UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

~~(Mark One)~~

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2005~~March 31, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to. ____

Commission File Number 001-09267

Enesco Group, Inc.

(Exact name of registrant as specified in its charter)


Illinois		04-1864170

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


225 Windsor Drive, Itasca, Illinois		60143

(Address of principal executive offices)		(Zip Code)


~~630-875-5300~~
630-875-5300 (Registrant’s telephone number, including area code)

N/A

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

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

YesþR Noo£

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange ~~Act).~~Act. (Check One):

~~Yes~~þ Noo


Large accelerated filer£		Accelerated filer£		Non-accelerated filerR

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

Yeso£ NoþR

At ~~November 7, 2005, 14,867,850~~April 27, 2006, 14,909,283 shares of the registrant’s Common Stock ~~with Associated Rights~~ were outstanding.

~~Cautionary Factors That May Affect Future Results~~Forward-Looking Statements

This report and other written reports and oral statements made from time to time by Enesco Group, Inc. and its subsidiaries (“Enesco,” “we” or “our”) and its management may contain cautionary or “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.

These statements can be identified by the use of such words ~~such~~ as “anticipate,” “estimate,” “could,” “expect,” “project,” “intend,” “plan,” “believe” and other words of similar meaning, but these words are not the exclusive means of identifying such statements. In particular, these include statements relating to intentions, beliefs or current expectations concerning, among other things, future performance, results of operations and the outcome of contingencies, such as legal proceedings and financial condition. Forward-looking statements give current expectations or forecasts of future events. They do not relate strictly to historical or current facts.

Any or all of the forward-looking statements made in this report and in any other public statements may turn out to be incorrect. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that actual future results of operations may vary materially from forward-looking statements. Accordingly, you should not rely on forward-looking statements as a prediction of actual future results. Any forward-looking statement made in this report ~~speak~~speaks only as of the date of such statement. We operate in a continually changing business environment and undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. However, you should consult any further disclosures we make on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the Securities and Exchange Commission ~~(“SEC”)~~(SEC).

It is not possible to predict or identify all factors that potentially could ~~potentially~~ cause actual results to differ materially and adversely from expected and historical results. ~~Some such~~Such factors include, but are not limited to:

Operating Improvement Plan

	•		Ability to implement Enesco’s comprehensive plan for operating improvement and to achieve its goals for cost savings and market share increases.

	•		Ability to comply with the covenants in the existing U.S. credit facility and to enter into and comply with the covenants in new credit facilities to finance operational requirements at competitive costs and interest rates.

Business Environment

	•		Day-to-day effects of current economic conditions and market fluctuations. This includes contributing factors, such as inflation, ~~and~~ interest and foreign currency rate changes, which may create a positive or negative impact on operations.

	•		Consumer interest in products is seasonal and may vary based on current market demand fluctuations and time of year.

	•		Effects of terrorist activity, armed conflict and epidemics, possibly causing a business disruption in global economic activity, and changes in logistics and security arrangements. This is particularly significant with respect to our heavy reliance on external manufacturing facilities located in China.

	•		Competitive activities, particularly those of our main competitors, which can significantly influence giftware prices and product demand.

	•		The level of success of our new product introductions and those of our competitors, which will impact our competitive position.

	•		Ability to grow ~~revenues~~revenue in mass and niche market channels.

	•		Mass retailers’ attempts at direct sourcing and determining the right product designs.

	•		Sales and profitability, which can be affected by changes over time in consumer preferences from one type of product to another. This may create a shift in demand from products with higher margins to those with lower margins or to products we do not ~~sell at all.~~sell.

	•		Success in ~~moving customers out of accounts receivable~~implementing new credit standards and a new credit ~~hold.~~scoring system, and continuing to improve days sales outstanding.

Production, Procurement and Distribution

	•		Ability to implement and execute supply chain distribution improvements and cost savings with a third-party logistics company using a new computer system.

	•		Timing of customer orders, shipments to the U.S. from suppliers in China and ~~emerging~~other developing countries, and the ability to forecast and meet customer demands for products in a timely and cost-effective manner.

	•		Ability to understand metrics to track and effectively manage manufacturing and supply chain lead times, which cause fluctuations in inventory levels and order fulfillment ~~timeliness, can influence demand.~~timeliness.

	•		~~Fluctuations~~Changes in customs regulations, tariffs, freight and political ~~changes~~climate, which can adversely affect results of operations.

	•		Availability to source products due to changes in conditions that impact suppliers including environmental conditions, laws and regulations, litigation involving suppliers, transportation disruptions, force majeure events and/or business decisions made by suppliers, which could have an adverse impact on operating ~~results.~~results .

Legal and Other

	•		Risk of trademark and license infringements, and our ability to effectively enforce our rights.

	•		~~Variations~~Ability to comply with the continued listing standards of the New York Stock Exchange (NYSE).

	•		The actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in ~~sales channels, product costs or mix~~determining the value of ~~products sold.~~certain assets (including the amounts of related allowances), liabilities, claims and tax assessments of undetermined metrics and amount asserted against us for various legal matters and other items reflected in our Consolidated Financial Statements.

~~Legal and Other~~

The actual events, circumstances, outcomes and amounts differing from judgments, assumptions and estimates used in determining the value of certain assets (including the amounts of related allowances), liabilities, claims and tax assessments of undetermined merit and amount asserted against us for various legal matters and other items reflected in our Consolidated Financial Statements. Risk of trademarks and license infringements, and our ability to effectively enforce our rights.

PART I.I – FINANCIAL INFORMATION

~~ITEM~~Item 1. ~~FINANCIAL STATEMENTS~~Financial Statements

ENESCO GROUP, INC.

Consolidated Balance Sheets
~~CONSOLIDATED BALANCE SHEETS~~
~~SEPTEMBER 30, 2005 AND DECEMBER~~As of March 31, ~~2004~~
~~(In thousands)~~2006 and December 31, 2005


	(Unaudited)						(Unaudited)
	September 30,			December 31,			March 31,			December 31,
(In thousands)							2006			2005
	2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	4,093		$	14,646		$	8,724		$	12,918
Accounts receivable, net		76,626			70,526			34,087			42,285
Inventories		54,219			65,371			42,414			40,659
Prepaid expenses		4,247			3,310			4,044			3,471
Deferred income taxes		587			920			836			783

Total current assets		139,772			154,773			90,105			100,116


Property, Plant and Equipment, at cost:
Property, plant and equipment, at cost:
Land and improvements		1,200			1,200			1,200			1,200
Buildings and improvements		19,934			22,131			19,606			19,538
Machinery and equipment		9,910			10,273			9,663			9,636
Office furniture and equipment		37,851			37,454			37,920			37,826
Transportation equipment		669			796			406			532

		69,564			71,854			68,795			68,732
Less — accumulated depreciation and amortization		(53,058	)		(49,345	)


Less: accumulated depreciation and amortization								(54,178	)		(53,228	)

Property, plant and equipment, net		16,506			22,509			14,617			15,504


Other Assets:
Other assets:
Goodwill		9,560			9,403			8,400			8,364
Other		3,138			4,116			3,302			3,135
Deferred income taxes		3,072			3,082			3,072			3,072

Total other assets		15,770			16,601			14,774			14,571

Total assets	$	172,048		$	193,883		$	119,496		$	130,191


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Notes and loans payable							$	38,422		$	30,823
Accounts payable								12,522			15,306
Federal, state and foreign income taxes								8,576			9,005
Deferred gain on sale of fixed assets								5,886			6,358
Accrued expenses
Payroll and commissions								2,807			3,083
Royalties								3,064			5,782
Post-retirement benefits								140			142
Other								4,165			5,585

Total current liabilities								75,582			76,084

Non-current liabilities:
Post-retirement benefits								993			1,281

Total non-current liabilities								993			1,281

Shareholders’ Equity:
Common stock, par value $0.125: authorized 80,000 shares; issued 25,228 shares								3,154			3,154
Capital in excess of par value								41,441			41,430
Retained earnings								237,881			248,437
Accumulated other comprehensive income								5,078			4,438

								287,554			297,459


Less: cost of treasury stock (10,308 shares)								(244,633	)		(244,633	)

Total shareholders’ equity								42,921			52,826

Total liabilities and shareholders’ equity							$	119,496		$	130,191

ENESCO GROUP, INC.

Consolidated Statements of Operations
~~CONSOLIDATED BALANCE SHEETS~~
~~SEPTEMBER 30, 2005 AND DECEMBER~~For the Three Months Ended March 31, ~~2004~~2006 and 2005
~~(In thousands)~~(Unaudited)

(Unaudited)
September 30, December 31,
2005 2004
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Notes and loans payable $ 50,222 $ 26,354
Accounts payable 21,148 18,680
Income taxes payable 7,450 6,405
Deferred gain on sale of property, plant and equipment 1,711 1,711
Accrued expenses —
Payroll and commissions 3,554 2,599
Royalties 7,160 12,267
Post-retirement benefits 176 821
Other 5,016 5,941

Total current liabilities 96,437 74,778

Long-Term Liabilities:
Post-retirement benefits 1,564 3,008
Deferred gain on sale of fixed assets 5,461 6,830

Total long-term liabilities 7,025 9,838

Shareholders’ Equity:
Common stock, par value $.125:
Authorized 80,000 shares;
Issued 25,228 shares 3,154 3,154
Capital in excess of par value 42,474 44,229
Retained earnings 263,095 302,462
Accumulated other comprehensive income 5,700 8,152

314,423 357,997
Less — shares held in treasury, at cost:
Common stock, 10,414 shares at September 30, 2005 and 10,671 shares at December 31, 2004 (245,837 ) (248,730 )

Total shareholders’ equity 68,586 109,267

Total liabilities and shareholders’ equity $ 172,048 $ 193,883


	March 31,			March 31,
(In thousands, except per share amounts)	2006			2005

Net revenues	$	37,964		$	60,084
Cost of sales		22,000			37,481

Gross profit		15,964			22,603

Selling, general and administrative expenses		25,273			35,282


Operating loss		(9,309	)		(12,679	)

Interest expense		(559	)		(399	)
Interest income		28			120
Other income (expense), net		19			(179	)


Loss before income taxes		(9,821	)		(13,137	)
Income tax expense		(735	)		(2,079	)


Net loss	$	(10,556	)	$	(15,216	)


Loss per Common Share:
Basic and diluted	$	(0.71	)	$	(1.04	)

The accompanying notes are an integral part of these ~~consolidated financial statements.~~Consolidated Financial Statements.

ENESCO GROUP, INC.
~~CONSOLIDATED STATEMENTS OF OPERATIONS~~
~~THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004~~
~~(Unaudited)~~
~~(In thousands, except per share amounts)~~

2005 2004
Net revenues $ 79,221 $ 85,291
Cost of sales 46,824 50,578

Gross profit 32,397 34,713

Selling, general and administrative expenses 31,413 33,056

Operating income 984 1,657

Interest expense (661 ) (350 )
Interest income 15 90
Other expense, net (82 ) (201 )

Income before income taxes 256 1,196

Income tax expense (2,371 ) (157 )

Net income (loss) $ (2,115 ) $ 1,039

Net income (loss) per common share — basic and diluted $ (0.14 ) $ 0.07

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)


														Accumulated
											Capital in			Other						Total
	Common Stock				Treasury Stock						Excess of			Comprehensive			Retained			Shareholders’
(In thousands)	Shares		Amount		Shares			Amount			Par Value			Income			Earnings			Equity

Balance December 31, 2004		25,228	$	3,154		10,671		$	(248,730	)	$	44,229		$	8,152		$	302,462		$	109,267

Net loss																		(15,216	)		(15,216	)
Currency translation adjustments															(578	)					(578	)

Total comprehensive loss																					(15,794	)
Exercise of stock options						(50	)		562			(240	)								322
Other common stock issuance						(52	)		591			(196	)								395

Balance March 31, 2005		25,228	$	3,154		10,569		$	(247,577	)	$	43,793		$	7,574		$	287,246		$	94,190


Balance December 31, 2005		25,228	$	3,154		10,308		$	(244,633	)	$	41,430		$	4,438		$	248,437		$	52,826

Net loss																		(10,556	)		(10,556	)
Currency translation adjustments															640						640

Total comprehensive loss																					(9,916	)
Stock based compensation												11									11

Balance March 31, 2006		25,228	$	3,154		10,308		$	(244,633	)	$	41,441		$	5,078		$	237,881		$	42,921

The accompanying notes are an integral part of these ~~consolidated financial statements.~~Consolidated Financial Statements.

ENESCO GROUP, INC.
~~CONSOLIDATED STATEMENTS OF OPERATIONS~~
~~NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004~~
~~(Unaudited)~~
~~(In thousands, except per share amounts)~~

2005 2004
Net revenues $ 188,464 $ 199,309
Cost of sales 114,485 115,058
Cost of sales — loss on license termination 7,713 —

Gross profit 66,266 84,251

Selling, general and administrative expenses 99,206 92,012

Operating loss (32,940 ) (7,761 )

Interest expense (1,516 ) (624 )
Interest income 173 345
Other expense, net (281 ) (244 )

Loss before income taxes (34,564 ) (8,248 )

Income tax (expense) benefit (4,803 ) 3,769

Net loss $ (39,367 ) $ (4,515 )

Net loss per common share — basic and diluted $ (2.68 ) $ (0.32 )

Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005
(Unaudited)


	March 31,			March 31,
(In thousands)	2006			2005

Cash Flows from Operating Activities:
Net loss	$	(10,556	)	$	(15,216	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization of property, plant and equipment		959			3,662
Deferred income taxes		(53	)		105
Gains on sales of property, plant and equipment		(509	)		(516	)
Stock based compensation		11			395
Changes in assets and liabilities:
Accounts receivable		8,368			5,794
Inventories		(1,536	)		2,390
Prepaid expenses		(554	)		(1,653	)
Other assets		(10	)		35
Accounts payable and accrued expenses		(7,163	)		(4,131	)
Income taxes payable		(426	)		1,686
Non-current post retirement benefits		(486	)		(91	)

Net cash used by operating activities		(11,955	)		(7,540	)


Cash Flows from Investing Activities:
Purchases of property, plant and equipment		(21	)		(618	)
Proceeds from sales of property, plant and equipment		44			5

Net cash provided (used) by investing activities		23			(613	)


Cash Flows from Financing Activities:
Net issuance of notes and loans payable		7,599			11,761
Exercise of stock options		—			322

Net cash provided by financing activities		7,599			12,083


Effect of exchange rate changes on cash and cash equivalents		139			60

Increase (decrease) in cash and cash equivalents		(4,194	)		3,990
Cash and cash equivalents, beginning of period		12,918			14,646

Cash and cash equivalents, end of period	$	8,724		$	18,636



(In millions)
Supplemental disclosure of cash paid for:
Interest	$	0.8		$	0.4
Income taxes	$	1.2		$	0.2

The accompanying notes are an integral part of these ~~consolidated financial statements.~~Consolidated Financial Statements.

~~ENESCO GROUP, INC.~~
~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004~~
Notes to Consolidated Financial Statements (Unaudited)
~~(In thousands)~~

2005 2004
Operating Activities:

Net loss (39,367 ) (4,515 )
Adjustments to reconcile net loss to net cash used by operating activities

Depreciation and amortization of property, plant and equipment 6,702 4,275
Deferred income taxes 303 257
Gains on sale of capital assets (1,351 ) (10 )
Stock based compensation 816 785
Loss on license termination 7,713 —
Changes in assets and liabilities:
Accounts receivable (6,923 ) (31,557 )
Inventories 2,214 (846 )
Prepaid expenses (1,078 ) 273
Other assets 626 22
Accounts payable and accrued expenses (2,451 ) 3,830
Income taxes payable 1,018 (6,268 )
Long-term post retirement benefits (1,444 ) 58

Net cash used by operating activities (33,222 ) (33,696 )

Investing Activities:

Purchases of property, plant and equipment (1,974 ) (3,805 )
Acquisitions, net of cash acquired — (14,321 )
Proceeds from sales of property, plant and equipment 766 58

Net cash used by investing activities (1,208 ) (18,068 )

Financing Activities:

Net issuance of notes and loans payable 23,979 50,111
Exercise of stock options 322 1,021

Net cash provided by financing activities 24,301 51,132

Effect of exchange rate changes on cash and cash equivalents (424 ) 1,003

Decrease in cash and cash equivalents (10,553 ) 371
Cash and cash equivalents, beginning of period 14,646 10,645

Cash and cash equivalents, end of period 4,093 11,016

Supplemental disclosure of cash paid for:
Interest 466 434
Income taxes 1,898 2,343

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~ENESCO GROUP, INC.~~
~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~
~~September 30, 2005~~For the Three Months Ended March 31, 2006

Note 1. Description of Business

Enesco Group, Inc. (“Enesco,” ~~the “Company,”~~ “we” or “our”) is a ~~corporation~~world leader in the design, manufacturing and marketing of licensed and proprietary branded giftware, and home and garden décor products to a variety of specialty gift, home décor, mass-market and direct mail retailers. Enesco was organized in ~~1937. Enesco’s corporate headquarters~~1937 and is incorporated in Illinois. Our principal executive offices are located at 225 Windsor Drive, Itasca, Illinois 60143. We

Enesco conducts business through its subsidiaries and affiliated corporations. Our subsidiaries are ~~a world leader in the giftware,~~wholly owned and ~~home~~include (including their jurisdiction of incorporation): Enesco Limited (England), Enesco France S.A. (France), Enesco International Ltd. (Delaware), Enesco International (H.K.) Limited (Hong Kong), N.C. Cameron & Sons Limited (Canada), Enesco Holdings Limited (England), Stanley Home Produtos De Limpeza Ltda. (Brazil), and garden décor industries. We distribute products to a wide variety of specialty gift retailers, home décor boutiques and garden stores, as well as mass-market chains and direct retailers. Internationally, we serve markets in the United Kingdom, Canada, Europe, Mexico, Australia and Asia. Gregg Manufacturing, Inc. (California). All subsidiaries currently are active, except for Stanley Home Produtos De Limpeza Ltda.

Our product lines ~~comprise~~are giftable items within four merchandise categories; decorative, inspirational, brand enthusiast and occasion-based. Enesco’s product lines include some of the world’s most recognizable brands, includingBratz^™,Border Fine Arts^™,Cherished Teddies^{^®}, Halcyon Days^{^®}, Heartwood Creek ~~Walt Disney Company,~~^™by Jim Shore, Lilliput Lane^™, Pooh & Friends^{^®}, Walt Disney Classics ~~Collection, Pooh & Friends, Jim Shore Designs, Inc.~~Collections^{^®} andDisney^{^®}, ~~Foundations, Circle of Love, Nickelodeon, Bratz~~,~~Halcyon Days, Lilliput Lane~~among others. We believe that these merchandise categories elicit strong and ~~Border Fine Arts~~.sustainable market demand and profitability, and leverage our core distribution base. Some of our specific products are ~~accent furniture,~~ wall décor, garden accessories, frames, desk accessories, figurines, cottages, musicals, music boxes, ornaments, ~~water balls,~~waterballs, candles, tableware, general home accessories ~~crystal~~ and ~~glassware, and porcelain bisque and other figurines.~~resin figures.

We believe that demographic and economic trends support growth in giftware, home and garden décor lines. The home redecoration focus continues to grow in the ~~United States. We currently have~~U.S. Enesco has a presence and ~~compete~~competes in three major geographical ~~areas~~markets that include the U.S., Canada and Europe (primarily the U.K., France and ~~Canada. Consolidated~~Germany). The U.S. market accounted for approximately 36% of our consolidated net revenues ~~for~~in the ~~nine~~three months ended ~~September 30, 2005 consisted of sales in the U.S. of approximately 57%,~~March 31, 2006 while Europe ~~31%~~accounted for 45%, Canada ~~11%~~for 18% and ~~the rest of the world 1%. European revenues are primarily in the U.K. and France. Revenues in the rest of the world are primarily in Mexico with minor amounts in~~ various other ~~countries.~~countries for 1%.

~~Our operations~~Enesco sells it products through its own employee sales organizations in the U.S., Canada, U.K.~~, Canada~~ and France ~~each have their own employee sales organizations. We also sell our products through~~as well as third-party distributors in approximately 25 countries around the world. Enesco Limited ~~a subsidiary of Enesco Group, Inc.,~~ sells various ~~Enesco-developed~~Enesco proprietary design product lines in the U.K. and several other European countries. ~~Headquartered in Carlisle, England,~~ Enesco Limited also oversees the operations of our subsidiary located in France and independent distributors in Germany, Holland and Belgium. Enesco Limited also administers the European collectors clubs. ~~Our Canadian subsidiary,~~ N.C. Cameron & Sons Limited sells its various product lines in Canada and administers the Canadian collectors clubs.

We market our product lines primarily through retail promotions, trade shows and private shows held in major U.S. and foreign cities, as well as through catalogs, collector clubs, trade advertisings and the Enesco website. Our ~~2005~~2006 marketing ~~structure focuses on~~focus is brand building, particularly for ~~Enesco-developed~~Enesco proprietary design product lines, such asFoundations^{^®},~~Dartington Crystal~~Growing Up Birthday Girls~~in the U.K.~~^{^®}, Gregg Gift and other ~~lines of products,~~licensed brands, such asHeartwood Creek^™by Jim Shore. ~~We are leveraging~~Enesco leverages the talents of outside artists across a range of product categories and price positions.

Financial Statements of this report should be read in conjunction with the ~~consolidated financial statements~~Consolidated Financial Statements and the ~~notes~~Notes thereto included in our Annual Report on Form 10-K as of and for the year ended December 31, ~~2004.~~2005.

In our opinion, these ~~consolidated financial statements~~Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the ~~United States~~U.S. applicable to interim period financial statements and reflect all adjustments necessary for a fair presentation of our financial position as of ~~September 30, 2005,~~March 31, 2006 and the results of operations ~~for the three and nine months ended September 30, 2005 and 2004,~~ and cash flows for the ~~nine~~three months ended ~~September 30, 2005~~March 31, 2006 and ~~2004.~~2005.

We reclassified certain ~~prior-year~~prior year amounts as described in Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. In addition, during the second quarter of 2005, we reclassified changes in stock-based compensation in our Consolidated Statements of Cash Flows from financing activities to operating activities. We also reclassified bank fees and credit card fees in our Consolidated Statements of Operations from other expense to selling, general and administrative expenses. Lastly, we reclassified certain employee benefit obligations in our Consolidated Balance Sheets from accrued expenses other to accrued expenses—payroll and commissions. Prior year amounts were reclassified to conform to the current year presentation.2005. These reclassifications had a negative effect of ~~$0.3 million and $0.9~~$0.5 million on our operating ~~income (loss)~~loss for the three months ~~and nine months~~ ended ~~September 30, 2004, respectively,~~March 31, 2005, but had no effect on the previously reported net ~~income (loss)~~loss for ~~these periods.~~the period.

The results of operations for interim periods are not necessarily indicative of the operating results for full fiscal years or any future period. The information in this report reflects all normal recurring adjustments and disclosures that are, in our opinion, necessary to fairly present the results of operations and financial condition for the interim periods. Estimates are used for, but not limited to, the accounting for allowances for doubtful accounts, sales ~~returns and~~ allowances, inventory valuations, impairments of tangible and intangible assets, and other special charges and taxes. Actual results could differ from these estimates. When preparing an estimate, ~~we determine~~Enesco determines what factors are most likely to affect the estimate. Enesco ~~also~~ gathers information from inside and outside the organization. The information is evaluated and the estimate is made.

~~The following~~Following are the critical accounting policies that ~~we believe~~management believes could have a significant impact on our financial statements if the judgments, assumptions and estimates used by usmanagement turn out to be incorrect. ~~In addition, we have~~Management has discussed these critical accounting policies with ~~our~~Enesco’s Audit Committee.

Accounts Receivable Allowances

Doubtful Accounts

~~Doubtful Accounts —~~ The allowance for doubtful accounts is based on our assessment of the ~~collectability~~collectibility of specific customer accounts and the historical write-off percentage applied to outstanding accounts receivable. If there is deterioration in a major customer’s creditworthiness or actual defaults are significantly different than our historical experience due to changes in the business environment or other factors, estimates of the recoverability of amounts due could be affected. This reserve is comprised of two ~~parts; the~~parts. The first ~~of which~~component is for specific accounts whose ~~collectability,~~collectibility, in our opinion, is in question. These accounts are reviewed on a monthly basis and adjusted as deemed necessary. At March 31, 2006, this reserve was $3.1 million as compared to $3.5 million at December 31, 2005. The second part is a general reserve, calculated by applying historical bad debt rates to month-end accounts receivable balances, after removing specific accounts identified as uncollectible. At March 31, 2006, this component of the reserve was $1.0 million compared to December 31, 2005, when it was $1.2 million. The historical rate, which generally does not fluctuate materially, is adjusted annually or as deemed necessary to reflect actual experience. Historical trends do not guarantee that the rate of future write-offs will not increase. If the general reserve percentage increased 1%, it would require an increase to the reserve of ~~$0.9~~$0.2 million, ~~(as~~as of ~~September 30, 2005)~~March 31, 2006, and a corresponding increase in bad debt expense of ~~$0.9~~$0.2 million. ~~The~~There was no change to the general reserve percentage for bad ~~debt~~debts during the three months ended March 31, 2006. The total allowance for doubtful accounts balance at ~~September 30, 2005 has not changed since~~March 31, 2006, was $4.1 million, or 9.7%, of total accounts receivable compared to December 31, ~~2004.~~2005, when the account was $4.7 million, or 9.3%, of accounts receivable. This percentage increase is due primarily to a change in the assessment of collectibility of accounts placed with attorneys or other collectors.

Sales Returns and Allowances —

Our estimated provision for sales returns and allowances is recorded as a reduction of sales revenue because it primarily relates to allowances and other billing adjustments. In cases where credits are issued for merchandise, the goods are typically not ~~re-saleable~~saleable and are destroyed. The sales returns and allowances reserve consists of two parts, the first of which is based on an analysis of specific accounts in which the customer has taken a deduction or similarly has ~~similarly~~ challenged an invoice, and we believe the claim will be accepted. This part of the reserve is reviewed by management on a monthly basis and is adjusted as deemed necessary. At March 31, 2006, this comprised $2.4 million of the reserve balance as compared to December 31, 2005, when it was $2.2 million of the reserve balance. The second part is a general reserve, calculated by applying historical percentages of sales returns and allowances to the current and prior month’s sales. We believe two months to be a reasonable amount of time for customers to receive and evaluate their

order and request a credit if necessary. At March 31, 2006, this component of the reserve was $1.0 million, compared to December 31, 2005 when this component of the reserve was $0.9 million. The sales allowance balance at March 31, 2006 was $3.4 million, or 8.1%, of accounts receivable. At December 31, 2005, the reserve was $3.1 million, or 6.0%, of accounts receivable. This percentage increase is attributable primarily to a change in assessment of the collectibility of customer deductions.

The general reserve fluctuates with sales volume, as sales returns and allowances volumes increase or decrease with sales levels. This percentage is adjusted yearly, ~~to reflect actual experience~~ or more frequently if deemed ~~necessary.~~necessary, to reflect actual experience. If the general reserve percentage increased 1%, it would require an increase to the reserve of ~~$0.2~~$0.3 million (as of ~~September 30, 2005)~~March 31, 2006) and a corresponding decrease in net revenues of ~~$0.2~~$0.3 million. ~~The~~There was no change to the general reserve percentage for returns and allowances ~~at September 30, 2005 has not changed since December~~during the three months ended March 31, ~~2004.~~2006. Historical trends do not guarantee that the rate of future returns and allowances will not increase.

Inventory Reserves

Excess or Slow Moving Inventory —

As part of our process of developing, forecasting and procuring products, it is likely that excess inventory exists for certain products. In order to liquidate this excess inventory, the selling price frequently is ~~frequently~~ reduced,

often to an amount less than the product cost. Therefore, an inventory reserve is maintained to properly state inventory at the lower of cost or market. At every month end, inventory balances by product are compared to unit sales of that product for the most recent 12 ~~rolling~~ months. The difference between the inventory on hand, by product, and the last 12 months’ sales is considered excess inventory and subject to reserve. The portion of inventory determined to be excess is reserved at varying percentages based on the historical sales volume and whether or not the product is still active or has been discontinued. Discontinued product that is considered slow moving, even though it may not currently be excess, is reserved at varying percentages based on historical sales. Once inventory has been identified as excess or slow moving, the reserve established on that portion of inventory cannot be decreased, although further increases in the reserve on that specific inventory may be necessary as market conditions change. At March 31, 2006, the inventory reserve balance was approximately $11.9 million, or 23.3%, of gross inventory compared to approximately $12.0 million, or 23.6%, of gross inventory at December 31, 2005. This decrease primarily is due to the sale of product lines we decided to discontinue in the fourth quarter of 2005 as a part of our Operating Improvement Plan to reduce the number of active product lines from 170 to approximately 50.

The recovery rate on the disposition of excess inventory depends upon a number of factors, such as market demand for closeout items and levels of such inventory. Historical averages are developed annually or more often if deemed necessary, and used to determine the likely recoverability of cost. If market conditions deteriorate, it is likely that inventory will be sold at greater discounts, necessitating an increase to the reserve. A change of 5% in this loss percentage would result in an additional inventory reserve of ~~$1.3~~$1.1 million as of ~~September 30, 2005. The reserve percentage for excess inventory at September 30, 2005 has increased approximately 5% since December~~March 31, ~~2004, resulting in an increase to the reserve, due to a lower price recovery rate on closeout sales.~~2006.

Inventory Shrinkage —

Based on historical trends, a reserve is established in anticipation of estimated inventory shrinkage during the year leading up to the time when we take our physical inventory at ~~year-end.~~year end. This reserve is ~~cleared~~eliminated at year-end when we record our actual inventory shrinkage as part of the ~~year-end~~year end physical inventory process. The reserve related to shrinkage was $0.2 million as of ~~September 30, 2005~~March 31, 2006 and ~~2004.~~$0.1 million as of March 31, 2005.

Revenue Recognition

~~We recognize revenue~~Revenue from the sales of products is recognized when title ~~passes~~and risk of loss transfer to ~~customers,~~the customer, which generally occurs when merchandise is ~~turned over~~released to the ~~shipper.~~transportation company. A provision for anticipated merchandise returns and allowances is recorded at the time of sale based upon historical experience. Amounts billed to customers for shipping and handling are included in revenue. License and royalty fees are recognized as revenue when earned.

The individual annual membership fees related to collector club sales are recorded as revenue as the membership entitles the member to receive a collector club kit, which includes a collectible figurine, a carrying case and related documentation, and ~~also entitles the member to receive~~ a quarterly newsletter. The newsletters are essentially marketing materials that contain information regarding products, artists and member stories, as well as special offers and new product offerings. ~~Membership~~Collector club membership fees are not refundable. Since the membership fee is paid in exchange for products delivered and represents the culmination of the earnings process, revenue is recognized at the time the collector club kit is shipped to the member. Membership also entitles the participant to purchase, for a limited time, certain exclusive items offered throughout the ~~year; revenue~~year. Revenue for these items is recognized upon shipment of each item.

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Impairments of Tangible and Intangible Assets

We assess the recoverability of significant tangible and intangible assets, including goodwill, under the Financial Accounting Standards Board ~~(“FASB”)~~(FASB) Statement of Financial Accounting Standards ~~(“SFAS”)~~(SFAS) No. 142, ~~— “~~Goodwill and Other Intangible Assets” and SFAS No. 144, ~~— “~~Accounting for the Impairment or Disposal of Long-Lived ~~Assets~~Assets..” For ~~Property, Plant~~property, plant and ~~Equipment,~~equipment, we evaluate the recoverability of these assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. For goodwill, we perform an impairment assessment annually or more frequently if impairment indicators arise. ~~Based on our annual impairment analysis, we have concluded that we do not have an impairment of goodwill as of September 30, 2005.~~ Due to ongoing operating losses from the U.S. ~~business,~~businesses, excluding Gregg Gift, which operates at a profit, an assessment of the carrying amount of long-lived assets was again completed as of ~~the end of the third quarter of 2005~~March 31, 2006 in accordance with SFAS No. 144. Based on the positive undiscounted cash flows expected to be generated from our long-lived assets, we ~~have~~ concluded that we dodid not have an impairment as of ~~September 30, 2005.~~March 31, 2006. Future cash flow is based on management’s estimates. Should these estimates change, recognition of impairment losses of long-lived assets may be required.

In December 2004, we determined that the Enterprise Resource Planning (“ERP”) system would be stabilized by using the core components of our former legacy software system. The plan was to update certain modules of the legacy software to provide advanced features and capabilities required by the business. We incurred accelerated depreciation charges related to the ERP system of $0.8 million in December 2004. During the second quarter of 2005, we successfully migrated from the ERP system at our Elk Grove distribution center to an upgraded version of our legacy information system. Late in the second quarter, we stabilized the remaining portions of our PeopleSoft systems that relate to order management and financials. Since we are currently processing customer orders and preparing financial statements using the PeopleSoft system, and now intend to continue to do so, we have revised our estimate of the remaining useful life of the portion of the asset value that relates to these two areas. The remaining net book value relating to our PeopleSoft system is $1.2 million, as of September 30, 2005, which will be depreciated over a period commensurate with its useful life. All costs associated with the distribution center ERP system have been fully depreciated as of the end of the second quarter. Total accelerated depreciation for the nine months ended September 30, 2005 amounted to $3.7 million, all of which was recorded in the first half of 2005.

Tax Accruals

Accruals have been established for taxes payable and potential tax ~~assessments.~~assessments, including potential interest as applicable. The accruals are included in current income taxes payable because it is uncertain as to when assessments may be made and taxes may be paid. We have filed and continue to file tax returns with a number of taxing authorities worldwide. We believe such filings have been and are in compliance with applicable laws, regulations and interpretations. Positions taken are subject to challenge by the taxing authorities, often for an extended number of years after the filing dates. To the extent accruals differ from assessments, when the open tax years are closed or the accruals ~~require adjustment~~are otherwise deemed unnecessary at a point in time, the accruals are adjusted through the provision for income taxes.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for the tax effects attributable to the carryforward of net operating losses. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are

~~expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.~~

Accounting for Stock-Based Compensation

~~At September 30, 2005,~~Effective January 1, 2006, we ~~had four stock-based~~adopted FASB Statement No. 123, revised 2004 (FAS 123R),Share-Based Payments.FAS 123R requires all entities to recognize compensation (fixed options) plans, not including plans with options that have fully expired. We account for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,~~Accounting for Stock Issued to Employees~~~~, and related interpretations. No stock-based compensation plan cost is reflected~~expense in ~~net loss, as all options granted under those plans had exercise prices~~an amount equal to the ~~market~~fair value of share-based payments, such as stock options granted to employees. We elected to adopt FAS 123R using the ~~underlying common stock on~~modified prospective method. Under this method, we are required to record compensation expense for newly granted options and for the unvested portion of previously granted awards that remain outstanding at the date of ~~grant. The following table illustrates~~adoption. Additionally, the ~~effect on net income (loss)~~financial statements for the prior interim periods and ~~income (loss) per share as if Enesco had applied the fair value recognition provisions of SFAS No. 123,~~~~Accounting for Stock-Based Compensation~~~~, to stock-based compensation plans:~~

~~(in thousands, except for per share amounts)~~

Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Net income (loss) as reported $ (2,115 ) $ 1,039 $ (39,367 ) $ (4,515 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (530 ) (582 ) (1,591 ) (1,747 )

Pro forma net income (loss) $ (2,645 ) $ 457 $ (40,958 ) $ (6,262 )

Income (loss) per share:
Basic and diluted — as reported $ (0.14 ) $ 0.07 $ (2.68 ) $ (0.32 )

Basic and diluted — pro forma $ (0.18 ) $ 0.03 $ (2.79 ) $ (0.44 )

fiscal year do not reflect any adjusted amounts.

Note 3. Brand Category Revenues and Geographic ~~Operations~~Operating Segments

~~We operate~~Enesco operates in the giftware, and home and garden décor ~~industries~~industry with ~~five~~products that fall under three major ~~brand categories.~~categories; Proprietary Designs, Licensed Boards and Third-party Distribution. The following table summarizes net sales by each major ~~brands~~product category for the three months ended March 31, 2006 and ~~nine months ended September 30, 2005 and 2004 (in thousands):~~2005:

Three Months Ended
March 31, 2005
2006 2005
(In thousands)

Proprietary Designs $ 12,837 $ 19,363
Licensed Brands 10,381 14,854
Third-party Distribution 14,592 14,237
Precious Moments^®(1)
— 10,814
Other 542 1,406
Intercompany (388 ) (590 )

Total consolidated $ 37,964 $ 60,084


(1)		Includes onlyPrecious Moments^{^®} product sales recorded by U.S. operations.

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Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Design Partners $ 17,729 $ 18,002 $ 37,179 $ 42,458
Enesco Developed 24,890 26,641 67,848 67,646
Major Licenses 7,802 9,418 14,317 17,354
Strategic Partners 7,264 5,344 19,897 14,777
Precious Moments (a) 9,081 14,839 30,984 44,196
Service Fees (b) 2,571 — 2,571 —

Other 10,638 11,458 16,938 14,397
Intercompany (754 ) (411 ) (1,270 ) (1,519 )

Consolidated $ 79,221 $ 85,291 $ 188,464 $ 199,309


~~(a)~~		~~Includes both Precious Moments, Inc. (“PMI”) product sales recorded under the PM Termination Agreement, discussed in Note 8 below, and continuing sales by non-U. S. operations.~~

~~(b)~~		~~Includes sales commissions and distribution service fees earned from PMI under the Transition Agreement.~~

Certain products have been reclassified from the brand categories presented at June 30, 2005 for all periods presented. These reclassifications do not affect comparability of brand categories between periods.

We operate in two major geographic classifications, the U.S. and International. The following table summarizes operations by geographic classification for the three months ended March 31, 2006 and ~~nine~~2005:

Three Months Ended
March 31,
2006 2005
(In thousands)

Net Revenues
U.S $ 12,721 $ 32,354
International 25,243 27,730

Total consolidated $ 37,964 $ 60,084

Operating Profit (Loss)
U.S $ (10,684 ) $ (13,710 )
International 1,375 1,031

Total consolidated $ (9,309 ) $ (12,679 )

Long-lived Assets
U.S.
Property, plant & equipment, net $ 9,097 $ 11,784
Other assets 11,666 12,375

Total U.S 20,763 24,159

International
Property, plant & equipment, net 5,520 7,550
Other assets 3,108 4,111

Total International 8,628 11,661

Total consolidated $ 29,391 $ 35,820

Capital Expenditures
U.S $ 9 $ 285
International 12 333

Total consolidated $ 21 $ 618

Depreciation and Amortization
U.S $ 695 $ 3,284
International 264 378

Total consolidated $ 959 $ 3,662

Total net revenues recorded in the U.K. for the three months ended ~~September~~March 31, 2006 and 2005 were $16.4 million and $18.1 million, respectively. Total long-lived assets in the U.K at March 31, 2006 and 2005 were $7.6 million and $10.4 million, respectively. On April 30, 2006, our U.K. subsidiary sold certain assets of its Dartington Crystal operation. See Note 11, Subsequent Events, for further details of this transaction.

Total net revenues recorded in Canada for the three months ended March 31, 2006 and 2005 were $7.1million in each period. Total long-lived assets recorded in Canada at March 31, 2006 and ~~2004 (in thousands):~~2005 were $0.7 million and $0.9 million, respectively.

Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Net Revenues

United States $ 48,690 $ 55,502 $ 105,467 $ 123,787
United States intercompany (495 ) (216 ) (495 ) (691 )
International 31,285 30,200 84,267 77,041
International intercompany (259 ) (195 ) (775 ) (828 )

Total consolidated $ 79,221 $ 85,291 $ 188,464 $ 199,309

Operating Income (Loss)

United States $ (1,779 ) $ (788 ) $ (36,355 ) $ (12,995 )
International 2,763 2,445 3,415 5,234

Total consolidated $ 984 $ 1,657 $ (32,940 ) $ (7,761 )

various foreign exchange forward contracts. Under SFAS ~~No.133,~~No. 133,Accounting for Derivative Instruments and Hedging Activities, the instruments are carried at fair value onin the balance sheet as a component of other current assets or other current liabilities. Changes in the fair value of foreign exchange forward contracts that meet the applicable hedging criteria of SFAS ~~No.133~~No. 133 are recorded as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Changes in the fair value of foreign exchange forward contracts that do not meet the applicable hedging criteria of SFAS ~~No.133~~No. 133 are recorded currently in income as cost of revenues or foreign exchange gain or loss, as applicable. Hedging activities did not have a material impact on results of operations or financial condition during the three months ~~and nine months~~ ended ~~September 30, 2005.~~March 31, 2006.

The table below details our outstanding currency instruments as of ~~September 30, 2005,~~March 31, 2006, all of which have scheduled maturity dates before October 17, 2006:


Forward Contracts	Notional Amount	Exchange Rate	Notional Amount	Exchange Rate
	(in thousands)		(In thousands)

Euros	$250	1.1963	$750	1.2350
Euros	$1,000	1.2350

that would have been recognized in the ~~third quarter 2004, our annual impairment assessment will be performed~~financial statements in future periods, had we not accelerated the vesting of these options is approximately $1.9 million.

The following table illustrates the effect on net loss and loss per share as if Enesco had applied the fair value recognition provisions of FAS 123R to stock-based compensation plans for the three months ended March 31, 2005:

Three Months
Ended
(In thousands, except per share amounts) March 31, 2005

Net loss as reported $ (15,216 )
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (127 )

Pro forma net loss (15,343 )

Loss per share:
Basic and diluted — as reported $ (1.04 )

Basic and diluted — pro forma $ (1.05 )

The total stock-based compensation expense recorded in the ~~fourth quarter~~three months ended March 31, 2006 amounted to $11 thousand.

The following table summarizes stock option activity during the three months ended March 31, 2006:

Three Months Ended March 31, 2006
Weighted Average Aggregate Weighted Average
Options Exercise Price Intrinsic Value Remaining Term

Outstanding at beginning of period 2,218,760 $ 9.53
Granted 61,200 1.86
Forfeited (5,888 ) 3.70
Exercised — N/A
Expired (54,187 ) 7.57

Outstanding at end of period 2,219,885 9.39 47,958 6.18

Exercisable at end of period 2,044,885 $ 10.04 $ — 5.88

The Company determines the fair value of ~~2005. Dartington is a U.K.-based designer~~stock option grants using the Black-Scholes valuation model and ~~manufacturer~~the key input assumptions are described in the table below. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are consistent with FAS 123R and appropriately estimates the fair value of ~~uncut crystal. Dartington’s product line includes glassware, bowls, vases, candleholders~~Enesco’s stock option grants. Estimates of fair value are not intended to predict actual future events of the value ultimately realized by employees who receive share-based awards, and ~~giftware. Only changes to foreign currency exchange rates have impacted~~subsequent events are not indicative of the ~~goodwill balances in 2005.~~reasonableness of original estimates of fair value made by the Company under FAS 123R.

The following table presents the key weighted average input assumptions for the Black-Scholes valuation model:

Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005 Methodology for the Three Months Ended March 31, 2006

Expected term (in years) 6.25 6.25 Simplified SAB 107 transition method.

Expected volatility 63.1 % 57.0 % Historic volatility over expected term of each grant.

Expected risk-free interest rate 4.31 % 4.25 % Set to the Treasury Constant Maturity (TCM) rate as of the measurement date with maturity equal to the expected term.

Expected dividend yield 0.0 % 0.0 % Dividends are not expected to be paid in the future.

Fair value $ 1.16 $ 4.28 Black-Scholes valuation model.

~~On July 1,~~June 2005 we ~~completed our transition under the PM Termination Agreement with PMI. On that date, we paid the second, and final, $2.0~~incurred a loss of $7.7 million minimum royalty payment for 2005, along with the second installment of $1.8 million for the 2004 minimum royalty shortfall. On September 30, 2005, we paid the third installment of $1.8 million of the 2004 minimum royalty shortfall. The final 2004 minimum royalty shortfall payment of $1.8 million is due January 1, 2006. Since July 1, 2005, under the Transition Agreement, we continue to ship PMI products out of our Elk Grove distribution center for customer orders placed prior to July 1, 2005. As PMI orders are shipped from our distribution center after June 30, 2005, we invoice the customer and remit 96% of the customer’s receivable to PMI. A 4% reduction was provided in the Transition Agreement to account for returns and allowances. We also receive a 10% distribution service fee each week for PMI shipments made in the prior week. At the end of each month, we receive a 15% sales commission on all PMI sales after June 30, 2005, which were initiated by the Enesco sales force.

~~The PM Termination Agreement will have a negative impact on sales and operating profit in 2005, yet is expected to have a positive impact on earnings and cash flows in 2006 and 2007 due~~equal to the ~~elimination~~cost of the $15.0 million annual minimum royalty payment. The net savings in 2005 on royalty costs is $11.0 million due to the reduction in the $15.0 million annual minimum royalty to $4.0 million. The total net inventory transferred to PMI. We have not recorded any revenues for transition services in 2006, as PMI ~~under this agreement was $7.7 million, and did not include~~has exercised its option to perform the inventory owned by our wholly owned non-U.S. subsidiaries N.C. Cameron & Sons Limited (Canada) and Enesco Limited (U.K.). Our Canadian subsidiary has entered into a new distribution agreement with PMI to continue to distribute PMI product throughout Canada. Our U.K. subsidiary will no longer distribute PMI product. The loss on the transfer of the U.S. inventory along with other minimal agreement costs are presented in “Cost of sales — loss on license termination” on our consolidated statements of operations for the nine months ended September 30, 2005.services in-house beginning January 1, 2006.

During the ~~third quarter of 2005, we had sales of $8.4 million~~transition period Enesco maintained inventories of PMI ~~product under~~products on a consignment basis and processed sales orders on PMI’s behalf. Enesco recorded the ~~Transition Agreement. We incurred costs~~gross sale and cost of sale of PMI products and, additionally, recorded a charge to cost of sales ~~totaling $8.1 million, resulting in a~~for the sale amounts to be remitted to PMI, net ~~gross profit~~ of ~~$0.3 million. In addition, we~~the amounts due from PMI for inventory purchases. Enesco also earned ~~$2.6 million of~~ sales ~~commission~~commissions and ~~distribution~~ service fees from PMI for product fulfillment, selling and marketing costs. The net impact on operating profits in the third quarter resulting from PMI sales and related sales commissions and distribution fees was estimated to be fully offset by their corresponding cost of sales, selling commission expenses, and distribution and warehousing costs. At ~~September 30, 2005,~~March 31, 2006, the net ~~payable due~~amount owed PMI ~~under the Transition Agreement~~ was ~~$2.9 million, which is included in accounts payable on our consolidated balance sheet.~~$0.3 million.

Note 9. ~~U.K. Property Sale and Restructurings~~

~~In April 2005, we closed the~~~~Lilliput Lane~~Workington plant in the U.K. Fifty-five workers were terminated, operations were consolidated into the Penrith plant, and the Workington plant was actively marketed for sale. The plant was sold in September 2005 for an amount approximating its net book value less ordinary disposal costs.

On September 29, 2005, the U.K. announced its plan for an additional reduction in workforce and recorded a severance charge of $0.6 million that is included in selling, general and administrative expenses in the consolidated statements of operations for the three months and nine months ended September 30, 2005.

~~10.~~ Notes and Loans Payable

At ~~September 30, 2005, we~~March 31, 2006, Enesco had total lines of credit providing for maximum borrowings of ~~$82.5~~$73.3 million, ~~of which $75.0~~$70.0 million ~~was available~~ under our current U.S. credit facility. Actual borrowings of ~~$50.2~~$38.4 million and letters of credit and a customs bond ~~of $5.7~~totaling $4.6 million were outstanding at ~~September 30, 2005.~~March 31, 2006. The net available borrowing capacity under our current U.S. credit facility based on eligible collateral as of ~~September 25, 2005~~March 26, 2006 (the most recent measurement date prior to ~~September 30, 2005)~~March 31, 2006) was ~~$24.3~~$5.5 million.

In June 2003, Enesco entered into a three-year domestic $50.0 million unsecured revolving credit facility that includes Enesco International (H.K.) Limited as a borrowing subsidiary. The credit agreement contains financial and operating covenants including restrictions on incurring indebtedness and liens, acquisitions, selling property, repurchasing Enesco’s shares and paying dividends. In addition, Enesco was required to satisfy fixed charge coverage ratio and leverage ratio tests at the end of the second, third and fourth quarters and a minimum annual operating profit covenant.

OnAs of August 31, 2005, we entered into a ninth amendment to our current U.S. credit facility. The ninth amendment reset ~~the Company’s~~our minimum EBITDA and capital expenditure covenants through the facility termination date, December 31, 2005, based on ~~the Company’s~~our reforecast and long-term partnership with Bank of America, as successor to Fleet ~~National Bank,~~ and LaSalle Bank. The ninth amendment also added the accounts receivable and inventories of Enesco Limited, Enesco Holdings Limited and Bilston & Battersea Enamels Limited, and the accounts receivable of Enesco International (H.K.) Limited as eligible collateral to the borrowing base under the current credit facility. The ninth amendment also increased the current credit facility size to $75.0 ~~million, rather than~~million.

On December 21, 2005, Enesco entered into a ~~variable size~~tenth amendment to our current U.S. credit facility extending the facility termination date from December 31, 2005 to January 1, 2007. The tenth amendment provides that, unless the outstanding loans and letters of ~~$50.0~~credit under the existing U.S. credit facility are paid in full prior to the following dates, the respective fees will become payable: 1) by January 1, 2006, $75,000; 2) by February 1, 2006, $150,000; 3) by March 1, 2006, $250,000; 4) by April 1, 2006, $275,000; 5) by May 1, 2006, $750,000; and 6) by June 1, 2006; $750,000. The amendment also provides for a monthly fee beginning January 1, 2006 through May 1, 2006 in the amount of 0.10% of the highest amount of loans that were outstanding during the preceding month. This fee will increase to 0.20% beginning June 1, 2006 through January 1, 2007. The amendment establishes cumulative minimum consolidated EBITDA requirements and cumulative maximum capital expenditure limitations, which are each measured monthly during 2006. During the three months ended March 31, 2006, Enesco paid the January 1, February 1, and March 1, 2006 bank penalty fees totaling $475,000.

~~We are aggressively seeking replacement financing to pay off~~million effective between the ~~current~~eleventh amendment date and January 1, 2007. In addition, unless the outstanding loans and letters of credits under the existing U.S. credit ~~facility. There~~facility are ~~no assurances that we will secure replacement financing~~paid in full, the eleventh amendment accelerated by one month the fees per the tenth amendment which were to be due May 1, 2006 and June 1, 2006. The total fees paid on April 1, 2006 was $1,025,000 and on May 2, 2006 was $750,000. The monthly fee of 0.10% of the ~~U.S.~~highest loan amount

outstanding during the preceding month increased to 0.20% on May 1, 2006, rather than June 1, 2006 as per the tenth amendment, and will continue until the facility termination date.

On December 14, 2005, Enesco signed a commitment letter with LaSalle Business Credit, LLC (LaSalle) to arrange a new $75 million senior ~~revolving~~secured credit facility. If entered into, the new credit facility ~~which expires on January 1, 2006. Under~~with LaSalle will have a ~~contemplated replacement facility, Enesco~~term of five years and will ~~be the borrower and our material domestic and foreign subsidiaries likely will be guarantors. In connection with closing on a replacement senior~~replace Enesco’s existing credit facility ~~we may need~~with Bank of America, as successor to ~~obtain additional financing secured by, among other things, certain foreign inventory~~Fleet Bank and ~~receivable collateral from Canada, Hong Kong~~LaSalle Bank. As the administrative agent, LaSalle expects to form a syndicate of financial institutions to participate in the new credit facility. The commitment letter contains a number of conditions that must be satisfied in order for the facility to be closed, including: Enesco having a minimum borrowing availability of at least $10 million at the time of closing; the lender’s completion of its final due diligence with respect to Enesco and its subsidiaries; the ~~U.K.~~negotiation and execution of a definitive credit agreement; there being no material adverse change in Enesco’s business, assets, liabilities, properties, condition (financial or otherwise), results of operations or prospects of Enesco and its subsidiaries since December 31, 2004; there being no material disruption or material adverse change in financial, banking or capital markets generally affecting credit facilities; and various appraisals, as well as ~~certain real estate assets, in order~~other standard and customary conditions. Under the commitment letter, the new credit facility was to ~~satisfy minimum excess availability conditions. Moreover, we anticipate that~~close on or before January 31, 2006.

Since January 31, 2006, Enesco has received monthly extensions of the proposed replacement facility will contain standard terms and conditions, and financial and other covenants including, without limitation, restrictions on incurring indebtedness and liens, acquisitions, selling property, repurchasing our shares and paying dividends.LaSalle commitment letter’s expiration date. On April 28, 2006, Enesco received a modification to its commitment letter from LaSalle, extending the expiration date from April 30, 2006 to May 31, 2006.

~~11.~~Note 10. Income Taxes

~~During~~For the three ~~month and nine month periods~~months ended ~~September 30, 2005,~~March 31, 2006, the Company determined the need for a valuation ~~allowances~~allowance for deferred tax assets arising primarily from the domestic ~~net operating loss carryforwards (“NOLs”).~~NOLs incurred during the period. The ultimate realization of net deferred tax assets, including those arising from NOLs, is dependent upon the generation of taxable income in future years. In determining the amount of valuation ~~allowances,~~allowance, future taxable income relating to existing deferred tax liabilities and available tax planning strategies are considered. Based upon these factors, we believe that it is more likely than not that the Company will realize the benefits of net deferred tax assets of approximately ~~$3.7~~$3.9 million as of ~~September 30, 2005.~~March 31, 2006. The total of all other deferred tax assets, which principally relate to domestic NOLs, have been offset by a valuation

allowance. This valuation allowance may require adjustment in future periods as the result of taxable income generated from operations or changes in estimates of future taxable income.

For the ~~quarter~~three months ended ~~September 30, 2005,~~March 31, 2006, income tax expense was ~~$2.4~~$0.7 million, comprised of a benefit from a domestic NOL of ~~$0.4~~$4.1 million, offset by a deferred tax asset valuation allowance expense of ~~$1.4~~$4.1 million, and a foreign tax expense related to operations of ~~$1.4~~$0.7 million. For the ~~quarter~~three months ended ~~September 30, 2004,~~March 31, 2005, income tax expense was ~~$0.2~~$2.1 million, which ~~was~~ comprised of a provision of $2.6 million to establish a reserve for the potential impact of a foreign tax examination, a benefit of $1.1 million related to reserves that were determined to be unnecessary, a benefit from a domestic NOL of ~~$1.5 million and a foreign tax expense related to operations of $1.7 million.~~

For the nine months ended September 30, 2005, income tax expense was $4.8 million, comprised of a domestic tax benefit of $0.1 million and a foreign tax expense of $4.9. The domestic tax benefit is comprised of a benefit from a NOL of $14.1$5.5 million, offset by a deferred tax asset valuation allowance expense of $15.1 million, and a benefit from the reversal of previously recorded tax reserves no longer required of $1.1 million. The foreign tax expense is comprised of $2.1 million related to operations and a reserve established in relation to a potential audit assessment of $2.8 million. For the nine months ended September 30, 2004, the tax benefit was $3.8 million, which was comprised of a benefit from a domestic NOL of $6.7$5.5 million and a foreign tax expense related to operations of ~~$2.9~~$0.6 million.

AsNote 11. Subsequent Events

On April 28, 2006, Enesco entered into and closed on an agreement to sell its Dartington Crystal operation, which was owned by Enesco’s wholly-owned subsidiary in the United Kingdom, Enesco Limited. The current management of Dartington has agreed to purchase certain of Dartington’s assets, including the computer system and software, customer and supplier contracts, machinery and equipment, goodwill, leasehold properties, licenses, intellectual property rights and inventory. Enesco Limited has retained the cash, factory building, and receivables and payables of Dartington. The Dartington employees, including their accumulated rights and benefits, have transferred with the business to the new owners. The Dartington factory in Torrington, England owned by Enesco Limited is being leased to the purchaser. The total consideration payable in cash for the sale is dependent upon the yet to be finalized value of inventory at the date of closing, but is estimated to be approximately $2.4 million, of which $0.5 million was received at closing and the balance of which is due in installments between May and December 2006.

Enesco Limited acquired Dartington Crystal, a designer and manufacturer of uncut crystal products, in 2004 for approximately $7.0 million in cash. Total goodwill recorded on this acquisition was $1.2 million. In the fourth quarter of 2005, Enesco performed its first annual impairment analysis on the Dartington goodwill, and concluded that impairment existed at December 31, ~~2004,~~2005. A complete write-off of the Dartington goodwill balance as of November 30, 2005 of $1.1 million was recorded in the fourth quarter. The loss on sale, including professional costs, is $2.4 million pre-tax, which will be recorded in the second quarter of 2006.

Dartington had a $2.5 million operating loss in 2005, including the $1.1 million goodwill write-off, and a $0.5 million operating loss in the three months ended March 31, 2006.

Enesco’s Board of Directors and Cynthia Passmore have mutually agreed that Ms. Passmore will no longer serve as President, Chief Executive Officer, and director of the Company, ~~was no longer able to rely upon~~effective May 15, 2006. Ms. Passmore will not stand for election as a director at the ~~indefinite reversal criteria~~Annual Meeting of ~~the Accounting Principles~~Shareholders on May 17, 2006. The Board ~~(“APB”) Opinion No. 23 with respect to the reinvested earnings~~ of certain of its foreign subsidiaries due to the anticipated guarantee in 2005 of the Company’s domestic debt by those subsidiaries, resulting in the recognition of a $17.6 million deferred tax liabilityDirectors has appointed an interim Chief Executive Officer and related tax expense. The debt guarantees were put into effect during August 2005, resulting in the recognition of deemed dividends from those subsidiaries for tax purposes under the United States Internal Revenue Code and the reversal of the $17.6 million deferred tax liability, which had no net impact on income tax expenses.interim Chief Financial Officer, effective May 15, 2006.

Management has not yet completed its evaluation of the tax implications of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Act”), and currently has no plan to make qualifying repatriations of foreign earnings under the Act. The deemed dividends noted above are not qualifying dividends under the provisions of the Act. It is not possible to estimate a range of the effect of any potential repatriations under the Act until a new credit facility is finalized. Subsequent to the completion of any new credit facility, management will complete its evaluation of the potential desirability of repatriations under the Act. It is possible that there may be no earnings repatriations under the Act due to the Company’s current year domestic NOL.

~~ITEM~~Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides ~~more depth into~~an explanation of the financial condition and results of operations of ~~Enesco and its subsidiaries.~~Enesco. This discussion should be read in conjunction with the financial statements and the accompanying notes and cautionary factors included elsewhere in this Form 10-Q. It contains forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those referred to in such forward-looking statements. We undertake no obligation to publicly update or

revise these statements, whether as a result of new information, future events or otherwise. The Consolidated Financial Statements include the accounts of the parent company and all of its ~~subsidiaries.~~subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated in the Consolidated Financial Statements. ~~All subsidiaries are wholly owned.~~ The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of our management’s estimates. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. ~~We operate~~

Enesco operates in a single industry segment which designs, manufactures ~~(primarily through third parties located in the Pacific Rim)~~ and markets ~~a wide variety of~~ licensed and proprietary branded giftware, and home and garden décor ~~items~~products to ~~retailers~~a variety of specialty gift, home décor, mass-market and direct mail retailers. We primarily ~~throughout~~serve markets in the U.S., Canada ~~Europe~~ and ~~Asia.~~Europe.

Overview

Throughout 2006, we will remain focused on stabilizing the business and building a platform for sustainable growth through the continued implementation of our Operating Improvement Plan, which was announced on September 28, 2005. The Plan is based on creating a more efficient operating structure and focused product portfolio. Our ~~primary focus in 2005~~main objective has been to ~~stabilize~~drive toward industry norms of performance — addressing our cost structure and improving profitability. We are concentrating on improving gross margins and reducing operating expenses at all levels to establish a platform from which we can maximize revenue potential. Competition in the ~~Company’s operating~~gift market is highly fragmented. As such, we are focused on market share expansion in our core channels of distribution around the world.

The Operating Improvement Plan clearly defines what is required to increase profitability, solidly entrench our core business ~~model. The main drivers of stability in this area are to reduce our selling,~~and grow sales. Our strategy focuses on three key initiatives: (1) rationalizing the U.S. product portfolio; (2) reducing global corporate overhead, general and administrative ~~expenses, rationalize the existing product portfolio, transition the~~and marketing costs; and (3) creating a more efficient and cost-effective distribution and warehousing ~~model~~model. We believe these initiatives will positively impact Enesco and allow us to ~~a more cost~~ultimately achieve our goals for SG&A savings and ~~service quality effective model,~~gross margin and ~~restructure~~EBITDA improvements. Our target goals as previously communicated to shareholders are as follows:

	•		gross profit margins of 40% to 45% from our continuing product lines;

	•		$30 million to $32 million in pre-tax annualized cost savings from corporate, marketing and general administrative functions; and

	•		pre-tax annualized cost savings of $4 million to $6 million from a more efficient distribution and warehousing model.

We believe that by achieving these target goals, we will achieve operating profit margins of 3% to 5% by 2007. Based on the ~~existing sales, marketing and product development processes.~~

~~In mid-2005, we successfully migrated from~~gross profit margin of 42.1% achieved in the ERP system at our Elk Grove distribution center to an upgraded version of our legacy information system, and stabilized our order management system. On May 17, 2005, pursuant to a Seventh Amendment and Termination Agreement (the “PM Termination Agreement”), we terminated our license agreement with Precious Moments, Inc. (“PMI”) to sell Precious Moments products. On July 1, 2005, we began operating under the Transitional Services Agreement with PMI (the “Transition Agreement”) by providing transitional services to PMI related to its licensed inventory. We will continue to provide transition services through Decemberthree months ended March 31, 2006, ~~unless PMI exercises its option to perform those services itself. If continued, management expects services provided in 2006 will decrease compared to that provided in 2005, as PMI~~the annual revenue breakeven level has ~~already exercised its option to bring much of the services in-house.~~

The PM Termination Agreement will continue to have a negative impact on sales and operating profit in 2005. However, it is expected to have a positive impact on earnings and cash flows in 2006 and 2007, due to the elimination of the $15.0been reduced 36% from approximately $375 million ~~annual minimum royalty payment. The net savings in 2005 on royalty costs is $11.0 million due to the reduction~~ in the ~~$15.0~~three months ended March 31, 2005 to approximately $240 million in the three months ended March 31, 2006. We do not expect to achieve this annual ~~minimum royalty to $4.0 million, which was expensed during~~revenue breakeven level in 2006. As we continue implementing the ~~first six~~Operating Improvement Plan, we would expect continuing product line revenues for the three months ~~of 2005. The total net inventory transferred to PMI under the PM Termination Agreement was $7.7 million.~~

~~During the transition period, per the Transition Agreement, we recorded gross sales of PMI product and a corresponding charge in cost of sales for amounts~~ending June 30, 2006, excluding Dartington revenues, to be ~~remitted to PMI. Hence, in~~relatively unchanged from continuing product line revenues for the third quarter, we recorded sales of $8.4 million of PMI product and incurred costs of sales totaling $8.1 million, resulting in a net gross margin of $0.3 million. In addition, we earned $2.6 million of sales commission and distribution service fees from PMI for product fulfillment, selling and marketing costs. The net impact on operating profits in the third quarter resulting from PMI sales and related sales commissions and distribution fees was estimated to be fully offset by the corresponding cost of sales, selling commission expenses, and distribution and warehousing costs.three months ended March 31, 2006.

2318

~~To better explain~~We anticipate that the results from our Operating Improvement Plan initiatives will positively impact each quarter of 2006 and that all cost savings will be fully realized in 2007.

Our written agreement with Keystone Consulting Group expired on March 31, 2006. Under a verbal agreement, Keystone continued to provide consulting services to Enesco through April 30, 2006. Effective May 10, 2006, Enesco retained Mesirow Financial Consulting, LLC to provide support to the finance team in implementing our Operating Improvement Plan and to assist us in identifying other improvement opportunities.

Impact of the Operating Improvement Plan Initiatives

In the three months ended March 31, 2006, we began to realize results from our Operating Improvement Plan initiatives, some of which we anticipated would have a negative effect for the short-term due to the discontinuation of more than 100 unproductive and/or unprofitable product lines and a shipping disruption that occurred during the transition of our warehousing and distribution operations to a third-party logistics provider.

Rationalization of the U.S. product portfolio

During the fourth quarter of 2005, we completed the rationalization of our U.S. product portfolio, reducing the overall number of product lines more than 70%, from 170 to approximately 50, based on minimum sales thresholds, margin hurdle rates and long-term marketing strategy. We will continue to monitor and eliminate product lines that do not meet the minimum criteria levels. As anticipated, revenues in the three months ended March 31, 2006 were negatively impacted by approximately $1.5 million resulting from the reduction of more than 70% of our product lines. We have continued to aggressively market these discontinued products, which are sold primarily to liquidators and other below-market wholesalers. Currently active products are also subject to discontinuation if they do not meet margin criteria and turnover at or above the average industry rate of three times per year. Discontinued inventory at the end of the first quarter 2006 totaled $11.5 million at cost, before lower of cost or market reserves. We expect to substantially complete the sale of the discontinued products from our product rationalization by the end of 2006.

The gross profit margin on our continuing product lines in the first quarter 2006 increased to 42.1%, from 37.6%, in the comparable period in 2005. This increase in gross profit margin was due in part to the U.S.Precious Moments^{^®} guaranteed minimum royalty fees recorded in 2005, and a more favorable product mix in the U.S. and Canada. While we expect the favorable impact from the elimination of the U.S.Precious Moments^® royalty fees and our other product mix to continue, we anticipate slightly lower gross margin levels for the remainder of 2006 as the level of close-out sales on our discontinued products increases.

Reducing global corporate overhead, general and administrative and marketing costs

We successfully completed the majority of our planned global reductions of corporate overhead, general and administrative and marketing costs. We implemented the steps necessary to achieve our goal of generating $26.7 million in pretax annualized cost savings to be fully realized in 2007. Reducing expenses continues to be a priority for us in 2006. In the first quarter 2006, we reduced selling, general and administrative expenses $10.0 million, or 28.4%, over the comparable period in 2005. The SG&A reduction was a result of reduced salary expense from our restructuring efforts, lower selling and marketing costs, reduced travel and entertainment expenses and a reduction in depreciation expense compared to the accelerated depreciation of our Enterprise Resource Planning system (ERP) in 2005. First quarter 2006 SG&A expenses also declined $5.5 million, or 17.8%, from the fourth quarter of 2005. This decrease is due primarily to a reduction in corporate expenses in 2006 and to the Dartington goodwill write-off and severance and other restructuring charges recorded in the fourth quarter of 2005.

Implementing a cost-effective distribution and warehousing model

In mid January, we substantially completed the transition of our U.S. distribution and warehousing operations for our active products to a third-party logistics provider, National Distribution Centers (NDC). NDC operates a leased facility in the Indianapolis metropolitan area, in which Enesco occupies approximately 150,000 square feet. Due to transition issues, we began shipping products from the new facility at the end of January 2006, one week later than was originally anticipated. This delay and other inefficiencies at the new facility resulted in certain missed product replenishment orders during the three months ended March 31, 2006. The ramp-up at the new facility is taking longer than expected. Although our shipment levels increased significantly since late January 2006, we did not reach shipping levels required to meet our target metrics for the first quarter causing a decline in net revenues in the three months ended March 31, 2006 compared to net revenues in the three months ended March 31, 2005. We continue to work with NDC to increase the shipment rate from this facility. We also have implemented alternate shipment points within Enesco to assist with the continuing ramp-up at NDC.

RESULTS OF OPERATIONS

Net Revenue and Gross Profit

Revenues in the first quarter 2006 were $38.0 million, down 36.8%, from $60.1 million, reported in the three months ended March 31, 2005. This decline in revenues resulted in part from the elimination of U.S.Precious Moments^® sales due to the termination of the U.S. license agreement. We did not record any revenues from Precious Moments^® in the U.S. in the three months ended March 31, 2006, compared to $10.8 million of revenues fromPrecious Moments^® in the U.S. in the three months ended March 31, 2005. Excluding U.S. revenues fromPrecious Moments^® in 2005, revenues for the three months ended March 31, 2006 declined 22.9%, from $49.3 million for the three months ended March 31, 2005. This decline primarily was due to lower-than-expected sales as a result of a slower product shipping ramp-up at the third-party warehouse and distribution facility, lost replenishment product sales as a result of the U.S. shipping delays in the three months ended March 31, 2006 caused by the warehouse transition, and lower sales of collectible products. These and other components of our revenue decline from the previous year are set forth below:


	Increase (Decrease)
	Three Months Ended March 31,
(In millions)	2006 vs. 2005

Termination ofPrecious Moments^{^®} U.S. licensing agreement		$ (10.8	)
Shipping delays at third-party warehouse and distribution center		(4.1	)
Lost replenishment product sales due to shipping delay at third-party warehouse and distribution center		(2.7	)
Lower revenues from collectible products		(2.7	)
First quarter 2005 sales of now discontinued product lines		(1.5	)
Unfavorable foreign currency exchange rate impact		(1.4	)
Lower revenues from Gregg Gift products		(1.2	)
Lower revenues from Dartington products		(0.4	)
First quarter 2006 sales of recently introduced products		2.3
Other, net		0.4

		$ (22.1	)

Net new orders of $62.9 million in the three months ended March 31, 2006 increased $0.2 million over the comparable period in 2005 (excludingPrecious Moments^{^®} orders). This increase was due primarily to an increase in customer orders received from our U.S. gift shows and a 6% increase in orders forHeartwood Creek^™by Jim Shoreproducts which helped to offset the drop in orders on products discontinued in late 2005.

Net open orders in backlog at March 31, 2006 were $35.2 million, a slight increase of $0.3 million compared to net open orders at March 31, 2005 (excludingPrecious Moments^{^®} orders). This increase is primarily due to U.S. shipping delays and inefficiencies. Net open orders represent orders received and approved by Enesco, yet subject to cancellation for various reasons, including credit considerations, product availability and customer requests. Changes in net open orders can be attributed to timing of product introductions, variability in retailer order cycles, economic conditions and our ability to reduce order lead times. Backlog represents that portion of net open orders that were scheduled to ship prior to the end of the current quarter, but did not ship due to various reasons, including credit considerations, product availability and shipping inefficiencies at our various distribution and fulfillment centers.

Gross profit for the first quarter was $16.0 million compared to $22.6 million in the same period last year. Gross profit margin increased to 42.1%, from 37.6%, in the first quarter of 2005. Gross profit margin in the first quarter 2005 was negatively impacted by approximately 3.5% due to the U.S.Precious Moments^® guaranteed minimum royalty costs and generally lower margins on the product line. On a comparative basis, gross profit margin in the first quarter 2006 also increased due to favorable product mix in the U.S. and Canada.

The following table presents a comparison of Enesco’s business, ~~on a going-forward basis~~ without U.S. sales, cost of sales and gross profit ~~percentage~~ generated from ~~PMI products, set forth below is a table comparing our continuing core business with our total business including PMI product for the three months and nine months ended September 30, 2005 and 2004.~~

Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 Change % 2005 2004 Change %
Net revenues, excluding PMI product $ 68,297 $ 71,004 -3.8 % $ 158,735 $ 157,888 0.5 %
PMI product revenues 8,353 14,287 -41.5 % 27,158 41,421 -34.4 %
PMI service fees 2,571 — 2,571 — ��

Net revenues as reported $ 79,221 $ 85,291 -7.1 % $ 188,464 $ 199,309 -5.4 %

Costs of sales, excluding PMI $ 38,706 $ 41,465 -6.7 % $ 94,804 $ 90,725 4.5 %
PMI cost of sales 8,118 5,622 44.4 % 15,681 15,401 1.8 %
Loss on PMI license termination — — 7,713 —
PMI royalties — 3,491 -100.0 % 4,000 8,932 -55.2 %

Cost of sales as reported $ 46,824 $ 50,578 -7.4 % $ 122,198 $ 115,058 6.2 %

Gross profit %, excluding PMI 43.3 % 41.6 % 40.3 % 42.5 %
Gross profit %, PMI 25.7 % 36.2 % 7.9 % 41.3 %

Gross profit % based on reported revenues 40.9 % 40.7 % 35.2 % 42.3 %

On September 27, 2005, we announced a comprehensive plan to improve our operating performance and establish a platform for gaining increased share of the wholesale gift market in the U.S., U.K. and Canada. Our goal is to implement an operating model commensurate with other leading companies in the giftware and related markets. This operating model will target gross margins in the range of 40% to 45% and an operating profit margin of 3% to 5% to be achieved in 2007.

As a result of the recently adopted operating improvement plan to be executed throughout 2006, we anticipate achieving pre-tax cost savings on an annualized basis in the range of $34 million to $38 million, as more fully described below. These cost savings include approximately $12 million in expenses related to the termination of the Precious Moments ~~license agreement, bank penalty fees and accelerated depreciation related to the ERP system, as previously reported by the Company, which are not expected to recur~~^® in ~~future years. The cost savings are anticipated to be fully realized in 2007.~~

~~Initiatives to Stabilize Enesco’s Operating Model~~

In the third quarter of 2005, the principal activity of the Company was to develop a comprehensive operational improvement plan (the “Plan”). In addition, the Company continued its earlier initiatives in the following two ways. First, we continued to stabilize the remaining portions of our PeopleSoft systems that relate to order management and financial reporting. For example, stabilizing the billing portion of the PeopleSoft system allowed us to increase our recovery rate for freight billings

~~from 65% for the six months ended June 30, 2005 to 94% for~~ the three months ended September 30, 2005, resulting in approximately $0.5 million of additional freight billings. Second, our distribution costs as a percentage of net sales for the third quarter 2005 were 7.6% versus 12.8% for the third quarter 2004. Hence, in stabilizing our enterprise resource planning systems, we continue to stabilize and improve our business operating model.

~~Operational Improvement Plan~~

The Company’s Plan centers around three key initiatives: rationalizing the product portfolio; reducing corporate overhead, general and administrative and marketing costs; and creating a more efficient and cost-effective distribution and warehousing model.

•		~~Product Portfolio~~: The Company intends to reduce its number of overall product lines from approximately 170 to between 50 and 60 to concentrate on giftable products, which elicit strong and sustainable market demand and profitability, and leverage Enesco’s core distribution base. The Company expects to eliminate those product lines that do not meet these criteria.

•		~~Corporate Overhead, General and Administrative and Marketing~~: The Company began to reduce corporate and general and administrative costs, as well as professional and consulting fees by $30 million to $32 million pre-tax on an annualized basis. These reductions are expected to approximate $15 million for corporate overhead, $11 million for general and administrative costs, and a range of $4 to $6 million for selling and marketing costs.

•		~~Distribution and Warehousing~~: The Company expects to implement strategies to bring its U.S. distribution and warehousing costs more in line with industry standards, while improving quality and service levels. Cost savings are expected to be in the range of $4 million to $6 million pre-tax on an annualized basis.

As we implement the three key initiatives above, we are realigning our marketing and product development groups into merchandise categories to better reflect the shopping preferences of our target customers. These merchandise categories reflect the rationalization of not only the product lines, but also the stock keeping units (“SKUs”) which will be supported by realigned staffing.

In addition to the initiatives discussed above, we intend to put in place a long-term replacement credit facility and to continue our search for a permanent CFO. We anticipate that the combined effect of these continuing initiatives should improve operating results and cash flows, strengthen the balance sheet and better enable the Company to meet the credit facility requirements.

~~Initiatives to Improve Enesco’s Cash Flow~~

Through September 30, 2005, the Company executed the following initiatives to improve cash flow. Beginning in the second quarter of 2005, we adjusted our seasonal ordering and Christmas shipping to better support customer demand. Rather than shipping seasonal products in April, May and June, we now “make to order” and spread the shipments and payment to our vendors during June through October. We will continue to receive cash per our December 1 retail payment terms. This reduces the seasonal inventory we have on hand and improves our cash flow. It also reduces the amount of inventory that retailers have to maintain in their stores. In addition, during the third quarter, we piloted a program to ship Christmas goods

from a third-party warehouse in Asia directly to our U.S. customers. These strategies reduced the amount of time between when we must pay our vendors for the merchandise and shipments and when our customers must pay Enesco for their orders.

Also in the third quarter, we continued to sell off our excess and older product inventory at lower recovery rates. We also continued to aggressively turn our slow-moving inventory into cash. We anticipate continuing our aggressive liquidation of excess and older product inventory, which will create a more efficient inventory base from which to implement our planned initiatives for more effective inventory and logistics management.

~~The above inventory initiatives have combined to result in a reduction in our “days cost of sales in inventory” from 134 days at September 30, 2004 to 129 days at September 30, 2005.~~

We continued in the third quarter to strictly enforce our payment terms, such that we put delinquent customers on “accounts receivable hold,” which substantially stopped shipment to customers that were over 30 days past due. In addition, we implemented a change in our customer “everyday payment terms” from 90 down to 45 days. These initiatives have helped reduce our days sales outstanding in accounts receivable from 114 days at September 30, 2004 to 99 days at September 30, 2005. We anticipate that these initiatives also will have a positive impact on future cash flow.

~~Continued Restructuring Initiatives~~

~~Reduction in Salary Expenditures~~

Since our previous corporate overhead spending supported a different type of company than we are today, Enesco continues to take steps to reduce its salary expense. On September 29, 2005, we announced workforce redundancies in the U.K, from which we anticipate an annual cost savings of approximately $1.0 million. In our third quarter results, we recorded a charge of $0.6 million in severance costs related to this action. Also, on October 6, 2005, the Company announced salary expense reductions in the U.S. from which annual cost savings are expected to total approximately $0.7 million. These reductions in the U.S. are included in the cost savings of $34 million to $38 million previously announced as part of the Company’s Plan.

~~Keystone Reengagement~~

On August 29, 2005, we entered into a phase two engagement agreement with Keystone Consulting LLC (“Keystone”) to assist the Company with the implementation of the Plan. It is the Company’s intention to retain Keystone, as needed, through March 31, 2006 and ~~if appropriate, will amend the engagement agreement beyond that period for continued implementation of the Plan through 2006.~~

~~RESULTS OF OPERATIONS~~

~~Overview~~

Historically, during the third quarter of the year, the Company reports its largest quarterly revenues for the year as a majority of the seasonal business is shipped in the third quarter of the year. This is done to provide our customers with the time needed to display our products for the busy holiday retail season. The third quarter of 2005 was no exception, as sales for the quarter increased 61.1% from sales for the second quarter of 2005 and increased 31.9% versus the first quarter of 2005.

~~Net Revenue and Gross Profit~~

Net revenues in the third quarter 2005 of $79.2 million decreased $6.1 million, or 7.1%, from the third quarter 2004 level of $85.3 million. Revenues in the U.S. declined by $7.1 million. Our revenues from the sales of collectibles continued to decrease in the U.S. and accounted for $4.0 million of the decline, primarily due to PMI product sales. The stricter application of credit policies resulted in placing more orders on hold during the quarter as compared to the third quarter of 2004. Revenues for the quarter were impacted positively by $3.0 million from higher Disney product sales to our mass market and card and gift accounts. Our~~Heartwood Creekand~~~~Foundations~~product lines were slightly up for the quarter, yet not enough to offset revenue declines in most of our other product lines. International revenues rose $0.5 million primarily due to the $1.7 million in higher sales of distributed products from strategic partners, partially offset by a $1.4 million drop in sales of collectibles. Net revenues excluding PMI product sales and fees for the three months ended September 30, 2005 were down only 3.8% from comparable revenues for 2004.

Net revenues for the nine months ended September 30, 2005 of $188.5 million decreased $10.8 million, or 5.4%, from the same period in 2004. U.S. revenues declined by $18.1 million. Our collectibles revenues decreased $15.0 million due primarily to PMI product sales. Lower freight and royalty income related to a decline in revenues accounted for an additional $1.4 million of the U.S. shortfall. For the nine months ended September 30, 2005, net revenues from our~~Heartwood Creek~~line rose $2.4 million over the same period in 2004. The February 2004 acquisition of Gregg Gift added $1.0 million in additional revenues for the nine month period, and the net of other lines dropped $4.6 million due to general softness in the U.S. retail market. International revenues rose $7.3 million primarily due to $6.9 million from the Dartington acquisition, and $5.7 million in higher sales of distributed products from strategic partners, partially offset by a $3.6 million drop in sales of collectibles and generally lower gift sales. Net revenues excluding PMI product sales and fees for the nine months ended September 30, 2005 were up 0.5% from comparable revenues for 2004.

Gross profit in the third quarter of 2005 of $32.4 million decreased by $2.3 million, or 6.6%, from the prior year primarily due to lower sales volumes. The gross profit percentage increased to 40.9% for the current quarter from 40.7% for the third quarter of 2004. The margin percent was impacted positively by the favorable product mix in the U.S., U.K. and Canada, which more than offset the lower margin percent achieved on PMI product sales and fees. The gross margin percent excluding PMI revenues and costs increased to 43.3% for the three months ended September 30, 2005 compared to 41.6% for the same period in 2004, showing an improvement in the gross margin percent for the core Enesco products.

Gross profit for the nine months ended September 30, 2005 was down $18.0 million, or 21.3%, from the same period in 2004. The gross profit percentage dropped from 42.3% for the nine months 2004 to 35.2% this year. Excluding the impact of the loss on the PM Termination Agreement, the gross profit percentage for the nine months ended September 30, 2005 would be

39.3%. The decrease in the gross margin percent is due primarily to an increase in the level of closeout sales in the U.S. in 2005 as compared to 2004. The gross margin percent excluding PMI revenues and costs decreased to 40.3% for the nine months ended September 30, 2005 compared to 42.5% for the same period in 2004 due primarily to the high level of closeout sales.

Three Months Ended March 31,
($ in thousands) 2006 2005 Change %

Net revenues, other thanPrecious Moments^®.
$ 37,964 $ 49,270 (22.9 )%
Precious Moments^® product revenues
— 10,814

Net revenues as reported $ 37,964 $ 60,084 (36.8 )%

Cost of goods sold, other thanPrecious Moments^®
$ 22,000 $ 30,233 (27.2 )%
Precious Moments^® cost of sales
— 3,941
Precious Moments^® royalties
— 3,307

Cost of goods sold as reported $ 22,000 $ 37,481 (41.3 )%

Gross margin, other thanPrecious Moments^®
42.1 % 38.6 %

Gross margin,Precious Moments^®
— % 33.0 %

Gross margin as reported 42.1 % 37.6 %

Selling, General and Administrative Expenses (SG&A)

~~SG&A~~Selling, general and administrative expenses declined $10.0 million, or 28.4%, to $25.3 million, in the ~~third~~first quarter ~~of 2005 of $31.4~~2006 from $35.3 million ~~decreased $1.6 million, or 5.0%, below~~in the ~~2004 level. For the nine months ended September 30, 2005, SG&A costs of $99.2 million are up $7.2 million, or 7.8%, from the comparable~~ prior year period. The decrease in SG&A, in dollars, for the quarter primarily reflects reduced salary expense due to our restructuring efforts, lower selling and marketing costs, reduced travel and entertainment expenses and a reduction in depreciation expense due to the accelerated depreciation of our ERP system in 2005. These factors were offset in part by increased bank and consulting fees. The total dollar amounts spent on SG&A has declined on a quarterly basis throughout 2005 and through the three months ended March 31, 2006, which we believe directly reflects our efforts to right-size the business. While we expect to achieve declines in SG&A from comparable prior periods last year, we do not expect to achieve reductions in SG&A on a quarterly basis during 2006.

The following table details the items that had significant impact on changes in SG&A ~~spending.~~spending:

Changes in SG&A from the Three Months
and Nine Months ended September 30, 2004 to the
Three Months Nine Months
($ in millions) Ended Ended
September September
30, 2005 30, 2005
Reduced salaries and benefit costs $ (3.4 ) $ (4.6 )
Reduced spending on selling and marketing initiatives (0.9 ) (2.7 )
Lower travel and entertainment (0.4 ) (1.2 )
Lower commissions due to reduced sales volume (0.4 ) (1.1 )
Higher bank fees 0.8 2.5
Accelerated depreciation on ERP system — 3.7
Severance and plant closure costs 0.6 1.5
Increase in bad debt reserve 0.7 1.4
Incremental SG&A costs from the Dartington acquisition 0.4 3.3
Higher consulting fees 0.7 1.6
Higher audit fees 0.5 1.6
Higher legal fees 0.7 0.6
Other, net (0.9 ) 0.6

$ (1.6 ) $ 7.2

Increase (Decrease)
Three Months Ended
March 31,
2006 vs. 2005
(In millions)
Reduced administrative salaries and benefit costs $ (3.7 )
Accelerated depreciation of ERP system in prior year (2.4 )
Reduced distribution and warehousing costs (1.0 )
Lower commissions due to reduced sales volume (0.8 )
Reduced spending on selling and marketing initiatives (0.6 )
Lower Sarbanes-Oxley compliance costs (0.5 )
Lower travel and entertainment (0.4 )
Favorable foreign currency exchange rate impact (0.4 )
Higher bank fees 0.5
Higher consulting fees 0.4
Other, net (1.1 )
$ (10.0 )

~~Operating Income (Loss)~~

~~The operating income for the quarter decreased to $1.0 million from $1.7 million~~Restructuring expenses recognized in the ~~prior year third quarter. The main contributors~~first quarter 2006 related to ~~this decrease~~our Operating Improvement Plan include approximately $0.2 for employee severance costs related to the transition of our warehousing and distribution operations to a third-party logistics provider (NDC) from our warehouse facility in ~~operating profit are lower gross profit~~Elk Grove Village, Illinois. We will have additional restructuring expenses associated with the outsourcing of ~~$2.3 million, primarily due to lower sales volume, which was only partially offset by a reduction in SG&A costs~~our warehousing and distribution operations through the remainder of ~~$1.6 million.~~2006.

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~~For~~Operating Income (Loss)

Operating loss for the ~~nine~~three months ended ~~September 30, 2005, the~~March 31, 2006 was $9.3 million, versus an operating loss ~~increased $25.2~~of $12.7 million, ~~to $32.9 million.~~reported in the three months ended March 31, 2005. The ~~main contributors to this increased loss are lower~~impact from our shortfall in sales quarter-over-quarter was more than offset by the improvement in gross ~~profit of $18.0 million, primarily due to lower sales volume~~margin percentage and ~~the loss on the PM Termination Agreement of $7.7 million and increased SG&A costs of $7.2 million.~~a significant reduction in our operating expenses.

Interest and Other Income (Expense), Net

Interest expense for the quarter ~~rose $0.3~~increased $0.2 million, to ~~$0.7~~$0.6 million, due to higher borrowings and ~~higher~~ interest rates. ~~For~~Other expense decreased $0.2 million, in the ~~nine~~three months ended ~~September 30, 2005, interest expense has increased $0.9 million~~March 31, 2006 due primarily to ~~$1.5 million.~~a reduction in foreign currency exchange losses.

Provision for Income Tax Expense (Benefit)

For the ~~quarter~~three months ended ~~September 30, 2005,~~March 31, 2006, income tax expense was ~~$2.4~~$0.7 million, comprised of a benefit from a domestic NOL of ~~$0.4~~$4.1 million, offset by a deferred tax asset valuation allowance expense of ~~$1.4~~$4.1 million, and a foreign tax expense related to operations of ~~$1.4~~$0.7 million. For the ~~quarter~~three months ended ~~September 30, 2004,~~March 31, 2005, income tax expense was ~~$0.2~~$2.1 million, which ~~was~~ comprised of: a provision of $2.6 million to establish a reserve for the potential impact of a foreign tax examination: a benefit of $1.1 million related to reserves that were determined to be unnecessary; a benefit from a domestic NOL of ~~$1.5 million and a foreign tax expense related to operations of $1.7 million.~~

For the nine months ended September 30, 2005, income tax expense was $4.8 million, comprised of a domestic tax benefit of $0.1 million and a foreign tax expense of $4.9. The domestic tax benefit is comprised of a benefit from a NOL of $14.1$5.5 million, offset by a deferred tax asset valuation allowance expense of $15.1 million, and a benefit from the reversal of previously recorded tax reserves no longer required of $1.1 million. The net foreign tax expense is comprised of $2.1 million related to operations and a reserve established related to a potential audit assessment of $2.8 million. For the nine months ended September 30, 2004, the tax benefit was $3.8 million, which was comprised of a benefit from a domestic NOL of $6.7 million$5.5 million; and a foreign tax expense related to operations of ~~$2.9~~$0.6 million.

As of December 31, 2004, the Company was no longer able to rely upon the indefinite reversal criteria of the Accounting Principles Board (“APB”) Opinion No. 23 with respect to the reinvested earnings of certain of its foreign subsidiaries due to the anticipated guarantee in 2005 of the Company’s domestic debt by those subsidiaries, resulting in the recognition of a $17.6 million deferred tax liability and related tax expense. The debt guarantees were put into effect during August 2005 resulting in the recognition of deemed dividends from those subsidiaries for tax purposes under the United States Internal Revenue Code and the reversal of the $17.6 million deferred tax liability, which had no net impact on income tax expenses.

Management has not yet completed its evaluation of the tax implications of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Act”), and currently has no plan to make qualifying repatriations of foreign earnings under the Act. The deemed dividends noted in the paragraph above are not qualifying dividends under the provisions of the Act. It is not possible to estimate a range of the effect of any potential repatriations under the Act until a new credit facility is finalized. Subsequent to the completion of any new credit facility, management will complete its evaluation of the potential desirability of repatriations under the Act. It is possible that there may be no benefit to earnings repatriations under the Act due to the Company’s current year domestic NOL.

LIQUIDITY AND CAPITAL RESOURCES

~~Subject to our ability to either extend our existing credit facility and/or secure replacement financing by January 1, 2006, the Company believes~~We believe that our current cash and cash equivalents, cash generated from operations, ~~and~~current available financing and our historical ability to negotiate increases to our seasonal loan advance rates on eligible collateral under our existing credit facility will satisfy our expected working capital needs, capital expenditures and other liquidity requirements associated with our existing operations. There are no assurances, however, of our ability to negotiate an increase in our seasonal loan advance rates on eligible collateral, obtain waivers of existing or future covenants if violated, extend our existing credit facility and/or secure replacement financing of the senior revolving credit facility, which expires January 1, ~~2006, or that we will successfully negotiate more favorable covenants, obtain further waivers of future covenants or maintain sufficient loan advance rates on eligible collateral.~~2007.

Liquid Assets

Cash and cash equivalents on ~~September 30, 2005~~March 31, 2006 were ~~$4.1~~$8.7 million, versus ~~$14.6~~$12.9 million at December 31, ~~2004.~~2005. Cash and cash equivalents ~~are~~is a function of cash flows from operating, investing and financing activities. ~~We historically~~Historically, we have satisfied capital requirements with ~~borrowings and, in 2004, proceeds from the sale of property, plant and equipment.~~borrowings. Cash balances and working capital requirements fluctuate due to operating results, shipping cycles, accounts receivable collections, inventory management and timing of payments, among other factors. Working capital requirements fluctuate during the year and generally are ~~generally~~ greatest early in the fourth quarter and lowest early in the first quarter.

Cash Flows

The net cash used by operating activities is a function of our net loss, offset by non-cash income and expenses such as depreciation and deferred gains on sales of property plant and equipment as well as changes in working capital. Net cash used in operations totaled ~~$33.2~~$12.0 million for the ~~nine~~three months ended ~~September 30, 2005, relatively unchanged~~March 31, 2006, an increase of $4.5 million, from the ~~$33.7~~$7.5 million, used in the same period last year. Non-cash expenses were ~~$8.9~~$3.2 million ~~higher~~lower in ~~2005~~2006 than in the same period in ~~2004,~~2005, primarily due to ~~the $7.7 loss on the PMI license termination. The non-cash expense increase also included~~ depreciation and amortization charges ~~of $6.7 million,~~ which, ~~were~~in 2005, included $2.4 million ~~higher than the comparable nine months last year, primarily due to~~of accelerated depreciation charges ~~of $3.7 million~~ related to the ~~enterprise resource planning (“ERP”)~~ERP system migration. ~~The first nine months of 2005 also included the non-cash recognition of $1.4 million of gain deferred from the December 2004 sale of the distribution center.~~

For the ~~nine~~three months ended ~~September 30, 2005,~~March 31, 2006, changes in operating assets and liabilities used ~~$8.0~~$1.8 million of cash, ~~which was $26.5~~a decline of $5.8 million ~~favorable to~~from the $4.0 million provided in the same period last ~~year, during which $34.5 million of cash was used.~~year. Accounts receivable ~~increased $6.9~~decreased $8.3 million ~~during~~in the ~~nine~~three months ended ~~September 30, 2005,~~March 31, 2006, compared to ~~an increase~~a decrease of ~~$31.6~~$5.8 million for the ~~2004~~same period in 2005. Inventories increased by $1.5 million in the three months ended March 31, 2006, compared to a decrease of $2.4 million for the same period in 2005 period. The ~~smaller increase~~changes in ~~2005 was~~receivables and inventories in the three months ended March 31, 2006 primarily were due ~~in part,~~ to lower revenues ~~for~~resulting from the ~~2005 third quarter versus~~slower than anticipated rate of shipping orders from NDC due to transition issues at the ~~2004 third quarter, as well as to more favorable sales terms and stricter credit policy management.~~new location.

~~We incurred a $7.7 million loss on the transfer of inventory related to the PM Termination Agreement~~The net cash used by investing activities in the ~~second quarter of 2005. Net of this transfer, inventories decreased an additional $2.2~~three months ended March 31, 2006 declined $0.6 million ~~during the first nine months of 2005, primarily~~ due to ~~warehouse order processing efficiencies, more timely procurement of Christmas merchandise and other products, and an increased level of close-out sales.~~a decline in equipment purchases.

3022

The net cash used by investing activities during the nine months ended September 30, 2005 of $1.2 million showed a decrease of $16.9 million compared to the same time period in 2004, during which the Company used $14.3 million for the acquisitions of Gregg Gift and Dartington. Additionally, the Company’s property, plant and equipment expenditures decreased from $3.8 million in the nine months ended September 30, 2004 compared to $2.0 million in the same 2005.

~~The net cash~~ provided by financing activities ~~through September 30, 2005~~in 2006 totaled ~~$24.3~~$7.6 million, versus ~~$51.1~~$12.1 million for ~~the same period in 2004.~~2005. The decrease resulted primarily from a $4.1 million decline in borrowing activities, which was ~~due~~made possible by a successful effort to lower investing activities in 2005 versus 2004. The primary financing requirements in 2004 were the February 2004 acquisition of Gregg Gift, the July 2004 acquisition of Dartington and the funding ofreduce the cash ~~used in operations.~~

~~For the nine months ending September 30, 2005 and 2004, we reclassified stock-based compensation expense from investing activities to~~balances on hand at our operating ~~activities~~facilities in the ~~Consolidated Statements~~U.K., Canada and Hong Kong.

Operating Improvement Plan Goals

As stated above, Enesco has specific profitability goals built into its Operating Improvement Plan. Enesco seeks to build a profitable, sustainable business model focused on high margin gift products. This operating model will target gross margins in the range of ~~Cash Flows. The reclassification was $0.8 million for the nine months ended September 30, 2005~~40% to 45% and ~~$0.8 million for the nine months ended September 30, 2004.~~an operating profit margin of 3% to 5%, which are expected to be achieved in 2007.

Credit Facilities

In June 2003, Enesco entered into a ~~new~~ three-year domestic $50.0 million unsecured revolving credit facility that includes Enesco International (H.K.) Limited as a borrowing subsidiary. The credit agreement contains financial and operating covenants including restrictions on incurring indebtedness and liens, acquisitions, selling property, repurchasing ~~the Company’s~~Enesco’s shares and paying dividends. In addition, as amended, Enesco is required to satisfy ~~fixed charge coverage ratio and leverage ratio tests~~certain financial covenants at the end of each ~~quarter and a minimum annual operating profit covenant.~~

On March 29, 2005, we entered into a sixth amendment to our existing U.S. credit facility, effective March 31, 2005, extending the term until January 1, 2006. The credit facility commitment ranged from $50.0 million to $70.0 million, based on our seasonal borrowing needs. The amendment also set certain financial covenants for 2005.month.

On July 7, 2005, we entered into an eighth amendment to our current U.S. credit facility. The eighth amendment added accounts receivable and inventory of N.C. Cameron & Sons Limited, our Canadian subsidiary, to the borrowing base under the credit facility and reduced the advance rate on inventory from 50% to 33% effective July 31, 2005. The fee of $1.75 million payable on the termination of the commitment under the credit facility was eliminated. The obligation to pay a fee of $0.7 million on June 30, 2005 was amended so that $0.35 million was payable on June 30, 2005 and the balance was payable on the earlier of July 29, 2005 and the date that liens are granted on the assets of the U.K. subsidiaries. On July 29, 2005, we paid the fee balance of $0.35 million.

As of August 31, 2005, we entered into a ninth amendment to our current U.S. credit facility. The ninth amendment reset ~~the Company’s~~our minimum EBITDA and capital expenditure covenants through the facility termination date, December 31, 2005, based on ~~the Company’s~~our reforecast and long-term partnership with Bank of America, as successor to Fleet ~~National Bank,~~ and

LaSalle Bank. The ninth amendment also added the accounts receivable and inventories of Enesco Limited, Enesco Holdings Limited and Bilston & Battersea Enamels Limited, and the accounts receivable of Enesco International (H.K.) Limited as eligible collateral to the borrowing base under the current credit facility. The ninth amendment also increased the current credit facility size to $75.0 ~~million, rather than~~million.

On March 31, 2006, we entered into an eleventh amendment to our existing U.S. credit facility. This amendment reset Enesco’s 2006 cumulative minimum monthly EBITDA covenants effective January 30, 2006, based on our reforecast and reduced the credit facility commitments from $75.0 million to $70.0 ~~million.~~million effective between the eleventh amendment date and January 1, 2007. In addition, unless the outstanding loans and letters of credits under the existing U.S. credit facility are paid in full, the eleventh amendment accelerates by one month the fees per the tenth amendment which were to be due May 1, 2006 and June 1, 2006. The total fees paid on April 1, 2006 was $1,025,000 and on May 2, 2006 was $750,000. The monthly fee of 0.10% of the highest loan amount outstanding during the preceding month increased to 0.20% on May 1, 2006, rather than June 1, 2006 as per the tenth amendment, and will continue until the facility termination date.

~~We are aggressively~~On December 14, 2005, Enesco signed a commitment letter with LaSalle Business Credit, LLC to arrange a new $75 million senior secured credit facility. If entered into, the new credit facility with LaSalle will have a term of five years and will replace our existing credit facility with Bank of America, as successor to Fleet National Bank, and LaSalle Bank. As the Administrative Agent, LaSalle expects to form a syndicate of financial institutions to participate in the new credit facility. The commitment letter contains a number of conditions that must be satisfied in order for the facility to be closed, including having a minimum borrowing availability of at least $10 million at the time of closing; the lender’s completion of its final due diligence with respect to Enesco and its subsidiaries; the negotiation and execution of a definitive credit agreement; there being no material adverse change in our business, assets, liabilities, properties, condition (financial or otherwise), results of operations or prospects of Enesco and its subsidiaries since December 31,

2004, there being no material disruption or material adverse change in financial, banking or capital markets generally affecting credit facilities, and various appraisals, as well as other standard and customary conditions. Under the commitment letter, the new credit facility was to close on or before January 31, 2006.

Since January 31, 2006, Enesco has received monthly extensions of the LaSalle commitment letter’s expiration date. On April 28, 2006 Enesco received a modification to its commitment letter from LaSalle, extending the expiration date from April 30, 2006 to May 31, 2006.

Enesco is seeking replacement financing to pay off the ~~current~~existing U.S. credit facility. There are no assurances that we will secure replacement financing of the U.S. senior revolving credit facility, which expires on January 1, ~~2006.~~2007. Under a contemplated replacement facility, Enesco will be the borrower, and Enesco and our material domestic and foreign subsidiaries likely will be guarantors. In connection with closing on a replacement senior credit facility, we may need to obtain additional financing secured by, among other things, certain foreign inventory and receivable collateral from Canada, Hong Kong and the U.K., as well as certain real estate assets, in order to satisfy minimum excess availability conditions. Moreover, we anticipate that the proposed replacement facility will contain standard terms and conditions, and financial and other covenants including, without limitation, restrictions on incurring indebtedness and liens, acquisitions, change of control, change of management, selling property, repurchasing our shares and paying dividends.

At ~~September 30, 2005, we~~March 31, 2006, Enesco had total lines of credit providing for maximum borrowings of ~~$82.5~~$73.3 million, ~~$75.0~~$70.0 million ~~of which was available~~ under our current U.S. credit ~~facility.~~facility, and $3.3 million under international facilities. Actual borrowings of ~~$50.2~~$38.4 million and letters of credit and a customs bond ~~of $5.7~~totaling $4.6 million were outstanding at ~~September 30, 2005.~~March 31, 2006. The net available borrowing capacity under our current U.S. credit facility based on eligible collateral as of ~~September 25, 2005~~March 26, 2006 (the most recent measurement date prior to ~~September 30, 2005)~~March 31, 2006) was ~~$24.3~~$5.5 million and as of May 7, 2006 (the most recent measurement date prior to the filing of this Quarterly Report on Form 10-Q), was $2.5 million.

As of March 31, 2006, Enesco had a total of $38.4 million of interest bearing debt outstanding, all in the U.S., with a floating interest rate of 6.9%, compared to an aggregate debt balance of $38.0 million with a floating interest rate of approximately 4.8% at March 31, 2005.

~~New~~Recent Accounting Pronouncements

In November 2004, the FASB issued FAS No. 151,Inventory Costs,which amended the guidance in Accounting Research Bulletin (ARB) No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material (spoilage). It also requires that the allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The standard is effective for inventory costs incurred by Enesco beginning January 1, 2006. The implementation of FAS No. 151 did not have a significant impact on the results of our operations in the three months ended March 31, 2006.

In December 2004, ~~the Financial Accounting Standards Board (“FASB”)~~FASB revised FASB Statement No. 123,Accounting for Stock-Based Compensation.This Statement ~~superseded~~supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees,, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or ~~Services~~Services.. This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6,Employers’ Accounting for Employee Stock Ownership Plans.This Statement is effective as of the beginning of the first annual reporting period that begins after June 15, ~~2005~~.~~We are evaluating whether we will continue to provide share-based compensation and~~2005. Enesco adopted this Statement for the ~~impact that this new accounting standard will have on the results of our operations going forward.~~

~~In November 2004, the FASB issued FAS No. 151,~~~~Inventory Costs~~, which amended the guidance in Accounting Research Bulletin (“ARB”) No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs and wasted material (spoilage). It also requires that the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facilities. The standard will be effective for inventory costs incurred by Enescoquarter beginning January 1, 2006. ~~We do not anticipate~~This revised Statement is applicable for Enesco’s yearly service awards granted after the required effective date and modified, repurchased or cancelled after that date. The impact on our Consolidated Statement of Operations for 2006 for options granted prior to the ~~implementation~~adoption of FAS ~~No. 151 will have~~123 is not significant due to the acceleration of vesting on all previous options granted at a ~~significant impact on~~price greater than the ~~results of our operations going forward.~~

~~In March 2005, the FASB issued Interpretation No. 47,~~~~Accounting for Conditional Asset Retirement Obligations~~~~, which provides additional guidance on conditional asset retirement obligations under FAS No. 143,~~~~Accounting for Asset Retirement Obligations~~~~. This standard is effective for fiscal years ended after December 15,~~market price in November 2005. ~~We do not anticipate that the implementation of FAS No. 143 will have a significant impact on the results of our operations going forward.~~

In May 2005, the FASB issued FAS No. 154, which addresses the accounting and reporting for changes in accounting principles. FAS No. 154 replaces APB Opinion No. 20. APB Opinion No. 20 allowed a change in accounting principle to be accounted for generally as a cumulative effect adjustment in the current year’s financial statements. FAS No. 154 states that the change be reported retrospectively, and requires the following:

	•		The cumulative effect of the change to the new accounting principle on periods prior to those presented shall be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented.

	•		An offsetting adjustment, if any, shall be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period.

	•		Financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying the new accounting principle.

FAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. ~~This Statement will be applicable for~~ Enesco ~~beginning~~has made no accounting changes in the three months ended March 31, 2006.

~~NYSE~~New York Stock Exchange Continued Listing ~~Requirements~~Standards Compliance

On September 8,1, 2005, ~~we announced that the Company~~Enesco received notification from the New York Stock Exchange ~~(“NYSE”) on September 1, 2005,~~(NYSE) that ~~the Company was~~we were not in compliance with the ~~NYSE’s~~ continued listing ~~standards.~~standards of the exchange. Enesco is considered “below criteria” by the NYSE, because ~~the Company’s~~our total market capitalization was less than $75 million over a consecutive ~~30 trading-day~~30-trading-day period and ~~its~~our shareholders’ equity was less than $75 million. On October 14, 2005, ~~the Company~~we submitted a plan to the NYSE, demonstrating how ~~it intends~~we intend to comply with the continued listing standards within 18 months of ~~the Company’s~~our receipt of the notice. ~~The~~On December 5, 2005, the NYSE ~~may take up~~accepted our plan for continued listing on the NYSE. Enesco’s common stock continues to ~~45 days to review and evaluate~~be listed on the ~~plan after it is submitted. If the plan is accepted, the Company will be~~NYSE, subject to quarterly ~~monitoring for compliance~~reviews by the ~~NYSE.~~ NYSE listings and compliance committee to ensure progress against our plan.

If we are unable to meet the criteria and are delisted, we may be unable to have our common stock listed on Nasdaq because of its minimum stock price and other listing requirements and, as a result, we would likely have our common stock quoted on the Over-the-Counter Bulletin Board, or the OTC BB, which would also require us to delist our common stock from the NYSE ~~does not accept~~Arca, formerly known as the ~~plan or if the Company is unable to achieve compliance with the NYSE’s continued listing criteria through its implementation of the plan, the Company will be subject to NYSE trading suspension~~Pacific Stock Exchange.

Item 3.Quantitative and ~~delisting, at which time the Company would intend to apply to have its shares listed on another stock exchange or quotation system.~~

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Qualitative Disclosures About Market Risk

There have been no material changes from the information previously reported under Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2004.~~2005. Enesco operates globally with various manufacturing and distribution facilities and product sourcing locations around the world. Enesco may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. Enesco does not use derivative financial instruments for trading or speculative purposes. Enesco regularly monitors foreign currency exposures and ensures that any hedge contract amounts do not exceed the amounts of the underlying exposures.

Enesco’s current hedging activity is limited to foreign currency purchases and intercompany foreign currency transactions. The purpose of Enesco’s foreign currency hedging activities is to protect Enesco from the risk that the eventual settlement of foreign currency transactions will be adversely affected by changes in exchange rates. Enesco may hedge these exposures by entering into various foreign exchange forward contracts. Under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, the instruments are carried at fair value in the balance sheet as a component of other current assets or other current liabilities. Changes in the fair value of foreign exchange forward contracts that meet the applicable hedging criteria of SFAS No. 133 are recorded as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Changes in the fair value of foreign exchange forward contracts that do not meet the applicable hedging criteria of SFAS No. 133 are recorded currently in income as cost of revenues or foreign exchange gain or loss, as applicable. Hedging activities did not have a material impact on results of operations or financial condition ~~during 2005.~~for the three months ended March 31, 2006.

~~ITEM~~Item 4. ~~CONTROLS AND PROCEDURES~~Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our President and Chief Executive Officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of ~~September 30, 2005.~~March 31, 2006. Our disclosure controls and procedures are designed

remediating over the remainder of 2005. However, our efforts to remediate such deficiencies have been adversely impacted by the vacancies in our senior and junior financial accounting positions. Such vacancies have strained our resources devoted to internal control over financial reporting. For example, we identified a deficiency in our internal control with respect to the process for tracking inventory in transit, which is in the process of being resolved. In the third quarter, we have filled our key senior accounting position and are interviewing candidates to fill our Chief Financial Officer position and to fill other accounting vacancies. We expect to have most of these vacancies filled before the end of 2005. In addition, to help management address these internal control deficiencies, we have outsourced our internal audit function to Grant Thornton LLP.

~~Other than as discussed above, there~~There were no changes in our internal control over financial reporting during the quarter ended ~~September 30, 2005,~~March 31, 2006, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART ~~II.~~II – OTHER INFORMATION

~~ITEM~~Item 1. ~~LEGAL PROCEEDINGS~~Legal Proceedings

~~We included in our Form 10-Q for the second fiscal quarter,~~In July 2005, ~~notice that on July 29, 2005, we~~Enesco filed ~~a Complaint~~suit against Department 56, Inc., Sunshine Productions, Inc., Kevin Knowles and Jim Shore Designs, Inc. in the ~~United States~~U.S. District Court, Northern District of Illinois, Eastern Division. ~~In summary, the Complaint,~~The complaint, as against Jim Shore Designs, ~~alleges~~alleged breach of contract related to Enesco’s ~~current~~ license agreement with Jim Shore Designs, ~~Inc.,~~ which license agreement was filed with the SEC on a Form 8-K, dated October 5, 2004. Enesco specifically ~~alleges~~alleged that Jim Shore Designs ~~is breaching~~breached provisions relating to Enesco’s exclusivity under the ~~current~~ license agreement. With regard to Department 56, the ~~Complaint alleges~~complaint alleged a violation of Section 43(a) of the Lanham Act. As against Sunshine Productions, Enesco ~~alleges~~alleged that Sunshine Productions interfered with Enesco’s contract with Jim Shore Designs. Finally, in the ~~Complaint,~~complaint, Enesco ~~alleges~~alleged that Sunshine Productions and Kevin Knowles engaged in a civil conspiracy and induced an employee to breach her duty of loyalty to Enesco. ~~We seek~~Enesco sought monetary and equitable relief in connection with the suit. ~~Enesco plans vigorously to pursue adherence to its current license agreement, and does not seek to terminate its license agreement with Jim Shore Designs in the Complaint.~~Defendants filed counterclaims against Enesco.

On August 15, 2005, weEnesco filed a motion for preliminary injunction against Department 56, Inc., based on our ~~Amended Complaint~~amended complaint in the ~~United States~~U.S. District Court, Northern District of Illinois, Eastern Division. ~~We are seeking~~Enesco sought preliminary injunctive relief relating to ~~our~~Enesco’s claim that Department 56 ~~has been~~had unfairly ~~competing~~competed through allegedly false and misleading statements and conduct. The ~~Amended Complaint alleges~~amended complaint alleged that the actions of Department 56 ~~violate~~violated federal unfair competition laws, as well as the Illinois Uniform Deceptive Trade Practices Act and the Illinois Consumer Fraud and Deceptive Business Practices Act. ~~We are vigorously pursuing adherence to~~The motion for preliminary injunction sought an order preliminarily prohibiting Department 56 from engaging in conduct that constitutes unfair competition.

On January 30, 2006, Enesco announced that it had resolved its complaint and counterclaim with Jim Shore Designs, Inc. As part of the settlement, we terminated our ~~current~~ license agreement with Jim Shore Designs ~~Inc.,~~effective November 23, 2005, and ~~we do~~entered into a new strategic alliance agreement. Under this agreement, Jim Shore Designs reaffirms and strengthens its commitment to Enesco, which, among other things, continues the relationship between Enesco and Jim Shore Designs three years from the effective date, November 23, 2005, through November 22, 2008, and through November 22, 2011 unless either party chooses not ~~seek~~ to ~~terminate the license agreement in the amended complaint.~~renew. The Strategic Alliance Agreement focuses on key gift and seasonal categories that have been very successful for Enesco and Jim Shore Designs.

~~As part of their responsive pleadings, the defendants each filed counterclaims against Enesco.~~On February 28, 2006, Enesco announced that it had resolved its complaint and counterclaim with Department 56, Inc. relating to Jim Shore Designs, Inc. ~~filed counterclaims alleging (a) tortious interference with~~As part of the ~~alleged license~~settlement agreement, ~~between it and Sunshine Productions, Inc., (b) fraudulent inducement with respect to its license agreement with~~ Enesco and ~~(c) various breaches by~~Department 56 agreed to a full waiver of any claims against each other and released each other from any losses, claims, damages and expenses relating to this lawsuit. The settlement agreements between Enesco ~~of the license~~

~~agreement.~~and Department 56 and Jim Shore Designs, Inc. ~~also seeks a declaratory judgment that its license agreement~~do not resolve Enesco’s ongoing litigation with ~~Enesco is limited to certain categories of goods and, accordingly, that Jim Shore Designs, Inc. has not breached the license agreement.~~Kevin Knowles and/or Sunshine Productions, Inc.’s counterclaim also alleges tortious interference with the alleged license with Jim Shore Designs, Inc. and that Enesco has disparaged Sunshine Productions and competed unfairly. Department 56, Inc. alleges that Enesco has tortiously interfered with Department 56’s alleged agreement with Sunshine Productions, Inc.Productions.

~~Finally, in~~In the ordinary course of Enesco’s business, there are various legal proceedings ~~may be~~ pending against Enesco and its ~~subsidiaries from time to time. While~~subsidiaries. In addition, while we cannot predict the eventual outcome of these proceedings, we believe that none of ~~the currently pending~~these proceedings will have a material adverse impact upon ~~Enesco’s consolidated~~our business, financial ~~statements.~~

~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~None.~~

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~

~~None.~~

~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS~~

~~None.~~

~~ITEM 5. OTHER INFORMATION~~

~~None.~~

~~ITEM 6. EXHIBITS~~

~~See Exhibit Index.~~condition or results of operations.

3626

Item 1A.Risk Factors

The ownership of our common stock involves a number of risks and uncertainties. You should carefully consider the risks and uncertainties described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005 and the other information in this Form 10-Q before deciding whether to invest in our common stock. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks described in our Annual Report on Form 10-K and as set forth below are not the only ones facing us. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations.

Our failure to generate sufficient cash to meet our liquidity needs may affect our ability to service our indebtedness and grow our business.

Our ability to make payments on and to refinance our indebtedness, amounts borrowed under our senior credit facility, and to fund any capital expenditures we may make in the future, if any, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control.

Should we fail to achieve forecasted results, Enesco will need to identify alternate sources of financing including extending our existing credit facility and/or securing replacement financing by January 1, 2007. Additionally we will need to negotiate with our lenders an increase to our seasonal loan advance rates on eligible collateral under our existing credit facility for our cyclical cash decline during the summer months. We cannot assure you that our business will generate sufficient cash flow from operations in the future, our currently anticipated long-term growth in revenues and cash flow will be realized on schedule or in an amount sufficient to enable us to service indebtedness, or that adequate future borrowings will be available to us under the senior credit facility. We may need to refinance all or a portion of our indebtedness, including our credit facility, on or before maturity. There can be no assurance that we will be able to do so on commercially reasonable terms or at all.

Our existing credit facility contains, and any new credit facility will most likely contain, various covenants which limit our management’s discretion in the operation of our business and the failure to comply with such covenants could have a material adverse effect on our business, financial condition and results of operations.

Our credit facility contains various provisions that limit our management’s discretion by restricting our ability to, among other things:

	•		incur additional indebtedness;

	•		pay dividends or distributions on, or redeem or repurchase, our common stock;

	•		make investments;

	•		incur liens;

	•		transfer or sell assets;

	•		consolidate, merge, or transfer all or substantially all of our assets; and

	•		retain and dismiss consultants to provide strategic and structural services without approval of our lenders.

We anticipate that we will be required by lenders to agree to a change in control default covenant in our replacement credit facility if our CEO and President were to resign. Any failure to comply with the restrictions of our credit facility or any other subsequent financing agreements may result in an event of default. An event of default may allow the creditors, if the agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies.

We are highly dependent upon the ability of our senior management and consultants to effectively run our operations.

We have been experiencing changes in our senior management team. Cynthia Passmore, our President and CEO and a director, will no longer serve in those capacities effective May 15, 2006. While we are conducting a search for executives to fill these positions on a permanent basis, we have appointed an interim CEO and an interim CFO who will begin employment effective May 15, 2006. In addition, we appointed a Chief Financial Officer in January 2005 who resigned in July 2005. We then appointed a Chief Accounting Officer to handle these functions. In addition, we have eliminated the position of Chief Operating Officer as part of our downsizing efforts and our General Counsel has resigned effective April 3, 2006. In connection with the development and implementation of our Operating Improvement Plan, we have engaged Keystone Consulting Group (Keystone), a restructuring advisor. Our credit agreement under our current credit facility requires us to retain Keystone or another consultant reasonably acceptable to our lenders until we have repaid our credit facility in full. We have been highly dependent on Keystone to assist us in implementing the Operating Improvement Plan. We have decided not to renew Keystone’s engagement agreement which expired March 31, 2006 and April 30, 2006 was the last day of Keystone’s services.

Effective May 10, 2006, Enesco retained Mesirow Financial Consulting, LLC to provide support to the finance team in implementing our Operating Improvement Plan and to assist us in identifying other improvement opportunities. Our ability to implement our business strategy is dependent upon our senior management’s ability to run our business effectively and to retain consultants with appropriate skills.

We do not have employment agreements with our executive officers. We cannot assure you that we will be able to retain any of our executives, that we will be successful in retaining consultants promptly on terms favorable to us who will have the expertise to assist us in the continued implementation of our Operating Improvement Plan, or that our lenders will approve our consultants and will grant a waiver of our failure to have retained consultants acceptable to them following the cessation of Keystone’s services. Our business, results of operations and financial condition could be materially adversely affected by the loss of any of these persons, the inability to attract and retain appropriately qualified replacements or consultants, or our lenders declaring a default under our credit agreement because of our failure to retain consultants acceptable to them. In addition, as noted above, if our CEO and President resigns or is terminated, our licensing agreement with Jim Shore Designs, Inc. would be at risk of being terminated.

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

Enesco did not sell or repurchase equity securities of Enesco during the period covered by this report.

Item 3.Defaults Upon Senior Securities

There have been no material defaults in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within 30 days, with respect to any indebtedness of Enesco or any of its significant subsidiaries exceeding 5% of the total assets of Enesco and its consolidated subsidiaries.

Enesco did not pay dividends during the period covered by this report. Enesco’s revolving credit agreement contains financial and operating covenants, including restrictions on paying dividends.

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

No matters were submitted to a vote of Enesco shareholders during the period covered by this report.

Item 5.Other Information

On March 14, 2006, we entered into an agreement with Koreen A. Ryan, our former Senior Vice President, Human Resources, General Counsel and Secretary, which provided for the transition of her duties and responsibilities through her resignation date of April 3, 2006. The agreement also provided Ms. Ryan separation pay of $181,500 payable in installments in accordance with our regular payroll payment schedule, her bonus for the prior fiscal year in the amount of $7,200, and the right to purchase COBRA continuation coverage at the active employee contribution rate for up to nine months. The agreement contained mutual non-disparagement obligations and mutual releases for all claims and required Ms. Ryan to continue to be subject to obligations under our confidentiality policies.

Item 6.Exhibits

Exhibits required to be filed by Enesco are listed in the Exhibit Index.

EXHIBIT INDEX


~~Exhibit Number~~Item 601		~~Exhibit Index — Description of~~ Exhibit

	~~10.1~~10.1*		Fifth Amendment to Second Amended and Restated Revolving Credit Agreement between Enesco Group, Inc. and Fleet National Bank filed (on January 31, 2005) as Exhibit 10.1 to registrant’s Current Report on Form 8-K, dated January 28, 2005, and hereby incorporated by reference.

	~~10.2~~		Letter Amendment to Fifth Amendment to Second Amended and Restated Revolving Credit Agreement among Enesco Group, Inc., Fleet National Bank and LaSalle Bank N.A. filed (on February 17, 2005) as Exhibit 10 to registrant’s Current Report on Form 8-K, dated February 16, 2005, and hereby incorporated by reference.

	~~10.3~~		Sixth Amendment dated March 29, 2005 between Enesco Group, Inc., Fleet National Bank and LaSalle Bank, N.A. filed (on March 29, 2005) as Exhibit 10.1 to registrant’s Current Report on Form 8-K, dated March 28, 2005, and hereby incorporated by reference.

	~~10.4~~		Seventh Amendment and Termination Agreement, dated May 17, 2005, between Precious Moments, Incorporated and Enesco Group, Inc. filed (on May 18, 2005) as Exhibit 99.1 to registrant’s Current Report on Form 8-K, dated May 18, 2005, and hereby incorporated by reference.

	~~10.5~~		~~Seventh Amendment~~Eleventh amendment to Second Amended and Restated Senior Revolving Credit Agreement, dated ~~May 16, 2005~~as of March 31, 2006, by and among Enesco Group, Inc., Fleet National Bank and LaSalle Bank, N.A.~~, filed (on May 26, 2005) as Exhibit~~ (Exhibit 99.1 to ~~registrant’s Current Report on~~ Form 8-K ~~dated May 26, 2005, and hereby incorporated by reference.~~filed on April 3, 2006 in Commission File No. 001-09267).

	~~10.6~~10.2*		~~Eighth Amendment~~Business Purchase Agreement between Enesco Limited and Dartington Crystal (Torrington) Limited (Exhibit 99.2 to Second Amended and Restated Senior Revolving Credit Agreement dated May 16, 2005 by and among Enesco Group, Inc., Fleet National Bank and LaSalle Bank, N.A., filed (on July 7, 2005) as Exhibit 99.1 to registrant’s Current Report on Form 8-K ~~dated July 7, 2005, and hereby incorporated by reference.~~filed on May 2, 2006 in Commission File No. 001-09267).

	~~10.7~~10.3		~~Letter Amendment to Eighth Amendment to Second Amended~~Transition/Resignation and ~~Restated Revolving Credit~~Release Agreement ~~among~~between Enesco Group, Inc.~~, Fleet National Bank~~ and ~~LaSalle Bank N.A. filed (on July 28, 2005) as Exhibit 99.1 to registrant’s Current Report on Form 8-K~~Koreen A. Ryan, dated ~~July 28, 2005, and hereby incorporated by reference.~~March 14, 2006.

	~~10.8~~		Ninth Amendment to Second Amended and Restated Senior Revolving Credit Agreement dated August 31, 2005 by and among Enesco Group, Inc., Fleet National Bank and LaSalle Bank, N.A., filed (on September 1, 2005) as Exhibit 99.1 to registrant’s Current Report on Form 8-K, dated August 31, 2005, and hereby incorporated by reference.

	~~10.9~~		Letter Amendment to Ninth Amendment to Second Amended and Restated Revolving Credit Agreement among Enesco Group, Inc., Bank of America, N.A. (formerly known as “Fleet National Bank”) and LaSalle Bank N.A., dated September 29, 2005.

	31.1		Certification of Chief Executive Officer under Exchange Act Rules ~~13a-15e and 15d-15e~~13a-14(a) or 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002


PART I

~~PART I. FINANCIAL INFORMATION~~Item 1.	Financial Statements		4

	Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005		5

~~Item 1. Financial~~	Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005		56

~~Consolidated Balance Sheets~~ ~~As of September 30, 2005 (Unaudited) and December 31, 2004~~		5

Consolidated Statements of ~~Operations~~ ~~For~~Shareholders’ Equity and Comprehensive Income (Loss) for the Three Months Ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004 (Unaudited)~~		7

	Consolidated Statements of ~~Operations~~ ~~For~~Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2006 and 2005 ~~and 2004 (Unaudited)~~		8

	Notes to Consolidated Financial Statements ~~of Shareholders’ Equity and Comprehensive Income (Loss)~~ ~~For~~for the ~~Nine~~Three Months Ended ~~September 30, 2005 and 2004 (Unaudited)~~March 31, 2006		9

~~Consolidated Statements~~ Item 2.	Management’s Discussion and Analysis of ~~Cash Flows~~ ~~For the Nine Months Ended September 30, 2005~~Financial Condition and ~~2004 (Unaudited)~~Results of Operations		1018

~~Notes to Consolidated Financial Statements (Unaudited)~~ Item 3.	Quantitative and Qualitative Disclosures About Market Risk		1125

Item ~~2. Management’s Discussion~~4.	Controls and ~~Analysis of Financial Condition and Results of Operations~~Procedures		2226

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~PART II
		34
Item 1.	Legal Proceedings		26

Item ~~4. Controls and Procedures~~1A.	Risk Factors		3428

~~PART II. OTHER INFORMATION~~Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3529

Item ~~1. Legal Proceedings~~3.	Defaults Upon Senior Securities		35
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		36
~~Item 3. Defaults upon Senior Securities~~		36
~~Item 4. Submission of Matters to a Vote of Security Holders~~		36
~~Item 5. Other Information~~		36
~~Item 6. Exhibits~~		3629

~~EXHIBIT INDEX~~ Item 4.	Submission of Matters to a Vote of Security Holders		3729
~~SIGNATURES~~		39
~~EXHIBIT 10.9~~
~~EXHIBIT~~ Item 5.	Other Information		29

Item 6.	Exhibits		29

Signatures			30

	Exhibit 10.3

	Exhibit 31.1
~~EXHIBIT~~
	Exhibit 31.2
~~EXHIBIT 32.1~~
~~EXHIBIT 32.2~~	Exhibit 32


~~Exhibit Number~~		~~Exhibit Index — Description of Exhibit~~

	31.2		Certification of Principal Financial Officer under Exchange Act Rules ~~13a-15e and 15d-15e~~13a-14(a) or 15d-14(a) pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002

	32.1		~~Statement~~Certification of Chief Executive Officer ~~Pursuant~~and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002


	ENESCO GROUP, INC. (Registrant)
Date: ~~November 9, 2005~~ May 12, 2006	By:	/s/ Cynthia ~~Passmore-McLaughlin~~Passmore
		Cynthia ~~Passmore-McLaughlin~~Passmore
		President and Chief Executive Officer



Date: ~~November 9, 2005~~ May 12, 2006	By:	/s/ Anthony G. Testolin
		Anthony G. Testolin
		Chief Accounting Officer (~~principal financial officer)~~Principal Financial Officer)

	•		~~Ability to implement the Company’s comprehensive plan for operating improvement and achieving its goals for cost savings and market share increases.~~

	•		Ability to ~~comply~~maintain strategic alliance agreements, particularly with ~~the covenants~~Jim Shore Designs, Inc., in the ~~existing U.S. credit facility and~~event Enesco experiences a change in control, including, but not limited to, ~~enter into new credit facilities to finance operational requirements at competitive cost and interest rates.~~a change in the President/CEO of Enesco.

	•		Ability to secure, maintain and renew licenses and contracts, particularly Jim Shore Designs, Inc., Disney and Priscilla Hillman (Cherished Teddies^®),which ~~have been~~are our top performers and make up approximately ~~25%~~27% of associated product line revenues.

	•		Changes in the geographical mix of revenue for the U.S. and ~~International~~international, which will impact gross margin.


	2005			2004
Operating Activities:
Net loss		(39,367	)		(4,515	)
Adjustments to reconcile net loss to net cash used by operating activities

Depreciation and amortization of property, plant and equipment		6,702			4,275
Deferred income taxes		303			257
Gains on sale of capital assets		(1,351	)		(10	)
Stock based compensation		816			785
Loss on license termination		7,713			—
Changes in assets and liabilities:
Accounts receivable		(6,923	)		(31,557	)
Inventories		2,214			(846	)
Prepaid expenses		(1,078	)		273
Other assets		626			22
Accounts payable and accrued expenses		(2,451	)		3,830
Income taxes payable		1,018			(6,268	)
Long-term post retirement benefits		(1,444	)		58

Net cash used by operating activities		(33,222	)		(33,696	)


Investing Activities:
Purchases of property, plant and equipment		(1,974	)		(3,805	)
Acquisitions, net of cash acquired		—			(14,321	)
Proceeds from sales of property, plant and equipment		766			58

Net cash used by investing activities		(1,208	)		(18,068	)


Financing Activities:
Net issuance of notes and loans payable		23,979			50,111
Exercise of stock options		322			1,021

Net cash provided by financing activities		24,301			51,132

Effect of exchange rate changes on cash and cash equivalents		(424	)		1,003

Decrease in cash and cash equivalents		(10,553	)		371
Cash and cash equivalents, beginning of period		14,646			10,645

Cash and cash equivalents, end of period		4,093			11,016

Supplemental disclosure of cash paid for:
Interest		466			434
Income taxes		1,898			2,343


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income (loss) as reported	$	(2,115	)	$	1,039		$	(39,367	)	$	(4,515	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(530	)		(582	)		(1,591	)		(1,747	)

Pro forma net income (loss)	$	(2,645	)	$	457		$	(40,958	)	$	(6,262	)


Income (loss) per share:
Basic and diluted — as reported	$	(0.14	)	$	0.07		$	(2.68	)	$	(0.32	)

Basic and diluted — pro forma	$	(0.18	)	$	0.03		$	(2.79	)	$	(0.44	)


	Three Months Ended
	March 31, 2005
	2006			2005
(In thousands)

Proprietary Designs	$	12,837		$	19,363
Licensed Brands		10,381			14,854
Third-party Distribution		14,592			14,237
Precious Moments^®(1)		—			10,814
Other		542			1,406
Intercompany		(388	)		(590	)

Total consolidated	$	37,964		$	60,084


	Three Months
	Ended
(In thousands, except per share amounts)	March 31, 2005

Net loss as reported	$	(15,216	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(127	)

Pro forma net loss		(15,343	)


Loss per share:
Basic and diluted — as reported	$	(1.04	)

Basic and diluted — pro forma	$	(1.05	)


				Three Months Ended March 31, 2006
				Weighted Average		Aggregate		Weighted Average
	Options			Exercise Price		Intrinsic Value		Remaining Term

Outstanding at beginning of period		2,218,760		$	9.53
Granted		61,200			1.86
Forfeited		(5,888	)		3.70
Exercised		—			N/A
Expired		(54,187	)		7.57

Outstanding at end of period		2,219,885			9.39		47,958		6.18

Exercisable at end of period		2,044,885		$	10.04	$	—		5.88


	Three Months Ended March 31,
($ in thousands)	2006			2005			Change %

Net revenues, other thanPrecious Moments^®.	$	37,964		$	49,270			(22.9	)%
Precious Moments^® product revenues		—			10,814

Net revenues as reported	$	37,964		$	60,084			(36.8	)%


Cost of goods sold, other thanPrecious Moments^®	$	22,000		$	30,233			(27.2	)%
Precious Moments^® cost of sales		—			3,941
Precious Moments^® royalties		—			3,307

Cost of goods sold as reported	$	22,000		$	37,481			(41.3	)%


Gross margin, other thanPrecious Moments^®		42.1	%		38.6	%

Gross margin,Precious Moments^®		—	%		33.0	%

Gross margin as reported		42.1	%		37.6	%


	Changes in SG&A from the Three Months
	and Nine Months ended September 30, 2004 to the
	Three Months			Nine Months
($ in millions)	Ended			Ended
	September			September
	30, 2005			30, 2005
Reduced salaries and benefit costs	$	(3.4	)	$	(4.6	)
Reduced spending on selling and marketing initiatives		(0.9	)		(2.7	)
Lower travel and entertainment		(0.4	)		(1.2	)
Lower commissions due to reduced sales volume		(0.4	)		(1.1	)
Higher bank fees		0.8			2.5
Accelerated depreciation on ERP system		—			3.7
Severance and plant closure costs		0.6			1.5
Increase in bad debt reserve		0.7			1.4
Incremental SG&A costs from the Dartington acquisition		0.4			3.3
Higher consulting fees		0.7			1.6
Higher audit fees		0.5			1.6
Higher legal fees		0.7			0.6
Other, net		(0.9	)		0.6

	$	(1.6	)	$	7.2


*
	~~32.2~~	~~Statement of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~Incorporated by reference