
become vested, is considered outstanding on the grant date when computing net
income (loss) per common share  assuming dilution. For the 39 weeks ended
September 30, 2006, all options and unvested restricted stock were considered
anti-dilutive and excluded from the computation of common equivalent shares
because the Company reported a net loss.

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

In October
2005, the Company committed to a plan to cease operations of its Time to
Celebrate business. Time to Celebrate ceased operations in December 2005, and,
in accordance with SFAS 144, the Company has reclassified Time to Celebrates
results into discontinued operations for all periods presented. Prior to being
classified as discontinued operations, Time to Celebrates operating results
had been presented in the Companys Retail segment. Time to Celebrates sales
for the third quarter and 39 weeks ended September 30, 2006 was $0 compared to
$408 and $1,360 during the third quarter and 39 weeks ended October 1, 2005,
respectively.

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

Lenox Acquisition

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

Goodwill
recorded as part of the initial purchase price allocation was $16.7 million at
December 31, 2005. During the first eight months of 2006, finalization of the
purchase price allocation resulted in cumulative adjustments of $1.5 million,
which increased this amount to $18.2 million. The $1.5 million increase in
goodwill was primarily due to further adjustments of preliminary valuations of
the acquired tangible assets and assumed liabilities.

10

---



The following
condensed consolidated financial results of operations are presented comparing
actual third quarter and 39 weeks ended September 30, 2006 results to pro forma
third quarter and 39 weeks ended October 1, 2005 results (with the pro forma
information assuming that the acquisition described above had been completed at
the beginning of each 2005 period presented):

|                                                     |  |                      |         |                   |   |                      |  |                   |         |   |   |         |  
|---------------------------------------------------- |  | -------------------- | ------- | ----------------- | - | -------------------- |  | ----------------- | ------- | - | - | ------- | -
|                                                     |  | 13 Weeks Ended       |         | 39 Weeks Ended    |  
|                                                     |  |                      |         |                   |  
|                                                     |  | September 30,
  2006 |         | October 1,
  2005 |   | September 30,
  2006 |  | October 1,
  2005 |        
|                                                     |  |                      |         |                   |   |                      |  |                   |        
|                                                    
|Net sales                                            |  | $                    | 154,035 |                   | $ | 161,270              |  | $                 | 342,249 |   | $ | 387,570 |  
|Goodwill impairment                                  |  |                      |        |                   |   |                     |  |                   | 37,074  |   |   |        |  
|Income (loss) from continuing operations             |  |                      | 5,387   |                   |   | 3,522                |  |                   | (42,880 | ) |   | (6,913  | )
|Net income (loss)                                    |  |                      | 5,387   |                   |   | 3,522                |  |                   | (42,880 | ) |   | (6,913  | )
|                                                     |  |                      |         |                   |   |                      |  |                   |         |   |   |         |  
|Income (loss) per share from continuing
  operations |  |                      |         |                   |   |                      |  |                   |         |   |   |         |  
|Basic                                                |  | $                    | 0.39    |                   | $ | 0.26                 |  | $                 | (3.12   | ) | $ | (0.51   | )
|Assuming dilution                                    |  |                      | 0.39    |                   |   | 0.26                 |  |                   | (3.12   | ) |   | (0.51   | )
|                                                     |  |                      |         |                   |   |                      |  |                   |         |   |   |         |  
|Weighted average shares outstanding                  |  |                      |         |                   |   |                      |  |                   |         |   |   |         |  
|Basic                                                |  |                      | 13,758  |                   |   | 13,688               |  |                   | 13,743  |   |   | 13,661  |  
|Assuming dilution                                    |  |                      | 13,795  |                   |   | 13,713               |  |                   | 13,743  |   |   | 13,661  |  

The actual
third quarter and 39 weeks ended September 30, 2006 results above include a net
positive purchase accounting adjustment of $0.0 million and $3.5 million,
respectively, as a result of the requirement to value Lenox inventory at its
estimated selling price less cost of disposal at the opening balance sheet
date.

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

Willitts Acquisition

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

11

---



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

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

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

The Company continues to
list the assets associated with the Pomona facility for sale. As of October 3,
2006, the Company has entered into an agreement to sell the facility to a third
party (see Note 15). The assets are listed on the balance sheet as held for
sale at their carrying amount, which is the lesser of carrying value or fair
value less expected selling costs, in the cumulative amount of $5.5 million.

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

In
connection with the acquisition of Lenox, the Company assumed severance
reserves related to plant closings, retail store closings and general
restructurings that took place prior to the Companys acquisition of Lenox. At
September 1, 2005, the acquisition date, the Company accrued additional amounts
related to an additional plant closing, retail store closings and general
restructurings that were planned as part of the acquisition. During the third
quarter of 2006, the Company finalized these plans, which resulted in an
adjustment of $0.6 million to these reserves.

The
table below shows a reconciliation of the severance and restructuring reserve
activity as of September 30, 2006:

|                              |  |                   |        |                          |   |                          |   |           |        |          |   |        |   |   |        |  
|----------------------------- |  | ----------------- | ------ | ------------------------ | - | ------------------------ | - | --------- | ------ | -------- | - | ------ | - | - | ------ | -
|                              |  | Plant 
  Closings |        | Retail Store 
  Closings |   | General 
  Restructuring |   | Total     |       
|                              |  | Severance         |        | Other                    |   | Severance                |   | Severance |        | Reserves |  
|                              |  |                   |        |                          |   |                          |   |           |        |          |  
|                             
|Balance,
  December 31, 2005  |  | $                 | 3,694  |                          | $ | 2,609                    |   | $         | 1,793  |          | $ | 4,105  |   | $ | 12,201 |  
|Adjustment                    |  |                   |       |                          |   |                         |   |           |       |          |   | 600    |   |   | 600    |  
|Incurred                      |  |                   | (3,419 | )                        |   | (736                     | ) |           | (1,651 | )        |   | (3,186 | ) |   | (8,992 | )
|                              |  |                   |        |                          |   |                          |   |           |        |          |   |        |   |   |        |  
|Balance,
  September 30, 2006 |  | $                 | 275    |                          | $ | 1,873                    |   | $         | 142    |          | $ | 1,519  |   | $ | 3,809  |  
|                              |  |                   |        |                          |   |                          |   |           |        |          |   |        |   |   |        |  

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

At
September 30, 2006, one customer accounted for approximately 15% of the
Companys total accounts receivable. For the quarter ended and 39 weeks
ended September 30, 2006, this same customer accounted for approximately 17%
and 16%, respectively, of the Companys total net sales.

12

---



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

Inventories from continuing
operations were comprised of:

|                  |  |                       |         |                      |   |                   |  |   |         | 
|----------------- |  | --------------------- | ------- | -------------------- | - | ----------------- |  | - | ------- | 
|                  |  | September 30, 
  2006 |         | December 31, 
  2005 |   | October 1,
  2005 | 
|                  |  |                       |         |                      |   |                   | 
|                 
|Raw materials     |  | $                     | 4,112   |                      | $ | 4,038             |  | $ | 5,676   | 
|Work-in-process   |  |                       | 5,224   |                      |   | 6,442             |  |   | 11,823  | 
|Finished goods    |  |                       | 118,614 |                      |   | 83,866            |  |   | 120,840 | 
|                  |  |                       |         |                      |   |                   |  |   |         | 
|Total inventories |  | $                     | 127,950 |                      | $ | 94,346            |  | $ | 138,339 | 
|                  |  |                       |         |                      |   |                   |  |   |         | 

Certain of the Companys
manufacturing flatware and giftware utilize fine silver as its principal raw
material. The Company has a precious metals consignment arrangement with a
major financial institution whereby the Company currently has the ability to
obtain up to $9.0 million in consigned inventory to use in the manufacture of
such products. As required by the terms of the consignment agreement, the
Company does not take title to consigned inventory until product is sold.
Accordingly, the Company does not include the value of consigned inventory or
the corresponding liability in the financial statements. The value of consigned
inventory as of September 30, 2006, December 31, 2005 and October 1, 2005 was
$6.0, $3.8, and $4.1 million, respectively. The consignment does not have a
stated term, and may therefore be terminated by the Company upon one weeks
notice to the financial institution or by the financial institution upon 90
days written notice to the Company. Additionally, the Company expensed
consignment fees related to this agreement of $0.1 million and $0.0 million for
the quarter ended September 30, 2006 and October 1, 2005, respectively, and
$0.2 million and $0.1 million for the 39 weeks ended September 30, 2006 and
October 1, 2005, respectively.

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

Changes in the carrying
amount of goodwill as of September 30, 2006 by segment were as follows:

|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|--------------------------------- |  | --------- | ------- | ------ |  | ------ |  | ------ | - | ------------ | - | ------- | - | - | ------- | -
|                                  |  | Wholesale |         | Retail |  | Direct |  | Other* |   | Consolidated |  
|                                  |  |           |         |        |  |        |  |        |   |              |  
|Balance at December 31,
  2005    |  | $         | 37,074  |        |  |       |  |        |  |              | $ | 16,695  |   | $ | 53,769  |  
|Allocation of acquired
  goodwill |  |           | 16,695  |        |  |       |  |        |  |              |   | (16,695 | ) |   |        |  
|Adjustment to acquired
  goodwill |  |           | 1,500   |        |  |       |  |        |  |              |   |        |   |   | 1,500   |  
|Goodwill impairment               |  |           | (37,074 | )      |  |       |  |        |  |              |   |        |   |   | (37,074 | )
|                                  |  |           |         |        |  |        |  |        |   |              |   |         |   |   |         |  
|Balance at September 30,
  2006   |  | $         | 18,195  |        |  |       |  |        |  |              |   |        |   | $ | 18,195  |  

* In the third quarter of
2006, the Company allocated the goodwill acquired in connection with the
purchase of Lenox to the Lenox Wholesale reporting unit.

13

---



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

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

|                                    |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         |  |   |         |  |   |        |   |   |         | 
|----------------------------------- |  | --------------------- | ------- | ------------------------ | - | --------------- | - | --------------------- | ------- | ------------------------ | - | ------- |  | --------------------- | ------ | ------------------------ | - | ------- |  | - | ------- |  | - | ------ | - | - | ------- | 
|                                    |  | September 30, 2006    |         | December 31, 2005        |   | October 1, 2005 |  
|                                    |  |                       |         |                          |   |                 |  
|                                    |  | Gross carrying amount |         | Accumulated amortization |   | Net             |   | Gross carrying amount |         | Accumulated amortization |   | Net     |  | Gross carrying amount |        | Accumulated amortization |   | Net     | 
|                                    |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         | 
|Finite-life
  intangible assets     |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         |  |   |         |  |   |        |   |   |         | 
|Customer
  relationships            |  | $                     | 15,300  |                          | $ | (1,789          | ) | $                     | 13,511  |                          | $ | 15,300  |  | $                     | (551   | )                        | $ | 14,749  |  | $ | 15,300  |  | $ | (138   | ) | $ | 15,162  | 
|Favorable
  lease interests         |  |                       | 2,542   |                          |   | (1,748          | ) |                       | 794     |                          |   | 2,542   |  |                       | (770   | )                        |   | 1,772   |  |   | 2,669   |  |   | (44    | ) |   | 2,625   | 
|Non-compete
  agreements            |  |                       | 2,705   |                          |   | (2,295          | ) |                       | 410     |                          |   | 2,705   |  |                       | (2,189 | )                        |   | 516     |  |   | 2,705   |  |   | (2,154 | ) |   | 551     | 
|                                   
|Indefinite-life
  intangible assets |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         |  |   |         |  |   |        |   |   |         | 
|Trademarks                          |  |                       | 126,857 |                          |   | (4,139          | ) |                       | 122,718 |                          |   | 126,110 |  |                       | (4,139 | )                        |   | 121,971 |  |   | 114,090 |  |   | (4,139 | ) |   | 109,951 | 
|                                    |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         |  |   |         |  |   |        |   |   |         | 
|                                   
|Total
  Intangibles                 |  | $                     | 147,404 |                          | $ | (9,971          | ) | $                     | 137,433 |                          | $ | 146,657 |  | $                     | (7,649 | )                        | $ | 139,008 |  | $ | 134,764 |  | $ | (6,475 | ) | $ | 128,289 | 
|                                    |  |                       |         |                          |   |                 |   |                       |         |                          |   |         |  |                       |        |                          |   |         |  |   |         |  |   |        |   |   |         | 

Intangible asset amortization expense for the third
quarter and 39 weeks ended September 30, 2006 was $582 and $2,322,
respectively, compared to $217 and $287 for the third quarter and 39 weeks ended
October 1, 2005, respectively. The increase in amortization expense for the
third quarter and 39 weeks ended September 30, 2006 was the result of the Lenox
acquisition. Expected future amortization expense for finite-lived intangible
assets is as follows:

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

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

14

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

Components
of net periodic benefit cost for the third quarter ended September 30, 2006
were as follows:

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

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

|                               |  |                  |        |                                    |   |       | 
|------------------------------ |  | ---------------- | ------ | ---------------------------------- | - | ----- | 
|                               |  | Pension Benefits |        | Medical and LifeInsurance Benefits |  
|                               |  |                  |        |                                    |  
|                              
|Service
  cost                 |  | $                | 3,588  |                                    | $ | 639   | 
|Interest
  cost                |  |                  | 7,137  |                                    |   | 1,062 | 
|Expected
  return on assets    |  |                  | (7,089 | )                                  |   |      | 
|Amortization
  of gain         |  |                  | (198   | )                                  |   |      | 
|                               |  |                  |        |                                    |   |       | 
|Net
  periodic pension expense |  | $                | 3,438  |                                    | $ | 1,701 | 
|                               |  |                  |        |                                    |   |       | 

|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies

Legal Proceedings

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

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

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

15

---



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

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

|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|-------------------------------------------------- |  | -------------------------------------- | ------- | ------------------- |  | ----------------------------------- | - | ------------------ | ------ | -------------------------------------- |  | ------------------ |  | ----------------------------------- | ------- | ------------------ |  | --- | - | - | ------- |  |  | --- | 
|(In thousands)                                     |  | 13 WEEKS
  ENDED
  SEPTEMBER30,
  2006 |         | %
  of 
  Net Sales |  | 13 WEEKS
  ENDED
  OCTOBER1,
  2005 |   | %
  of
  Net Sales |        | 39 WEEKS
  ENDED
  SEPTEMBER30,
  2006 |  | %
  of
  Net Sales |  | 39 WEEKS
  ENDED
  OCTOBER1,
  2005 |         | %
  of
  Net Sales | 
|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    | 
|WHOLESALE:                                         |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|Net sales                                          |  | $                                      | 117,959 |                     |  | 100                                 |   | $                  | 78,898 |                                        |  | 100                |  | $                                   | 240,434 |                    |  | 100 |   | $ | 131,971 |  |  | 100 | 
|Gross profit                                       |  |                                        | 50,561  |                     |  | 43                                  |   |                    | 35,462 |                                        |  | 45                 |  |                                     | 103,393 |                    |  | 43  |   |   | 61,657  |  |  | 47  | 
|Selling expenses                                   |  |                                        | 12,424  |                     |  | 11                                  |   |                    | 6,765  |                                        |  | 9                  |  |                                     | 32,122  |                    |  | 13  |   |   | 14,526  |  |  | 11  | 
|Goodwill impairment                                |  |                                        |        |                     |  |                                    |   |                    |       |                                        |  |                   |  |                                     | 37,074  |                    |  | 15  |   |   |        |  |  |    | 
|Operating income from continuing
operations        |  |                                        | 38,137  |                     |  | 32                                  |   |                    | 28,697 |                                        |  | 36                 |  |                                     | 34,197  |                    |  | 14  |   |   | 47,131  |  |  | 36  | 
|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|RETAIL:                                            |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|Net sales                                          |  | $                                      | 14,333  |                     |  | 100                                 |   | $                  | 11,857 |                                        |  | 100                |  | $                                   | 41,040  |                    |  | 100 |   | $ | 14,757  |  |  | 100 | 
|Gross profit                                       |  |                                        | 7,445   |                     |  | 52                                  |   |                    | 7,542  |                                        |  | 64                 |  |                                     | 25,604  |                    |  | 62  |   |   | 9,571   |  |  | 65  | 
|Selling expenses                                   |  |                                        | 7,684   |                     |  | 54                                  |   |                    | 4,671  |                                        |  | 39                 |  |                                     | 24,106  |                    |  | 59  |   |   | 7,773   |  |  | 53  | 
|Operating (loss) income from continuing
operations |  |                                        | (239    | )                   |  | (2                                  | ) |                    | 2,871  |                                        |  | 24                 |  |                                     | 1,498   |                    |  | 4   |   |   | 1,798   |  |  | 12  | 
|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|DIRECT:                                            |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|Net sales                                          |  | $                                      | 21,743  |                     |  | 100                                 |   | $                  | 8,716  |                                        |  | 100                |  | $                                   | 60,775  |                    |  | 100 |   | $ | 8,716   |  |  | 100 | 
|Gross profit                                       |  |                                        | 15,501  |                     |  | 71                                  |   |                    | 5,667  |                                        |  | 65                 |  |                                     | 41,275  |                    |  | 68  |   |   | 5,667   |  |  | 65  | 
|Selling expenses                                   |  |                                        | 12,339  |                     |  | 57                                  |   |                    | 4,150  |                                        |  | 48                 |  |                                     | 31,900  |                    |  | 53  |   |   | 4,150   |  |  | 48  | 
|Operating income from continuing
operations        |  |                                        | 3,162   |                     |  | 15                                  |   |                    | 1,517  |                                        |  | 17                 |  |                                     | 9,375   |                    |  | 15  |   |   | 1,517   |  |  | 17  | 
|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|CORPORATE:                                         |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|Unallocated general and administrative
expenses    |  | $                                      | 28,099  |                     |  |                                     |   | $                  | 13,907 |                                        |  |                    |  | $                                   | 82,724  |                    |  |     |   | $ | 27,904  |  |  |     | 
|                                                   |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|CONSOLIDATED:                                      |  |                                        |         |                     |  |                                     |   |                    |        |                                        |  |                    |  |                                     |         |                    |  |     |   |   |         |  |  |     | 
|Net sales                                          |  | $                                      | 154,035 |                     |  | 100                                 |   | $                  | 99,471 |                                        |  | 100                |  | $                                   | 342,249 |                    |  | 100 |   | $ | 155,444 |  |  | 100 | 
|Operating income (loss) from continuing
operations |  |                                        | 12,961  |                     |  | 8                                   |   |                    | 19,178 |                                        |  | 19                 |  |                                     | (37,654 | )                  |  | (11 | ) |   | 22,542  |  |  | 15  | 

16

---



|    |                  
|--- | -----------------
|15. | Subsequent Events

On October 3,
2006, the Company entered into an agreement of sale with BTR Capital Fund II
LLC for the sale of the Companys factory in Pomona, New Jersey for $7.0
million, subject to a 45-day buyer due diligence period. Pursuant to the sale
agreement, the Company agreed to lease back from the buyer 31,500 square feet
for a retail store for an initial term of five years, subject to earlier
termination or renewal for two additional five year terms. The Company also
agreed to lease back on a six month basis, with two six month renewal terms,
55,000 square feet for the manufacturing of sterling silver products, 19,700
square feet for its technical center and 14,000 square feet for customer
service offices. Closing of this sale is expected to take place on or before
December 30, 2006.

On October 31, 2006, the
Company announced that it will freeze the Lenox non-union defined benefit
pension plan and increase its matching 401(k) contribution rate for those
employees to a maximum of four percent of salary, effective January 2007.
Legacy non-union Lenox employees also will now be eligible for the Companys
profit-sharing plan. This pension plan, acquired as part of the Lenox
acquisition in 2005, covers about 2,200 current and former employees. In addition,
postretirement health-care benefits for Lenox non-union employees retiring
after December 31, 2006 will no longer be available. As a result of the
pension-plan change, no future benefits will accrue under the pension plan, but
pension benefits earned through December 31, 2006 will be available to legacy
Lenox employees when they retire under the terms of the plan. The changes to
the pension plan do not affect current Lenox retirees or former employees with
vested benefits.

17

---



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

RESULTS OF OPERATIONS

This Item should be read in conjunction with the segment financial
table presented in Note 14 to the Condensed Consolidated Financial Statements
in this Form 10-Q. Other components of the Condensed Consolidated Statement of
Operations which are classified below income from operations (i.e. interest
expense, provision for income taxes, etc.) are not allocated by segment and are
discussed separately.

Comparison of
Results of Operations for the Quarter Ended September 30, 2006 to the Quarter
Ended October 1, 2005.

Wholesale

Net sales increased $39.1 million, or 50%, to $118.0 million in the
third quarter of 2006 from $78.9 million in the third quarter of 2005. The
increase in revenue was principally due to the acquisition of Lenox in
September 2005 (the Acquisition) as well as an increase in Department 56 brand
sales of $0.6 million. The Company owned the Lenox wholesale business for only
one month during the third quarter of 2005 compared to the full three months
during the third quarter of 2006.

Gross profit as a percentage of net sales was 43% and 45% in the third
quarter of 2006 and 2005, respectively. Gross profit in the third quarter of
2005 was negatively impacted by two percentage points on net sales due to a
$1.4 million purchase accounting amortization charge related to the write-up of
Lenox inventory to its estimated selling price less cost of disposal under the
purchase method of accounting on the opening balance sheet date. In addition,
gross profit as a percentage of net sales was lower in 2006 because the
acquired Lenox wholesale business (which typically generates lower gross margin
percentages compared to the legacy Department 56 wholesale business because it
primarily sells to national customers with higher discounts) represented a
larger portion of revenue in 2006 compared to 2005 as indicated above.

Selling expenses were $12.4 million, or 11% of sales, in the third
quarter of 2006 compared to $6.8 million, or 9% of sales, in the third quarter
of 2005. The increase in selling expenses was principally due to the
Acquisition, while the increase in selling expense as a percentage of sales was due
to the timing of the Acquisition. The Company has historically generated lower
selling expense as a percentage of sales in September when compared to the rest
of the period because September has higher sales. Since the 2005 results only
included the month of September, selling expense as a percentage of sales was
lower in 2005 than in 2006.

Operating
income from continuing operations was $38.1 million in the third quarter of
2006 compared to $28.7 million in the third quarter of 2005. The increase in
operating income from continuing operations was principally due to the
Acquisition.

18

---



Retail

Net sales increased $2.4 million to $14.3 million in the third quarter
of 2006 from $11.9 million in the third quarter of 2005, reflecting the impact
of the Acquisition. Same-store sales (including stores added as a result of the
Acquisition which are compared against pre-acquisition results) decreased by
2.2%. The decrease in same store sales was due to Lenox comparable stores in
the prior year running aggressive promotions in conjunction with the
non-comparable stores that were going to be closed at the end of the holiday
selling season.

Gross profit as a percentage of net sales was 52% and 64% in the third
quarter of 2006 and 2005, respectively. During the third quarter of 2005, the
Company was running store closing sales related to the closing of 31 stores
operated under the Lenox trade name. The impact of this
activity normally would have resulted in lower gross margins for the Lenox
retail business; however, this was offset by the requirement to value Lenox inventory
at its estimated selling price less cost of disposal under the purchase method
of accounting on the opening balance sheet date. The impact of this purchase
accounting adjustment was approximately $0.7 million during the third quarter
of 2005, which increased gross profit as a percentage of sales by seven
percentage points on net sales for the third quarter of 2005. In addition,
gross profit as a percentage of net sales was lower in 2006 because the
acquired Lenox outlet retail stores (which typically carry lower gross profit
percentages then stores operated under the Department 56 trade name) represented a
larger portion of revenue in 2006 compared to 2005. A full quarter of results
from the Lenox retail stores were in the Companys third quarter of 2006
compared to only one month of results in the third quarter of 2005.

Selling expenses were $7.7 million or 54% of sales in the third quarter
of 2006 compared to $4.7 million or 39% of sales in the third quarter of 2005.
The increase in selling expenses (including the increase in selling expense as
a percentage of sales) was primarily due to the Acquisition. During the one
month that the acquired Lenox stores were included in the Companys third
quarter of 2005 results, the Company increased sales due to the aggressive
promotions that were run to liquidate merchandise in anticipation of the outlet
store closings. This increase in sales had the effect of reducing selling
expense as a percentage of sales.

Operating loss from continuing operations was $0.2 million in the third
quarter of 2006 compared to operating income from continuing operations of $2.9
million in the third quarter of 2005. The decrease in operating income from
continuing operations was principally due to the decrease in gross profit percentage
and an increase in selling expenses described above.

Direct

Net sales increased $13.0 million to $21.7 million in the third quarter
of 2006 from $8.7 million in the third quarter of 2005. The increase in revenue
was due to the Acquisition. The Company owned the direct business for only one
month during the third quarter of 2005, compared to the full three months
during the third quarter of 2006.

19

---



Gross profit as a percentage of net sales was 71% and 65% in the third
quarter of 2006 and 2005, respectively. Gross profit in the third quarter of
2005 was negatively impacted by seven percentage points on net sales due to a
$0.6 million purchase accounting amortization charge related to the write-up of
Lenox inventory to its estimated selling price less cost of disposal under the
purchase method of accounting on the opening balance sheet date.

Selling expenses were $12.3 million, or 57% of sales, in the third
quarter of 2006 compared to $4.2 million, or 48% of sales, in the third quarter
of 2005. The increase in selling expenses was primarily due to the Acquisition.
The Company owned the direct business for only one month during the third
quarter of 2005 compared to the full three months during the third quarter of
2006. The increase in selling expense as a percentage of sales was due to the
timing of the Acquisition. The Company has historically generated lower selling
expense as a percentage of sales in September when compared to the rest of the
period because September has higher sales. Since the 2005 results only included
the month of September, selling expense as a percentage of sales was lower in
2005 than in 2006.

Operating income from continuing operations was $3.2 million in the
third quarter of 2006 compared to $1.5 million in the third quarter of 2005.
The increase in operating income from continuing operations was principally due
to the Acquisition. The Company owned the direct business for only one month
during the third quarter of 2005 compared to the full three months during the
third quarter of 2006.

Corporate

General and administrative expenses were $28.1 million in the third
quarter of 2006 compared to $13.9 million in 2005, reflecting the impact of the
Acquisition.

Provision for Income Taxes

The effective income tax rate was 34% in the third quarter of 2006
compared to 36% in the third quarter of 2005. The effective income tax rate
during both periods was impacted by the reversal of prior year tax accruals
that were no longer necessary ($0.4 million and $0.3 million in the third
quarter of 2006 and 2005, respectively).

Comparison of
Results of Operations for the 39 Weeks Ended September 30, 2006 to the 39 Weeks
Ended October 1, 2005.

Wholesale

Net sales increased $108.5 million, or 82%, to $240.4 million in 2006
from $132.0 million in 2005. The increase in revenue was principally due to the
Acquisition offset by a decrease in Department 56 branded sales of $13.3
million. The Company owned the Lenox wholesale business for only one month
during the first nine months of 2005 compared to the full nine months during
2006. The decrease in Department 56 branded sales was principally due to the
timing of receipt of product from manufacturers overseas as well as the
continued softness experienced in the Gift and Specialty channel.

20

---



Gross profit as a percentage of net sales was 43% and 47% in the first
nine months of 2006 and 2005, respectively. Gross profit in the first nine
months of 2005 was negatively impacted by one percentage point on net sales due
to a $1.4 million purchase accounting amortization charge related to the
write-up of Lenox inventory to its estimated selling price less cost of
disposal under the purchase method of accounting on the opening balance sheet
date. In addition, gross profit as a percentage of net sales was lower in 2006 because
the acquired Lenox wholesale business (which typically generates lower gross
margin percentages compared to the legacy Department 56 wholesale business
because it primarily sells to national customers with higher discounts)
represented a larger portion of revenue in 2006 compared to 2005 as indicated
above.

Selling expenses were $32.1 million, or 13% of sales, in 2006 compared
to $14.5 million, or 11% of sales, in 2005. The increase in selling expenses
was principally due to the Acquisition, while the increase in selling expense as a
percentage of sales was due to the timing of the Acquisition. The Company has
historically generated lower selling expense as a percentage of sales in
September when compared to the rest of the period because September has higher
sales. Since the 2005 results only included the month of September, selling
expense as a percentage of sales was lower in 2005 than in 2006.

In the second quarter of 2006, a goodwill impairment charge of $37.1
million was recorded to write-down the goodwill related to the Department 56
wholesale reporting unit. See Note 11 to the Condensed Consolidated Financial
Statements in this Form 10-Q.

Operating income from continuing operations was $34.2 million in 2006
compared to $47.1 million for in 2005. The decrease in operating income from
continuing operations was principally due to the $37.1 million goodwill
impairment offset by increased operating income due to the Acquisition as
described above.

Retail

Net sales increased $26.2 million to $41.0 million in 2006 from $14.8
million in 2005, reflecting the impact of the Acquisition. Same-store sales
(including stores added as a result of the Acquisition which are compared
against pre-acquisition results) decreased by 0.6%.

21

---



Gross profit as a percentage of net sales was 62% and 65% in the first
nine months of 2006 and 2005, respectively. During the last four months of 2005
and the first quarter of 2006, the Company was running store closing sales
related to the closing of 31 stores operated under the Lenox trade name. The impact
of this activity normally would have resulted in lower gross margins for the
Lenox retail business; however, this was offset by the requirement to value
Lenox inventory at its estimated selling price less cost of disposal under the
purchase method of accounting on the opening balance sheet date. The impact of
this purchase accounting adjustment was approximately $4.5 million during the
first nine months of 2006 and $0.7 million during the first nine months of
2005, which increased gross profit as a percentage of sales by 11 percentage
points on net sales and five percentage points on net sales for the first nine
months of 2006 and 2005, respectively. In addition, gross profit as a
percentage of net sales was lower in 2006 because the acquired Lenox outlet
retail stores (which typically carry lower gross profit percentages then stores
operated under the Department 56 trade name) represented a
larger portion of revenue in 2006 compared to 2005. The 2006 results included
nine months of results from the Lenox retail stores whereas the 2005 results
included only one month of results.

Selling expenses were $24.1 million or 59% of sales in 2006 compared to
$7.8 million or 53% of sales in 2005. The increase in selling expenses
(including the increase in selling expense as a percentage of sales) was
primarily due to the Acquisition. During the one month that the acquired Lenox
stores were included in the Companys 2005 results, the Company increased sales
due to the aggressive promotions that were run to liquidate merchandise in
anticipation of the outlet store closings. This increase in sales had the
effect of reducing selling expense as a percentage of sales.

Operating income from continuing operations was $1.5 million in 2006
compared to $1.8 million in 2005.

Direct

Net sales increased $52.1 million to $60.8 million in 2006 from $8.7
million in 2005. The increase in revenue was due to the Acquisition. The
Company owned the direct business for only one month during the first nine
months of 2005, compared to the full nine months of 2006.

Gross profit as a percentage of net sales was 68% and 65% in the first
nine months of 2006 and 2005, respectively. Gross profit in both periods was
impacted by purchase accounting amortization charges related to the write-up of
Lenox inventory to its estimated selling price less cost of disposal under the
purchase method of accounting on the opening balance sheet date. The impact of
these charges to gross profit in the first nine months of 2006 was $1.2
million, or two percentage points on net sales. The impact of these charges to
gross profit in the first nine months of 2005 was $0.6 million, or seven
percentage points on net sales.

22

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Selling expenses were $31.9 million, or 53% of sales, in 2006 compared
to $4.2 million, or 48% of sales, in 2005. The increase in selling expenses was
primarily due to the Acquisition. The Company owned the direct business for
only one month during the first nine months of 2005, compared to the full nine
months of 2006. The increase in selling expense as a percentage of sales was
due to the timing of the Acquisition. The Company has historically generated
lower selling expense as a percentage of sales in September when compared to
the rest of the period because September has higher sales. Since the 2005
results only included the month of September, selling expense as a percentage
of sales was lower in 2005 than in 2006.

Operating income from continuing operations was $9.4 million in 2006
compared to $1.5 million in 2005. The increase in operating income from
continuing operations was principally due to the Acquisition. The Company owned
the direct business for only one month during the first nine months of 2005,
compared to the full nine months of 2006.

Corporate

General and administrative expenses were $82.7 million in 2006 compared
to $27.9 million in 2005, primarily reflecting the impact of the Acquisition.

Provision for Income Taxes

The effective income tax rate was 13% during the first nine months of
2006 compared to 36% during the first nine months of 2005. The decrease in the
effective income tax rate was principally due to the goodwill impairment (which
is primarily non-tax deductible).

SEASONALITY

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

23

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LIQUIDITY AND CAPITAL
RESOURCES

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

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

Cash Flows from
Operations

Net cash used in operating activities
increased $49.6 million from $51.1 million used during the first nine months of
2005 to $100.7 million used during the first nine months of 2006. The increase
in cash used in operating activities was principally due to the seasonal
working capital requirements of the acquired Lenox business, $9.0 million in
payments of severance and restructuring costs accrued as part of the
Acquisition and $8.2 million of payments in pension and postretirement
expenses.

Cash Flows from
Investing Activities

Capital expenditures in the
first nine months of 2006 were $8.7 million compared to $1.1 million in the
prior year. The increase in capital expenditures was principally related to the
consolidation of the Lenox wholesale and direct businesses into a newly
renovated office facility in Bristol, Pennsylvania, costs associated with the
opening of the Companys new concept stores, and manufacturing and technology
infrastructure expenditures.

24

---



In the second
quarter of 2006, the Company completed the acquisition of Willitts for $3.0
million and in the third quarter of 2005 the Company completed the acquisition
of Lenox for $204.0 million (see Note 6 to the Condensed Consolidated Financial
Statements in this Form 10-Q).

In the second
quarter of 2006, the Company received $9.9 million in net proceeds from the
sale of the Langhorne, Pennsylvania facility. During the first nine months of
2005, the Company received net proceeds from the sale of available-for-sale
securities of $11.2 million.

Cash Flows from Financing Activities

Under the
terms of its credit facility, the Company is required to use the proceeds of
any asset sales to pay down long-term debt. As a result, the Company used the
proceeds from the sale of its facility in Langhorne, Pennsylvania to pay down
$9.9 million in long-term debt. In addition, the Company made contractual
scheduled payments on its long-term debt of $2.5, $2.2 and $2.2 million in the
first, second and third quarters, respectively. The Company also borrowed
$118.2 million under its revolving credit facility in the first nine months of
2006 to fund its operating and investing activities.

The revolving
credit facility provides for borrowings up to $175.0 million, which may be in
the form of letters of credit and revolving credit loans.  Borrowings under the revolving credit
facility are subject to certain borrowing base limitations, and the Companys
borrowing capacity fluctuates during the year based upon accounts receivable
and inventory levels. The Companys borrowing capacity under the revolving
credit facility as of September 30, 2006, was $158.0 million, of which $25.1
million was available for additional borrowings or letters of credit at such
date.

During the
first nine months of 2006, the Company entered into amendments to its revolving
credit facility and term loan facility. The amendments were entered into in
connection with the Companys intention to sell its manufacturing facility
located in Pomona, New Jersey and its distribution/office facility located in
Langhorne, Pennsylvania. Pursuant to the amendments, the lenders granted the
Company limited consent to sell the facilities, provided that 100% of the net
cash proceeds of such sales are used to repay a portion of the indebtedness
with respect to the term loan facility. The amendments also adjusted the
maximum leverage ratios and interest coverage ratios set forth in the credit
facility agreements and required the payment of an amendment fee of $0.4
million. In addition, the amendment to the term loan facility increased the
applicable margin by 0.25% to 2.75% for Alternate Base Rate loans and to 3.75%
for Adjusted LIBOR Rate loans.

25

---



The credit
facilities (as amended) also require maintenance of minimum levels of interest coverage
and maximum levels of leverage, in each case at the end of each fiscal quarter.
The minimum interest coverage ratio (as defined within the credit facility
agreements) requires the Company to maintain a minimum ratio of Consolidated
EBITDA (as defined within the credit facility agreements) to interest expense
over a 12-month period ending on each fiscal quarter. The minimum ratio to be
maintained at each quarter-end over the term of the facilities is defined
within the credit facility agreements and ranges from 2.35:1.0 to 3.75:1.0. The
maximum leverage ratio (as defined within the credit facility agreements)
requires the Company to maintain a maximum ratio of debt (as measured at the
end of each fiscal quarter) to Consolidated EBITDA over a 12-month period
ending on each fiscal quarter. The maximum leverage ratio to be maintained at
each quarter-end over the term of the facilities is defined within the credit
facility agreements and ranges from 2.0:1.0 to 5.75:1.0. As of September 30,
2006, the Companys interest coverage ratio was 2.53:1.0 (compared to the
minimum allowed for the period of 2.40:1.0), the leverage ratio was 5.41:1.0
(compared to the maximum allowed for the period of 5.75:1.0) and the Company
was in compliance with all material conditions and covenants under the credit
facilities. The goodwill impairment charge recorded in the second quarter of
2006 was non-cash in nature and did not affect the Companys liquidity or
result in non-compliance with respect to any of its credit facility covenants.

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

OFF-BALANCE SHEET ARRANGEMENTS

The Company
does not have off-balance sheet arrangements.

26

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CONTRACTUAL OBLIGATIONS

As of
September 30, 2006, the Company is obligated to make cash payments in
connection with its debt obligations, operating leases, purchase obligations
and royalty guarantees in the amounts listed below. The Company has no
unrecorded obligations other than the items noted in the following table:

|                             |  |                             |        |      |   |        |  |      |        |      |   |            |  |       |         |  |   |        |  |   |         | 
|---------------------------- |  | --------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------- |  | - | ------ |  | - | ------- | 
|                             |  | Payments Due (in thousands) |       
|                             |  |                             |       
|                             |  | 2006 (Q4)                   |        | 2007 |   | 2008   |  | 2009 |        | 2010 |   | Thereafter |  | Total |        
|                             |  |                             |        |      |   |        |  |      |        |      |   |            |  |       |        
|Revolving Credit
Facility1,2 |  |                             |       |      |   |       |  |      |       |      |   |           |  | $     | 128,644 |  |   |       |  | $ | 128,644 | 
|Long-term Debt2,3            |  | $                           | 2,246  |      | $ | 8,985  |  | $    | 8,985  |      | $ | 8,985      |  |       | 8,985   |  | $ | 44,922 |  |   | 83,108  | 
|Operating Leases             |  |                             | 4,060  |      |   | 13,621 |  |      | 11,417 |      |   | 10,033     |  |       | 7,903   |  |   | 33,123 |  |   | 80,157  | 
|Purchase
Commitments4        |  |                             | 47,315 |      |   |       |  |      |       |      |   |           |  |       |        |  |   |       |  |   | 47,315  | 
|Royalty
Guarantees5          |  |                             | 489    |      |   | 517    |  |      | 174    |      |   | 30         |  |       |        |  |   |       |  |   | 1,210   | 
|                             |  |                             |        |      |   |        |  |      |        |      |   |            |  |       |         |  |   |        |  |   |         | 
|Total                        |  | $                           | 54,110 |      | $ | 23,123 |  | $    | 20,576 |      | $ | 19,048     |  | $     | 145,532 |  | $ | 78,045 |  | $ | 340,434 | 
|                             |  |                             |        |      |   |        |  |      |        |      |   |            |  |       |         |  |   |        |  |   |         | 

|  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 | The
  Companys borrowings under the revolving credit facility are classified as
  current liabilities on the Consolidated Balance Sheets in accordance with
  Emerging Issues Task Force Issue No. 95-22, Balance Sheet Classification of
  Borrowings Outstanding under Revolving Credit Agreements That Include both a
  Subjective Acceleration Clause and a Lock-Box Arrangement.                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|2 | In addition
  to the principal payments on debt included in the summary of significant
  contractual obligations, the Company will incur interest expense on
  outstanding variable rate debt.  All
  amounts outstanding under the revolving and term loan credit facilities are
  variable interest rate debt with weighted average interest rates as of
  September 30, 2006 of 7.90% and 9.08%, respectively.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|3 | Long term
  debt does not include the $250 in principal amount of conditional notes
  payable to the Maryland Department of Business and Economic Development and
  the County Commissioners of Washington County, Maryland as the principal of
  these notes may be fully or partially forgiven if the Company meets certain
  levels of employment at the Hagerstown, Maryland distribution facility.          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|4 | The Company
  is committed to pay suppliers of product under the terms of open purchase
  orders issued in the normal course of business.                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                  
|5 | The Company
  is committed to pay licensors under the terms of license agreements entered
  into in the normal course of business.                                                                                                                                                                                                                                                                               

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

CRITICAL ACCOUNTING POLICIES

There were no
material changes in the Companys critical accounting policies from those
described in the Companys 2005 Annual report of Form 10-K (as modified by the
Companys Form 10-Q for the quarter ended July 1, 2006).

FORWARD-LOOKING STATEMENTS

Any
conclusions or expectations expressed in, or drawn from, the statements in this
filing concerning matters that are not historical corporate financial results
are forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties.  These statements are based on managements
estimates, assumptions and projections as of today and are not guarantees of
future performance. Such risks and uncertainties that could affect performance
include, but are not limited to, the ability of the Company to: (1) integrate
Lenox into its business; (2) achieve revenue and cost synergies; (3) obtain
sufficient financing for working capital needs; and (4) generate cash flow to
pay off debt. Actual results may vary materially from forward-looking
statements and the assumptions on which they are based. The Company undertakes
no obligation to update or publish in the future any forward-looking
statements. Please read the risk factors set out in Item 1A and Item 7 in the
Companys 2005 Annual Report on Form 10-K, which are incorporated herein by
reference and applicable to the forward-looking statements set forth herein.

27

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|        |                                                           
|------- | ----------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures about Market Risk

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

|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end
of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the Evaluation
Date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that we file or submit
under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms, and (ii)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosure.

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

28

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PART II
-  OTHER INFORMATION

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

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

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

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

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

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

29

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|        |          |                                                                                                                                                                                                                                                                                                                                                       
|------- | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 6. | Exhibits
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 3.1      | Restated Certificate of
  Incorporation of the Company. (Incorporated herein by reference to Exhibit
  3.1 of Registrants Annual Report on Form 10-K for the fiscal year ended
  December 31, 2005. SEC File No. 1-11908.)                                                                                                                           
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 3.2      | Certificate of
  Designation, Preferences and Rights of Series A Junior Participating
  Preferred Stock of the Company. (Incorporated herein by reference to Exhibit
  1.1 of Registrants Amendment No. 1, dated May 12, 1997, to Registration
  Statement on Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                                 
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 3.3      | Restated By-Laws of the
  Company. (Incorporated herein by reference to Exhibit 3.2 of Registrants
  Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of
  Registrants Current Report on Form 8-K dated February 15, 1996. SEC File No.
  1-11908.)                                                                         
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 4.1      | Specimen Form of Companys
  Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of
  Registrants Annual Report on Form 10-K for the fiscal year ended December
  31, 1994. SEC File No. 1-11908.)                                                                                                                                   
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 4.2      | Rights Agreement
  (including Exhibits A, B and C thereto) dated as of April 23, 1997, between
  the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
  (Incorporated herein by reference to Exhibit 1 of Registrants Registration
  Statement on Form 8-A, dated April 23, 1997. SEC File No. 1-11908.)                       
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 4.3      | First Amendment dated as
  of March 13, 1998, to Rights Agreement between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 1 to Registrants Amendment No. 2, dated March 16, 1998,
  to Registration Statement on Form 8-A, dated April 23, 1997. SEC File No.
  1-11908.)
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 4.4      | Amendment No. 2 to Rights
  Agreement, dated as of February 25, 1999, between the Company and ChaseMellon
  Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by
  reference to Exhibit 99.2 of Registrants Current Report on Form 8-K dated
  February 26, 1999. SEC File No. 1-11908.)                                           
|        |          |                                                                                                                                                                                                                                                                                                                                                       
|        | 4.5      | Letter Agreement Adopting the
  Rights Agreement, dated as of March 14, 2005, between the Company and Wells
  Fargo Shareholder Services, as Rights Agent. (Incorporated herein by
  reference to Exhibit 4.5 of Registrants Annual Report on Form 10-K for the
  fiscal year ended January 1, 2005. SEC File No. 1-11908.)                          

30

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

* Filed herewith

31

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SIGNATURES

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

|      |                  |                                                    
|----- | ---------------- | ---------------------------------------------------
|      |                  | LENOX GROUP INC                                    
|      |                  |                                                    
|Date: | November 9, 2006 | /s/ Susan E. Engel                                 
|      |                  |                                                    
|      |                  | Susan E. Engel                                     
|      |                  | Chairwoman of the Board and Chief Executive Officer
|      |                  | (Principal Executive Officer)                      
|      |                  |                                                    
|Date: | November 9, 2006 | /s/ Timothy J. Schugel                             
|      |                  |                                                    
|      |                  | Timothy J. Schugel                                 
|      |                  | Chief Financial Officer and Chief Operating Officer
|      |                  | (Principal Financial Officer)                      

32

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EXHIBIT
INDEX

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

33

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