UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D. C. 20549
 
 
 **FORM
        10-Q**
 
 (Mark
        One)
 x
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**
 
 For
          the
          quarterly period ended December 31, 2006
 or
 
 **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 1-2661
 
 CSS
        INDUSTRIES, INC.
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              
              13-1920657(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)
 
 
 1845
                  Walnut Street, Philadelphia, PA
              
              19103(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 
 (215)
        569-9900
 (Registrant's
        telephone number, including area code)
 
 
 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.
 x Yes
⁪
        No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
 
 Large
                  accelerated filer⁪
              Accelerated
                  filer x
              Non-accelerated
                  filer⁪
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act.)
 ⁪
Yes
        x No
 
 As
        of
        January 19, 2007, there were 10,738,645 shares of common stock outstanding
        which
        excludes shares which may still be issued upon exercise of stock
        options.
  
  
  CSS
        INDUSTRIES, INC. AND SUBSIDIARIES
 
 INDEX
 
 
 PAGE
                  NO.PART
                  I - FINANCIAL INFORMATIONItem
                  1. Financial Statements (Unaudited)Consolidated
                  Statements of Operations and
                  Comprehensive Income - Three and nine months ended December 31,
                  2006 and
                  2005
              
              3Condensed
                  Consolidated Balance Sheets - December 31, 2006
                  and March 31, 2006
              
              4Consolidated
                  Statements of Cash Flows - Nine months ended
                  December 31, 2006 and 2005
              
              5Notes
                  to Consolidated Financial
                  Statements
              
              6-13Item
                  2. Management's Discussion and Analysis of Financial Conditionand
                  Results of Operations
              
              14-19Item
                  3. Quantitative and Qualitative Disclosures About
                  Market Risk
              
              19Item
                  4. Controls and Procedures
              
              20PART
                  II - OTHER INFORMATIONItem
                  1A. Risk Factors
              
              21Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              
              21Item
                  6. Exhibits
              
              23Signatures
              
              24
 2
 ***Index***
  CSSINDUSTRIES,
        INC. ANDSUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (Unaudited)
 
 (In
        thousands, except per share data)
 
 Three
                  Months Ended
              
              Nine
                  Months EndedDecember
                  31,
              
              December
                  31,2006
              
              2005
              
              2006
              
              2005SALES
              
              $
              264,065
              
              $
              251,796
              
              $
              485,428
              
              $
              473,333COSTS
                  AND EXPENSESCost
                  of sales
              
              
              197,695
              
              
              189,367
              
              
              360,761
              
              
              357,808Selling,
                  general and administrative expenses
              
              
              26,424
              
              
              23,867
              
              
              73,917
              
              
              66,868Restructuring
                  expenses
              
              
              1,745
              
              
              3
              
              
              1,745
              
              
              37Interest
                  expense, net
              
              
              1,446
              
              
              1,483
              
              
              2,663
              
              
              2,982Other
                  income, net
              
              
              (130
              )
              
              (47
              )
              
              (358
              )
              
              (182
              )227,180
              
              
              214,673
              
              
              438,728
              
              
              427,513INCOME
                  BEFORE INCOME TAXES
              
              
              36,885
              
              
              37,123
              
              
              46,700
              
              
              45,820INCOME
                  TAX PROVISION
              
              
              13,595
              
              
              13,199
              
              
              17,214
              
              
              16,312NET
                  INCOME
              
              $
              23,290
              
              $
              23,924
              
              $
              29,486
              
              $
              29,508NET
                  INCOME PER COMMON SHAREBasic
              
              $
              2.19
              
              $
              2.27
              
              $
              2.79
              
              $
              2.81Diluted
              
              $
              2.13
              
              $
              2.18
              
              $
              2.71
              
              $
              2.69WEIGHTED
                  AVERAGE SHARES OUTSTANDINGBasic
              
              
              10,641
              
              
              10,538
              
              
              10,565
              
              
              10,483Diluted
              
              
              10,931
              
              
              10,979
              
              
              10,863
              
              
              10,967CASH
                  DIVIDENDS PER SHARE OF COMMON STOCK
              
              $
              .12
              
              $
              .12
              
              $
              .36
              
              $
              .36COMPREHENSIVE
                  INCOMENet
                  income
              
              $
              23,290
              
              $
              23,924
              
              $
              29,486
              
              $
              29,508Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              3
              
              
              -Comprehensive
                  income
              
              $
              23,290
              
              $
              23,924
              
              $
              29,489
              
              $
              29,508
 
 See
        notes
        to consolidated financial statements.
  3
 ***Index***
  CSSINDUSTRIES, INC. AND SUBSIDIARIES
 
 CONDENSED
        CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 (In
        thousands)
  December
                    31,
                
                March
                    31,2006
                
                2006ASSETSCURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                10,303
                
                $
                57,656Accounts
                    receivable, net
                
                
                223,944
                
                
                35,582Inventories
                
                
                66,455
                
                
                103,770Deferred
                    income taxes
                
                
                7,718
                
                
                7,898Assets
                    held for sale
                
                
                2,796
                
                
                -Other
                    current assets
                
                
                13,234
                
                
                18,906Total
                    current assets
                
                
                324,450
                
                
                223,812PROPERTY,
                    PLANT AND EQUIPMENT, NET
                
                
                61,307
                
                
                70,868OTHER
                    ASSETSGoodwill
                
                
                30,952
                
                
                30,952Intangible
                    assets, net
                
                
                4,351
                
                
                4,422Other
                
                
                3,807
                
                
                4,095Total
                    other assets
                
                
                39,110
                
                
                39,469Total
                    assets
                
                $
                424,867
                
                $
                334,149LIABILITIES
                    AND STOCKHOLDERS’ EQUITYCURRENT
                    LIABILITIESNotes
                    payable
                
                $
                42,400
                
                $
                -Current
                    portion of long-term debt
                
                
                10,195
                
                
                10,169Accrued
                    customer programs
                
                
                16,516
                
                
                10,791Accrued
                    restructuring expenses
                
                
                1,232
                
                
                4Other
                    current liabilities
                
                
                61,498
                
                
                41,366Total
                    current liabilities
                
                
                131,841
                
                
                62,330LONG-TERM
                    DEBT, NET OF CURRENT PORTION
                
                
                20,441
                
                
                30,518LONG-TERM
                    OBLIGATIONS
                
                
                3,300
                
                
                3,533DEFERRED
                    INCOME TAXES
                
                
                5,080
                
                
                5,258STOCKHOLDERS’
                    EQUITY
                
                
                264,205
                
                
                232,510Total
                    liabilities and stockholders’ equity
                
                $
                424,867
                
                $
                334,149
  See
        notes
        to consolidated financial statements.
  4
 ***Index***
  CSS
        INDUSTRIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 (In
        thousands)
 
 Nine
                  Months EndedDecember 31,2006
              
              2005Cash
                  flows from operating activities:Net
                  income
              
              $
              29,486
              
              $
              29,508Adjustments
                  to reconcile net income to net cash used for operating
                  activities:Depreciation
                  and amortization
              
              
              10,564
              
              
              10,460Provision
                  for doubtful accounts
              
              
              202
              
              
              479Asset
                  impairments
              
              
              422
              
              
              -Deferred
                  tax provision (benefit)
              
              
              1
              
              
              (224
              )(Gain)
                  loss on sale of assets
              
              
              (16
              )
              
              61Share-based
                  compensation expense
              
              
              2,131
              
              
              172Changes
                  in assets and liabilities:Increase
                  in accounts receivable
              
              
              (188,564
              )
              
              (163,400
              )Decrease
                  in inventory
              
              
              37,315
              
              
              16,936Decrease
                  in other assets
              
              
              5,855
              
              
              361Increase
                  in other liabilities
              
              
              20,070
              
              
              14,876Increase
                  in accrued taxes
              
              
              6,802
              
              
              15,934Total
                  adjustments
              
              
              (105,218
              )
              
              (104,345
              )Net
                  cash used for operating activities
              
              
              (75,732
              )
              
              (74,837
              )Cash
                  flows from investing activities:Purchase
                  of property, plant and equipment
              
              
              (4,036
              )
              
              (6,930
              )Proceeds
                  from sale of assets
              
              
              16
              
              
              335Net
                  cash used for investing activities
              
              
              (4,020
              )
              
              (6,595
              )Cash
                  flows from financing activities:Borrowings
                  on long-term obligations
              
              
              -
              
              
              729Payments
                  on long-term obligations
              
              
              (10,080
              )
              
              (10,373
              )Borrowings
                  on notes payable
              
              
              168,560
              
              
              227,795Repayments
                  on notes payable
              
              
              (126,160
              )
              
              (169,895
              )Dividends
                  paid
              
              
              (3,801
              )
              
              (3,783
              )Purchase
                  of treasury stock
              
              
              (303
              )
              
              (6,101
              )Proceeds
                  from exercise of stock options
              
              
              2,987
              
              
              4,103Tax
                  benefit realized for stock options exercised
              
              
              1,193
              
              
              -Net
                  cash provided by financing activities
              
              
              32,396
              
              
              42,475Effect
                  of exchange rate changes on cash
              
              
              3
              
              
              -Net
                  decrease in cash and cash equivalents
              
              
              (47,353
              )
              
              (38,957
              )Cash
                  and cash equivalents at beginning of period
              
              
              57,656
              
              
              57,333Cash
                  and cash equivalents at end of period
              
              $
              10,303
              
              $
              18,376
 
 See
        notes
        to consolidated financial statements.
  5
 ***Index***
  CSS
        INDUSTRIES, INC. AND SUBSIDIARIES
 
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December
        31, 2006
 (Unaudited)
 
 (1)
              SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES:
 
 Basis
        of Presentation -
 
 CSS
        Industries, Inc. (collectively with its subsidiaries, “CSS” or the “Company”)
        has prepared the consolidated financial statements included herein pursuant
        to
        the rules and regulations of the Securities and Exchange Commission. The
        Company
        has condensed or omitted certain information and footnote disclosures normally
        included in consolidated financial statements prepared in accordance with
        accounting principles generally accepted in the United States pursuant to
        such
        rules and regulations. In the opinion of management, the statements include
        all
        adjustments (which include normal recurring adjustments) required for a fair
        presentation of financial position, results of operations and cash flows
        for the
        interim periods presented. These consolidated financial statements should
        be
        read in conjunction with the consolidated financial statements and notes
        thereto
        included in the Company’s Annual Report on Form 10-K for the fiscal year ended
        March 31, 2006. The results of operations for the interim periods are not
        necessarily indicative of the results for the full year.
 
 Principles
        of Consolidation -
 
 The
        consolidated financial statements include the accounts of the Company and
        all of
        its subsidiaries. All significant intercompany transactions and accounts
        have
        been eliminated in consolidation.
 
 Nature
        of Business -
 
 CSS
        is a
        consumer products company primarily engaged in the design, manufacture,
        procurement, distribution and sale of seasonal and social expression products,
        principally to mass market retailers. These products include gift wrap, gift
        bags, boxed greeting cards, gift tags, tissue paper, paper and vinyl
        decorations, classroom exchange Valentines, decorative ribbons and bows,
        Halloween masks, costumes, make-up and novelties, Easter egg dyes and novelties,
        and craft and educational products. The seasonal nature of CSS’ business has
        historically resulted in lower sales levels and operating losses in the first
        and fourth quarters and comparatively higher sales levels and operating profits
        in the second and third quarters of the Company’s fiscal year which ends March
        31, thereby causing significant fluctuations in the quarterly results of
        operations of the Company.
 
 Reclassification -
 
 Certain
        prior period amounts have been reclassified to conform with the current year
        classification.
 
 Foreign
        Currency Translation and Transactions -
 
 Translation
        adjustments are charged or credited to a separate component of stockholders’
equity. Gains and losses on foreign currency transactions are not material
        and
        are included in other income, net in the consolidated statements of operations.
  6
 ***Index***
  Use
        of
        Estimates -
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Judgments and assessments of uncertainties are required
        in
        applying the Company’s accounting policies in many areas. Such estimates pertain
        to the valuation of inventory and accounts receivable, the assessment of
        the
        recoverability of goodwill and other intangible assets, income tax accounting,
        the valuation of share-based awards and resolution of litigation and other
        proceedings. Actual results could differ from these estimates.
 
 Inventories -
 
 The
        Company records inventory at the date of taking title which generally occurs
        upon receipt or prior to receipt dependent on supplier shipping terms. The
        Company adjusts unsaleable and slow-moving inventory to its estimated net
        realizable value. Substantially all of the Company’s inventories are stated at
        the lower of first-in, first-out (FIFO) cost or market. The remaining portion
        of
        the inventory is valued at the lower of last-in, first-out (LIFO) cost or
        market. Inventories consisted of the following (in thousands):
 
 December
                  31,
              
              March
                  31,2006
              
              2006Raw
                  material
              
              $
              15,932
              
              $
              22,881Work-in-process
              
              
              16,141
              
              
              35,741Finished
                  goods
              
              
              34,382
              
              
              45,148$
              66,455
              
              $
              103,770
 
 
 Assets
        Held for Sale -
 
 Assets
        held for sale in the amount of $2,796,000 represents two former manufacturing
        facilities and a separate distribution facility which the Company is in the
        process of selling. The Company expects to sell these facilities within the
        next
        12 months for an amount greater than the current carrying value. The Company
        ceased depreciating these facilities at the time they were classified as
        held
        for sale.
 
 Revenue
        Recognition -
 
 The
        Company recognizes revenue from product sales when the goods are shipped
        and
        title and risk of loss passes to the customer. Provisions for returns,
        allowances, rebates to customers and other adjustments are provided in the
        same
        period that the related sales are recorded.
  7
 ***Index***
  Net
        Income Per Common Share -
 
 The
        following table sets forth the computation of basic and diluted net income
        per
        common share for the three and nine months ended December 31, 2006 and 2005
        (in
        thousands, except per share data):
 
 Three
                  Months Ended
              
              Nine
                  Months EndedDecember 31,
              
              December
                  31,2006
              
              2005
              
              2006
              
              2005Numerator:Net
                  income
              
              $
              23,290
              
              $
              23,924
              
              $
              29,486
              
              $
              29,508Denominator:Weighted
                  average shares outstanding for basic income per common
                  share
              
              
              10,641
              
              
              10,538
              
              
              10,565
              
              
              10,483Effect
                  of dilutive stock options
              
              
              290
              
              
              441
              
              
              298
              
              
              484Adjusted
                  weighted average shares outstanding for diluted income per common
                  share
              
              
              10,931
              
              
              10,979
              
              
              10,863
              
              
              10,967Basic
                  net income per common share
              
              $
              2.19
              
              $
              2.27
              
              $
              2.79
              
              $
              2.81Diluted
                  net income per common share
              
              $
              2.13
              
              $
              2.18
              
              $
              2.71
              
              $
              2.69
 
 
 Statements
        of Cash Flows -
 
 For
        purposes of the consolidated statements of cash flows, the Company considers
        all
        holdings of highly liquid debt instruments with a purchased maturity of three
        months or less to be cash equivalents.
 
 (2)
              SHARE-BASED
                  COMPENSATION:
 
 Under
        the
        terms of the 2004 Equity Compensation Plan (“2004 Plan”), the Human Resources
        Committee (“Committee”) of the Board of Directors may grant incentive stock
        options, non-qualified stock options, restricted stock grants, stock
        appreciation rights, stock bonuses and other awards to officers and other
        employees. Grants under the 2004 Plan may be made through August 3, 2014.
        The
        term of each grant is at the discretion of the Committee, but in no event
        greater than ten years from the date of grant. The Committee has discretion
        to
        determine the date or dates on which granted options become exercisable.
        All
        options outstanding as of December 31, 2006 become exercisable at the rate
        of
        25% per year commencing one year after the date of grant. At December 31,
        2006,
        options to acquire 1,337,775 shares were available for grant under the 2004
        Plan.
 
 Under
        the
        terms of the CSS Industries, Inc. 2006 Stock Option Plan for Non-Employee
        Directors (“2006 Plan”), non-qualified stock options to purchase up to 200,000
        shares of common stock are available for grant to non-employee directors
        at
        exercise prices of not less than fair market value of the underlying common
        stock on the date of grant. Under the 2006 Plan, options to purchase 4,000
        shares of the Company’s common stock are granted automatically to each
        non-employee director on the last day that the Company’s common stock is traded
        in November from 2006 to 2010. Each option will expire five years after the
        date
        the option is granted and commencing one year after the date of grant, options
        begin vesting and are exercisable at the rate of 25% per year. At December
        31,
        2006, options to acquire 180,000 shares were available for grant under the
        2006
        Plan.
  8
 ***Index***
  Prior
        to
        April 1, 2006, the Company accounted for its equity incentive plans under
        the
        recognition and measurement provisions of Accounting Principles Board (“APB”)
        Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
        Interpretations, as permitted by Statement of Financial Accounting Standards
        (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Effective April 1,
        2006, the Company adopted the fair value recognition provisions of SFAS No.
        123R, “Share-Based Payment,” using the modified prospective transition method.
        Under that transition method, stock compensation cost recognized in fiscal
        2007
        includes: (a) compensation cost for all share-based payments granted prior
        to,
        but not vested as of April 1, 2006, based on the grant date fair value estimated
        in accordance with the original provisions of SFAS No. 123, and (b) compensation
        cost for all share-based payments granted subsequent to April 1, 2006, based
        on
        the grant date fair value estimated in accordance with the provisions of
        SFAS
        No. 123R, and c) compensation cost for all share-based payments modified,
        repurchased, or cancelled subsequent to April 1, 2006. Compensation cost
        is
        recognized on a straight-line basis over the vesting period during which
        employees perform related services. In accordance with the modified prospective
        transition method, the consolidated financial statements for fiscal 2006
        have
        not been restated to reflect the impact of SFAS No. 123R.
 
 Prior
        to
        the adoption of SFAS No. 123R, the Company presented all tax benefits of
        deductions resulting from share-based payment arrangements as operating cash
        flows in the Consolidated Statements of Cash Flows. SFAS No. 123R requires
        that
        the cash flows resulting from the tax benefits from tax deductions in excess
        of
        the compensation cost recognized for those share awards (referred to as excess
        tax benefits) be classified as financing cash flows. The $1,193,000 excess
        tax
        benefit classified as a financing cash inflow for the nine months ended December
        31, 2006 would have been classified as an operating cash inflow if the Company
        had not adopted SFAS No. 123R.
 
 Compensation
        cost related to stock options recognized in operating results (included in
        selling, general and administrative expenses) was $719,000 and $2,131,000
        in the
        three and nine months ended December 31, 2006, respectively. The associated
        future income tax benefit recognized was $172,000 and $497,000 in the three
        and
        nine months ended December 31, 2006, respectively. For the three and nine
        months
        ended December 31, 2006, basic and diluted income per share was $.05 and
        $.15
        lower, respectively, than if the Company had continued to account for
        share-based compensation under APB Opinion No. 25.
 
 The
        following table illustrates the effect on net income and net income per share
        if
        the Company had applied the fair value recognition provisions of SFAS No.
        123 to
        options granted under the Company’s stock option plans for the three and nine
        months ended December 31, 2005:
 
 Three
                  Months Ended
              
              Nine
                  Months EndedDecember
                  31, 2005
              
              December
                  31, 2005(in
                  thousands, except per share data)Net
                  income, as reported
              
              $
              23,924
              
              $
              29,508Add:
                  Total stock-based employee compensation expense included in the
                  determination of net income as reported, net of tax
                  effects
              
              
              -
              
              
              111Deduct:
                  Total stock-based employee compensation expense determined under
                  fair-value based method for all awards, net of related tax
                  effects
              
              
              (588
              )
              
              (1,825
              )Pro
                  forma net income
              
              $
              23,336
              
              $
              27,794Net
                  income per share:Basic
                  - as reported
              
              $
              2.27
              
              $
              2.81Basic
                  - pro forma
              
              $
              2.21
              
              $
              2.65Diluted
                  - as reported
              
              $
              2.18
              
              $
              2.69Diluted
                  - pro forma
              
              $
              2.13
              
              $
              2.53
  9
 ***Index***
  Upon
        exercise of stock options, the Company issues shares from treasury stock.
        Expected volatilities are based on historical volatility of the Company’s common
        stock. The expected life of the option is estimated using historical data
        pertaining to option exercises and employee terminations. The risk-free interest
        rate is based on U.S. Treasury yields in effect at the time of grant.
 
 The
        fair
        value of each stock option granted was estimated on the date of grant using
        the
        Black-Scholes option pricing model with the following average
        assumptions:
 
 For
                  the Three Months
              
              For
                  the Nine MonthsEnded
                  December 31,
              
              Ended
                  December 31,2006
              
              2005
              
              2006
              
              2005Expected
                  dividend yield at time of grant
              
              
              1.52
              %
              
              1.39
              %
              
              1.60
              %
              
              1.43
              %Expected
                  stock price volatility
              
              
              31
              %
              
              36
              %
              
              25
              %
              
              35
              %Risk-free
                  interest rate
              
              
              4.52
              %
              
              4.43
              %
              
              4.91
              %
              
              4.06
              %Expected
                  life of option
              
              
              4.7
                  years
              
              
              6.3
                  years
              
              
              4.7
                  years
              
              
              4.9
                  years
 
 Transactions
        from April 1, 2006 through December 31, 2006 under the Company’s stock option
        plans were as
 follows:
 Numberof
                  Shares
              
              Option
                  Priceper Share
              
              Weighted
                  AveragePrice
              
              Weighted
                  Average LifeRemaining
              
              Aggregate
                  Intrinsic Value(in thousands)Options
                  outstanding at April 1, 2006
              
              
              1,737,606
              
              $
              12.71
                  - 36.60
              
              $
              24.35Granted
              
              
              394,100
              
              
              27.60
                  - 33.24
              
              
              30.01Exercised
              
              
              (291,846
              )
              
              12.71
                  - 34.12
              
              
              17.23Canceled
              
              
              (146,138
              )
              
              16.70
                  - 35.00
              
              
              32.32Options
                  outstanding at December 31, 2006
              
              
              1,693,722
              
              $
              12.71
                  - 36.60
              
              $
              26.22
              
              
              4.0
                  years
              
              $
              15,538Options
                  exercisable at December 31, 2006
              
              
              916,468
              
              $
              12.71
                  - 36.60
              
              $
              21.97
              
              
              3.7
                  years
              
              $
              12,294
 
 The
        weighted average fair value of options granted during the nine months ended
        December 31, 2006 and 2005 was $7.85 and $10.81, respectively.
 
 The
        total
        intrinsic value of options exercised during the nine months ended December
        31,
        2006 was $3,936,000. As of December 31, 2006, there was $6,086,000 of total
        unrecognized compensation cost related to non-vested stock option awards
        granted
        under the Company’s equity incentive plans.
 
 (3)
              DERIVATIVE
                  FINANCIAL INSTRUMENTS:
 
 The
        Company enters into foreign currency forward contracts in order to reduce
        the
        impact of certain foreign currency fluctuations. Firmly committed transactions
        and the related receivables and payables may be hedged with foreign currency
        forward contracts. Gains and losses arising from foreign currency forward
        contracts are recognized in income or expense as offsets of gains and losses
        resulting from the underlying hedged transactions. As of December 31, 2006,
        the
        notional amount of open foreign currency forward contracts was $19,184,000
        and
        the related unrealized gain was $714,000. As of March 31, 2006, the notional
        amount of open foreign currency forward contracts was $494,000 and the related
        unrealized loss was immaterial.
 
 (4)
              BUSINESS
                  RESTRUCTURING:
 
 On
        November 27, 2006, the Board of Directors of the Company approved a
        restructuring plan to combine the operations of its Cleo Inc (“Cleo”) and
        Berwick Offray LLC (“Berwick Offray”) subsidiaries, to close Cleo’s Maysville,
        Kentucky production facility and to exit a non-material, non-core business.
        This
        restructuring was undertaken in order to improve profitability and efficiency
        through the elimination of redundant back office functions, certain senior
        management positions and excess manufacturing capacity. In connection with
        the
        restructuring plan, the Company estimates that it will incur pre-tax
        restructuring expenses of approximately $2,600,000, including termination
        costs
        of approximately $1,545,000 and other restructuring costs of $1,055,000.
        Also,
        in connection with the restructuring plan, the Company recorded an impairment
        of
        fixed assets at the effected facilities of $422,000 which is included in
        restructuring expenses. The Company expects to complete the restructuring
        plan
        by September 30, 2007. During the three months ended December 31, 2006, total
        costs of $1,745,000 are included in restructuring expenses. As part of the
        restructuring plan, the Company recorded a restructuring reserve of $1,323,000,
        including severance related to 29 employees. During the third quarter and
        nine
        months ended December 31, 2006, the Company made payments of
        $91,000.
  10
 ***Index***
  Selected
        information relating to the aforementioned restructuring follows (in
        thousands):
 
 Termination
                Costs
              
              Other
                Costs
              
              TotalInitial
                  accrual
              
              $
              1,200
              
              $
              123
              
              $
              1,323Cash
                  paid - fiscal 2007
              
              
              (26
              )
              
              (65
              )
              
              (91
              )Restructuring
                  reserve as of December 31, 2006
              
              $
              1,174
              
              $
              58
              
              $
              1,232
 
 On
        May 5,
        2004, a subsidiary of the Company announced a restructuring of its business
        and
        established a restructuring reserve related to its administrative office
        located
        in Minneapolis, Minnesota. This restructuring was undertaken in order to
        gain
        efficiencies within the business unit and was substantially completed by
        the
        first quarter of fiscal 2006. As part of this restructuring plan, the Company
        accrued $377,000 for termination costs and costs related to the restructuring
        of
        the administrative office. As of the end of fiscal 2005, the Company had
        communicated termination of employment to 33 employees. In fiscal 2005, the
        Company increased the restructuring reserve in the amount of $255,000 related
        to
        the ratable recognition of retention bonuses for employees providing service
        until their termination date. Additionally, during fiscal 2005, there was
        an
        increase in the restructuring reserve in the amount of $177,000 related to
        unutilized office space and of $398,000 related to other restructuring expenses.
        The Company increased the restructuring reserve by $37,000 during fiscal
        2006
        primarily related to the ratable recognition of retention bonuses for employees
        providing service until their termination. Final payments for termination
        costs
        of $4,000 were made in the first quarter of fiscal 2007.
 
 (5)
              GOODWILL
                  AND INTANGIBLES:
 
 The
        Company performs the required annual impairment test of the carrying amount
        of
        goodwill and indefinite-lived intangible assets in the fourth quarter of
        its
        fiscal year.
 
 Included
        in intangible assets, net in the accompanying condensed consolidated balance
        sheets are the following acquired intangible assets (in thousands):
 
 December
                  31,
              
              March
                  31,2006
              
              2006Tradenames
              
              $
              4,290
              
              $
              4,290Non-compete
                  and other, net
              
              
              61
              
              
              132$
              4,351
              
              $
              4,422
  11
 ***Index***
  Amortization
        expense related to intangible assets was $24,000 and $23,000 for the quarters
        ended December 31, 2006 and 2005, respectively, and $71,000 and $70,000 for
        the
        nine months ended December 31, 2006 and 2005, respectively. The aggregate
        estimated amortization expense for intangible assets remaining as of December
        31, 2006 is as follows (in thousands):
 
 Fiscal
                  2007
              
              $
              23Fiscal
                  2008
              
              
              38Total
              
              $
              61
 
 (6)
              COMMITMENTS
                  AND CONTINGENCIES:
 
 On
        August
        31, 2006, the United States Court of International Trade (“CIT”) denied the
        Company’s appeal challenging the imposition of antidumping duties on certain
        tissue paper products imported from China. As described in Part I, Item 3
        of the
        Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
        in the proceedings before the CIT the Company was seeking reversal of the
        March
        2005 final determination of the United States International Trade Commission
        (“ITC”) that, in part, resulted in the imposition of such duties. The Company is
        now contesting the final determination of the ITC in proceedings before the
        United States Court of Appeals for the Federal Circuit, which proceedings
        were
        initiated by the Company on October 27, 2006.
 
 In
        the
        fiscal year ended March 31, 2005, the Company recognized an expense of
        approximately $2,300,000 for these duties, reflecting the maximum liability
        of
        the Company’s Cleo subsidiary for duties relating to subject tissue paper
        products imported from China during the 2005 fiscal year based on the applicable
        deposit rates established by the United States Commerce Department. The amount
        of Cleo’s actual liability for tissue duties pertaining to the fiscal year ended
        March 31, 2005, which liability is capped at the deposit rates in effect
        with
        respect to the period of time that the subject products were imported by
        Cleo,
        will be determined at the time of “liquidation” of the applicable entries
        by the
        United States Customs & Border Protection. Liquidation of the applicable
        entries has been enjoined pending the outcome of the Company’s
        appeal.
 
 CSS
        and
        its subsidiaries are also involved in ordinary, routine legal proceedings
        that
        are not considered by management to be material. In the opinion of Company
        counsel and management, the ultimate liabilities resulting from such lawsuits
        and claims will not materially affect the financial position of the Company
        or
        its results of operations or cash flows.
 
 (7)
              ACCOUNTING
                  PRONOUNCEMENTS:
 
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for
        measuring fair value in accordance with accounting principles generally accepted
        in the United States, and expands disclosure about such fair value measurements.
        SFAS No. 157 is effective for fiscal years beginning after November 15, 2007
        (fiscal 2009 for the Company). The Company is currently assessing the impact
        of
        SFAS No. 157 on its financial position and results of operations.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff Accounting
        Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements
        when Quantifying Misstatements in Current Year Financial Statements.” SAB 108
        requires that public companies utilize a “dual-approach” to assessing the
        quantitative effects of financial misstatements. This dual approach includes
        both an income statement focused assessment and a balance sheet focused
        assessment. The guidance in SAB 108 must be applied to annual financial
        statements for fiscal years ending after November 15, 2006. The Company does
        not
        expect SAB 108 will have a material impact on the Company’s financial position
        or results of operations.
  12
 ***Index***
  In
        June
        2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for
        Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in
        income taxes. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. The interpretation
        requires that the Company recognize in the financial statements the impact
        of a
        tax position, if that position is more likely than not of being sustained
        on
        audit, based solely on the technical merits of the position. FIN 48 also
        provides guidance on derecognition, classification, interest and penalties,
        accounting in interim periods and disclosure. The provisions of FIN 48 will
        be
        effective for the Company beginning April 1, 2007 with the cumulative effect
        (if
        any) of the change in accounting principle recorded as an adjustment to opening
        retained earnings. The Company is currently evaluating the impact of adopting
        FIN 48 on its consolidated financial statements.
 
 In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
SFAS No. 154 requires retrospective application to prior periods’ financial
        statements for voluntary changes in accounting principle, unless it is
        impracticable to determine either the period-specific effects or the cumulative
        effect of the change. This statement also requires that retrospective
        application of a change in accounting principle be limited to the direct
        effects
        of the change. Indirect effects of a change in accounting principle, such
        as a
        change in non-discretionary profit-sharing payments resulting from an accounting
        change, should be recognized in the period of the accounting change. SFAS
        No.
        154 also requires that a change in depreciation, amortization or depletion
        method for long-lived non-financial assets be accounted for as a change in
        accounting estimate effected by a change in accounting principle. The provisions
        of this statement were effective for the Company beginning April 1, 2006.
        The
        Company’s financial position, results of operations or cash flows will only be
        impacted by SFAS No. 154 if it implements changes in accounting principles
        that
        are addressed by the standard or corrects accounting errors in future
        periods.
 
 In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the
        guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”
to clarify the accounting for abnormal amounts of idle facility expense,
        freight, handling costs and spoilage. SFAS No. 151 now requires that these
        costs
        be expensed as current period charges. In addition, this statement requires
        that
        the allocation of fixed production overhead to the costs of conversion be
        based
        on the normal capacity of the production facilities. The provisions of this
        statement were effective for the Company beginning April 1, 2006. The adoption
        of this statement did not have a material impact on the Company’s financial
        position or results of operations.
  13
 ***Index***
  CSS
        INDUSTRIES, INC. AND SUBSIDIARIES
 
 ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
 
 CONDITION
        AND RESULTS OF OPERATIONS
 
 
 STRATEGIC
        OVERVIEW
 
 Approximately
        75% of the Company’s sales are attributable to seasonal (Christmas, Valentine’s
        Day, Easter and Halloween) products, with the remainder being attributable
        to
        everyday products. Seasonal products are sold primarily to mass market retailers
        and the Company typically has a relatively high market share in many of these
        categories. Most of these markets have shown little or no growth in recent
        years, and the Company continues to confront significant cost pressure as
        its
        competitors source certain products from overseas and its customers increase
        direct sourcing from overseas factories. Increasing customer concentration
        has
        increased their bargaining power which has also contributed to price
        pressure.
 
 The
        Company has taken several measures to respond to cost and price pressures.
        CSS
        has increased its investment in product and packaging design and product
        knowledge to assure it can continue to provide unique added value to its
        customers. In addition, CSS substantially expanded an office and showroom
        in
        Hong Kong to better meet customers’ buying needs and to be able to provide
        alternatively sourced products at competitive prices. CSS also increased
        its
        focus on efficiency and productivity in its North American production and
        distribution facilities to maintain its competitiveness
        domestically.
 
 The
        Company’s everyday craft and floral product lines have higher inherent growth
        potential due to CSS’ relatively low current market share. The Company has
        established project teams to pursue top line sales growth in these and other
        areas.
 
 Historically,
        significant growth at CSS has come through acquisitions. Management anticipates
        that it will continue to utilize acquisitions to stimulate further
        growth.
 
 LITIGATION
 
 On
        August
        31, 2006, the United States Court of International Trade (“CIT”) denied the
        Company’s appeal challenging the imposition of antidumping duties on certain
        tissue paper products imported from China. As described in Part I, Item 3
        of the
        Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006,
        in the proceedings before the CIT the Company was seeking reversal of the
        March
        2005 final determination of the United States International Trade Commission
        (“ITC”) that, in part, resulted in the imposition of such duties. The Company is
        now contesting the final determination of the ITC in proceedings before the
        United States Court of Appeals for the Federal Circuit, which proceedings
        were
        initiated by the Company on October 27, 2006.
 
 In
        the
        fiscal year ended March 31, 2005, the Company recognized an expense of
        approximately $2,300,000 for these duties, reflecting the maximum liability
        of
        the Company’s Cleo Inc (“Cleo”) subsidiary for duties relating to subject tissue
        paper products imported from China during the 2005 fiscal year based on the
        applicable deposit rates established by the United States Commerce Department.
        The amount of Cleo’s actual liability for tissue duties pertaining to the fiscal
        year ended March 31, 2005, which liability is capped at the deposit rates
        in
        effect with respect to the period of time that the subject products were
        imported by Cleo, will be determined at the time of “liquidation” of the
        applicable entries by the United States Customs & Border Protection.
        Liquidation of the applicable entries has been enjoined pending the outcome
        of
        the Company’s appeal.
  14
 ***Index***
  CSS
        and
        its subsidiaries are also involved in ordinary, routine legal proceedings
        that
        are not considered by management to be material. In the opinion of Company
        counsel and management, the ultimate liabilities resulting from such lawsuits
        and claims will not materially affect the financial position of the Company
        or
        its results of operations or cash flows.
  CRITICAL
        ACCOUNTING POLICIES
 
 The
        consolidated financial statements are prepared in conformity with accounting
        principles generally accepted in the United States. The preparation of these
        financial statements requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
 
 The
        significant accounting policies of the Company are described in the notes
        to the
        consolidated financial statements included in the Annual Report on Form 10-K
        for
        the fiscal year ended March 31, 2006. Judgments and estimates of uncertainties
        are required in applying the Company’s accounting policies in many areas.
        Following are some of the areas requiring significant judgments and estimates:
        revenue; cash flow and valuation assumptions in performing asset impairment
        tests of long-lived assets and goodwill; valuation reserves for inventory
        and
        accounts receivable; income tax accounting; the valuation of share-based
        awards
        and resolution of litigation and other proceedings. There have been no material
        changes to the critical accounting policies affecting the application of
        those
        accounting policies as noted in the Company’s Annual Report on Form 10-K for the
        fiscal year ended March 31, 2006, except for the accounting for share-based
        compensation as described below.
 
 Share-Based
        Compensation
 
 Effective
        April 1, 2006, the Company adopted Statement of Financial Accounting Standards
        (“SFAS”) No. 123R, “Share-Based Payment,” using the modified prospective
        transition method and began accounting for its share-based compensation using
        a
        fair-value based recognition method. Under the provisions of SFAS No. 123R,
        share-based compensation cost is estimated at the grant date based on the
        fair-value of the award and is expensed ratably over the requisite service
        period of the award. Determining the appropriate fair-value model and
        calculating the fair value of share-based awards at the grant date requires
        considerable judgment, including estimating stock price volatility, expected
        option life and forfeiture rates. The Company develops its estimates based
        on
        historical data and market information which can change significantly over
        time.
 
 The
        Company uses the Black-Scholes option valuation model to value employee stock
        awards. The Company estimates stock price volatility based on historical
        volatility of its common stock. Estimated option life and forfeiture rate
        assumptions are also derived from historical data. The Company recognizes
        compensation expense using the straight-line amortization method for share-based
        compensation awards with graded vesting. Had the Company used alternative
        valuation methodologies and assumptions, compensation cost for share-based
        payments could be significantly different.
 
 RESULTS
        OF OPERATIONS
 
 Seasonality
 
 The
        seasonal nature of CSS’ business has historically resulted in lower sales levels
        and operating losses in the first and fourth quarters and comparatively higher
        shipment levels and operating profits in the second and third quarters of
        the
        Company’s fiscal year which ends March 31, thereby causing significant
        fluctuations in the quarterly results of operations of the Company.
  15
 ***Index***
  Nine
        Months Ended December 31, 2006 Compared to Nine Months Ended December 31,
        2005
 
 Sales
        for
        the nine months ended December 31, 2006 increased 3% to $485,428,000 from
        $473,333,000 in 2005 primarily due to higher sales of Christmas gift wrap
        and
        boxed greeting cards, partially offset by lower sales of all-occasion cards,
        tissue, gift bags and ribbons and bows.
  Cost
        of
        sales, as a percentage of sales, was 74% in 2006 and 76% in 2005. The
        improvement in cost of sales is primarily due to improved margins achieved
        in
        the gift wrap, gift bag and tissue product lines and the impact of higher
        sales
        of gift wrap and Christmas boxed greeting cards, partially offset by lower
        margins on Halloween products and incremental costs of $604,000 associated
        with
        the restructuring plan which includes $570,000 related to the write-down
        of
        inventory.
 
 Selling,
        general and administrative (“SG&A”) expenses, as a percentage of sales, were
        15% in 2006 and 14% in 2005. The increase in SG&A expenses, as a percentage
        of sales, is primarily due to incremental share-based compensation expense
        related to the adoption of SFAS No. 123R, increases in severance, incentive
        compensation and consulting costs and incremental costs of $285,000 associated
        with the restructuring plan established in the current year.
 
 Restructuring
        expenses were $1,745,000 in 2006 and $37,000 in 2005. The increase in
        restructuring expenses was due to the establishment of a restructuring plan
        in
        the current year to combine the operations of the Cleo and Berwick Offray
        (“Berwick Offray”) subsidiaries, to close Cleo’s Maysville, Kentucky production
        facility and to exit a non-material, non-core business. See Note 4 to the
        consolidated financial statements for further discussion.
 
 Interest
        expense, net was $2,663,000 in 2006 and $2,982,000 in 2005.  The
        decrease in interest expense was primarily due to lower borrowing levels
        during
        2006 compared to the same period in the prior year.
 
 Income
        taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in
        2005.
        The increase in the effective tax rate is primarily due to a portion of the
        stock option expense recorded as a result of the adoption of SFAS No. 123R
        not
        being deductible for tax purposes.
 
 Net
        income for the nine months ended December 31, 2006 was $29,486,000, or $2.71
        per
        diluted share, compared to $29,508,000, or $2.69 per diluted share in 2005.
        The
        impact of improved margins was substantially offset by the expensing of stock
        options due to the current year adoption of SFAS No. 123R, restructuring
        costs
        and higher severance, incentive compensation and consulting costs. Excluding
        costs relating to the restructuring plan and incremental stock option expense
        related to the Company’s adoption of SFAS No. 123R, net income increased 11% to
        $32,780,000, or $3.02 per diluted share, for the nine months ended December
        31,
        2006.
 
 Three
        Months Ended December 31, 2006 Compared to Three Months Ended December 31,
        2005
 
 Sales
        for
        the three months ended December 31, 2006 increased 5% to $264,065,000 from
        $251,796,000 in 2005 primarily due to increased sales of gift wrap, Christmas
        boxed greeting cards and ribbons and bows as well as the earlier timing of
        Easter shipments from the fourth quarter to the third quarter in the current
        fiscal year, partially offset by lower sales of all-occasion cards, tissue,
        gift
        tags and gift bags.
 
 Cost
        of
        sales, as a percentage of sales, was 75% in 2006 and 2005. Improved margins
        achieved in the gift bag, gift wrap and tissue product lines were substantially
        offset by lower margins on ribbons and bows and incremental costs of $604,000
        associated with the restructuring plan which includes $570,000 related to
        the
        write-down of inventory.
 
 SG&A
        expenses, as a percentage of sales, were 10% in 2006 and 9% in 2005. The
        increase in SG&A expenses, as a percentage of sales, is primarily due to
        incremental share-based compensation expense related to the adoption of SFAS
        No.
        123R, increases in incentive compensation and incremental costs of $285,000
        associated with the restructuring plan established in the current
        year.
  16
 ***Index***
  Restructuring
        expenses were $1,745,000 in 2006 and $3,000 in 2005. The increase in
        restructuring expenses was due to the establishment of a restructuring plan
        in
        the current year to combine the operations of the Cleo and Berwick Offray
        subsidiaries, to close Cleo’s Maysville, Kentucky production facility and to
        exit a non-material, non-core business. See Note 4 to the consolidated financial
        statements for further discussion.
 
 Interest
        expense, net of $1,446,000 in 2006 was relatively consistent with interest
        expense, net of $1,483,000 in 2005.
 
 Income
        taxes, as a percentage of income before taxes, were 37% in 2006 and 36% in
        2005.
        The increase in the effective tax rate is primarily due to a portion of the
        stock option expense recorded as a result of the adoption of SFAS No. 123R
        not
        being tax deductible for tax purposes.
 
 Net
        income for the three months ended December 31, 2006 was $23,290,000, or $2.13
        per diluted share, compared to $23,924,000, or $2.18 per diluted share in
        2005.
        The decrease in net income is primarily attributable to the expensing of
        stock
        options due to the current year adoption of SFAS No. 123R, higher incentive
        compensation cost and restructuring costs as described above, partially offset
        by improved margins. Excluding costs relating to the restructuring plan and
        incremental stock option expense related to the Company’s adoption of SFAS No.
        123R, net income increased 7% to $25,503,000, or $2.33 per diluted share,
        for
        the quarter ended December 31, 2006.
 
 LIQUIDITY
        AND CAPITAL RESOURCES
 
 At
        December 31, 2006, the Company had working capital of $192,609,000 and
        stockholders' equity of $264,205,000. The increase in accounts receivable
        from
        March 31, 2006 reflects seasonal billings of current year Christmas accounts
        receivables, net of current year collections. The decrease in inventories
        reflects the normal seasonal shipments during the fiscal 2007 shipping season.
        The increase in accrued restructuring expenses is due to the establishment
        of a
        restructuring plan in the current year to combine the operations of the Cleo
        and
        Berwick Offray subsidiaries, to close Cleo’s Maysville, Kentucky production
        facility and to exit a non-material, non-core business. The increase in other
        current liabilities was due to increased accruals for income taxes, sales
        commissions, royalties and employee benefits. The increase in stockholders’
equity was primarily attributable to year-to-date net income and capital
        contributed upon exercise of employee stock options, partially offset by
        payments of cash dividends.
 
 The
        Company relies primarily on cash generated from its operations and seasonal
        borrowings to meet its liquidity requirements. Historically, a significant
        portion of the Company’s revenues are seasonal with approximately 80% of sales
        recognized in the second and third quarters. As payment for sales of Christmas
        related products is usually not received until after the holiday selling
        season
        in accordance with general industry practice, short-term borrowing needs
        increase throughout the second and third quarters peaking prior to Christmas
        and
        dropping thereafter. Seasonal financing requirements are met under a $50,000,000
        revolving credit facility with five banks and an accounts receivable
        securitization facility with an issuer of receivables-backed commercial paper.
        This facility has a funding limit of $100,000,000 during peak seasonal periods
        and $25,000,000 during off-peak seasonal periods. In addition, the Company
        has
        outstanding $30,000,000 of 4.48% senior notes due ratably in annual $10,000,000
        installments through December 2009. These financing facilities are available
        to
        fund the Company’s seasonal borrowing needs and to provide the Company with
        sources of capital for general corporate purposes, including acquisitions
        as
        permitted under the revolving credit facility. At December 31, 2006, there
        was
        $30,000,000 of long-term borrowings outstanding related to the senior notes
        and
        $42,400,000 outstanding under the Company’s short-term credit facilities. In
        addition, the Company has a minor amount of capital leases outstanding. Based
        on
        its current operating plan, the Company believes its sources of available
        capital are adequate to meet its future cash needs for at least the next
        12
        months.
 
 As
        of
        December 31, 2006, the Company’s letter of credit commitments are as follows (in
        thousands):
 
 Less
                  than 1
                Year
              
              1-3
                Years
              
              4-5
                Years
              
              After
                  5
                Years
              
              TotalLetters
                  of credit
              
              $
              6,383
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              6,383
  17
 ***Index***
  The
        Company has letters of credit that guarantee funding of workers compensation
        claims as well as obligations to certain vendors. The Company has no financial
        guarantees or other arrangements with any third parties or related parties
        other
        than its subsidiaries.
 
 In
        the
        ordinary course of business, the Company enters into arrangements with vendors
        to purchase merchandise in advance of expected delivery. These purchase orders
        do not contain any significant termination payments or other penalties if
        cancelled.
 
 RECONCILIATION
        OF CERTAIN NON-GAAP MEASURES
 
 Management
        believes that presentation of results of operations adjusted to eliminate
        the
        affects of incremental, non-recurring costs related to a restructuring plan
        and
        the impact of the Company’s adoption of SFAS No. 123R in fiscal 2007 provides
        useful information to investors because it enhances comparability between
        the
        current year and prior year reporting periods.
 
 (in
        thousands, except per share data)
 **Nine
                  Months Ended December 31,
                  2006**Income
                  Before
                Income
                  Taxes
              
              Net
                  Income
              
              Diluted
                Earnings
                Per
                  ShareAs
                  reported
              
              $
              46,700
              
              $
              29,486
              
              $
              2.71-
                  Restructuring expenses
              
              
              1,745
              
              
              1,102
              
              
              .10-
                  Inventory write-downs due to facility closure
              
              
              570
              
              
              360
              
              
              .03-
                  Other incremental costs related to restructuring plan
              
              
              319
              
              
              201
              
              
              .02-
                  Expensing stock options - SFAS No. 123R
              
              
              2,131
              
              
              1,631
              
              
              .15Non-GAAP
                  measurement
              
              $
              51,465
              
              $
              32,780
              
              $
              3.02
 
 
 **Three
                  Months Ended December 31, 2006**Income
                  Before
                Income
                  Taxes
              
              Net
                  Income
              
              Diluted
                Earnings
                Per
                  ShareAs
                  reported
              
              $
              36,885
              
              $
              23,290
              
              $
              2.13-
                  Restructuring expenses
              
              
              1,745
              
              
              1,102
              
              
              .10-
                  Inventory write-downs due to facility closure
              
              
              570
              
              
              360
              
              
              .03-
                  Other incremental costs related to restructuring plan
              
              
              319
              
              
              201
              
              
              .02-
                  Expensing stock options - SFAS No. 123R
              
              
              719
              
              
              550
              
              
              .05Non-GAAP
                  measurement
              
              $
              40,238
              
              $
              25,503
              
              $
              2.33
 
 
 Diluted
        earnings per share for the nine months ended December 31, 2006 does not add
        due
        to rounding.
  18
 ***Index***
  LABOR
        RELATIONS
 
 With
        the
        exception of the bargaining units at the gift wrap facilities in Memphis,
        Tennessee and the ribbon manufacturing facilities in Hagerstown, Maryland,
        which
        totaled approximately 880 employees as of December 31, 2006, CSS employees
        are
        not represented by labor unions. Because of the seasonal nature of certain
        of
        its businesses, the number of production employees fluctuates during the
        year.
        The collective bargaining agreement with the labor union representing Cleo’s
        production and maintenance employees at the Cleo gift wrap plant and warehouses
        in Memphis, Tennessee remains in effect until December 31, 2007. A new
        collective bargaining agreement with the labor union representing the
        Hagerstown-based production and maintenance employees was concluded in the
        third
        quarter of fiscal 2007 and remains in effect until December 31, 2009.
 
 ACCOUNTING
        PRONOUNCEMENTS
 
 See
        Note
        7 to the Consolidated Financial Statements for information concerning recent
        accounting pronouncements and the impact of those standards.
 
 FORWARD-LOOKING
        STATEMENTS
 
 This
        report includes “forward-looking statements” within the meaning of the Private
        Securities Litigation Reform Act of 1995, including statements regarding
        the
        Company’s expectation that it will sell facilities held for sale within the next
        12 months for an amount greater than the current carrying value; improved
        profitability and efficiency from the Company’s restructuring plan to combine
        the operations of its Cleo and Berwick Offray subsidiaries; estimated future
        expenses in connection with such restructuring plan; continued use of
        acquisitions to stimulate further growth; the Company’s expected ultimate
        liabilities from lawsuits and claims; the expected future impact of changes
        in
        accounting principles; and the anticipated effects of measures taken by the
        Company to respond to cost and price pressures. Forward-looking statements
        are
        based on the beliefs of the Company’s management as well as assumptions made by
        and information currently available to the Company’s management as to future
        events and financial performance with respect to the Company’s operations.
        Forward-looking statements speak only as of the date made. The Company
        undertakes no obligation to update any forward-looking statements to reflect
        the
        events or circumstances arising after the date as of which they were made.
        Actual events or results may differ materially from those discussed in
        forward-looking statements as a result of various factors, including without
        limitation, general market conditions, increased competition, increased
        operating costs, including labor-related and energy costs and costs relating
        to
        the imposition or retrospective application of duties on imported products,
        currency risks and other risks associated with international markets, risks
        associated with the combination of the operations of the Company’s Cleo and
        Berwick Offray subsidiaries, including restructuring costs and the risk that
        such costs may exceed the expected amounts described herein, the risk that
        customers may become insolvent, costs of compliance with governmental
        regulations and government investigations, liability associated with
        non-compliance with governmental regulations, including regulations pertaining
        to the environment, Federal and state employment laws, and import and export
        controls and customs laws, and other factors described more fully in the
        Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2006
        and in the Company’s previous filings with the Securities and Exchange
        Commission. As a result of these factors, readers are cautioned not to place
        undue reliance on any forward-looking statements included herein or that
        may be
        made elsewhere from time to time by, or on behalf of, the Company.
 
 ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK
 
 The
        Company is exposed to the impact of interest rate changes and manages this
        exposure through the use of variable-rate and fixed-rate debt. The Company
        does
        not enter into contracts for trading purposes and does not use leveraged
        instruments. The market risks associated with debt obligations and other
        significant instruments as of December 31, 2006 have not materially changed
        from
        March 31, 2006 (see Item 7A of the Company’s Annual Report on Form 10-K for the
        fiscal year ended March 31, 2006).
  19
 ***Index***
  ITEM4.
        CONTROLS AND PROCEDURES
 
 (a)
              *Evaluation
                  of Disclosure Controls and Procedures.*As
                  of the end of the period covered by this report, the Company’s management,
                  with the participation of the Company’s President and Chief Executive
                  Officer and Vice President - Finance and Chief Financial Officer,
                  evaluated the effectiveness of the Company’s disclosure controls and
                  procedures in accordance with Rule 13a-15 of the Securities Exchange
                  Act
                  of 1934 (the “Exchange Act”). Based upon that evaluation, the President
                  and Chief Executive Officer and Vice President - Finance and Chief
                  Financial Officer concluded that the Company’s disclosure controls and
                  procedures are effective in providing reasonable assurance that
                  information required to be disclosed by the Company in reports
                  that it
                  files under the Exchange Act is recorded, processed, summarized
                  and
                  reported within the time periods specified in the Securities and
                  Exchange
                  Commission’s rules and forms.
 
 (b)
              *Changes
                  in Internal Controls*.
                  There was no change in the Company’s internal control over financial
                  reporting (as defined in Rules 13a-15(f) and 15d-15(f) as promulgated
                  by
                  the Securities and Exchange Commission under the Exchange Act)
                  during the
                  third quarter of fiscal year 2007 that has materially affected,
                  or is
                  reasonably likely to materially affect, the Company’s internal control
                  over financial reporting.
  20
 ***Index***
  CSS
        INDUSTRIES, INC. AND SUBSIDIARIES
 
 PART
        II - OTHER INFORMATION
 
 Item1A. Risk
        Factors
 
 Risk
        factors included in the Company’s Annual Report on Form 10-K for the fiscal year
        ended March 31, 2006 have not changed with the exception of the
        following:
 
 Risks
        associated with our use of foreign suppliers may adversely affect our business,
        results of operations and financial condition.
 
 For
        some
        of our product lines, particularly our Halloween, Easter, Christmas boxed
        greeting cards, gift bags, gift tags and tissue paper product lines, we use
        foreign suppliers to manufacture a portion of our products. Approximately
        37% of
        our sales in fiscal 2006 were related to products sourced from foreign
        suppliers. Our use of foreign suppliers exposes us to risks inherent in doing
        business outside of the United States, including risks associated with foreign
        currency fluctuations, transportation costs and delays, difficulties in
        maintaining and monitoring quality control, compliance with foreign laws
        and
        regulations, costs relating to the imposition or retrospective application
        of
        duties on imported products, economic or political instability, international
        public health issues, and restrictions on the repatriation of profits and
        assets.
 
 Item.
        2. Unregistered
        Sales of Equity Securities and Use of Proceeds
 
 Unregistered
        Sales of Equity Securities
 
 On
        November 30, 2006, CSS issued options to purchase 20,000 shares of its common
        stock ($.10 par value) to the non-employee members of the Board of Directors
        of
        CSS pursuant to CSS’ 2006 Stock Option Plan for Non-Employee Directors (the
“2006 Plan”). The 2006 Plan provides for the automatic issuance of an option to
        purchase 4,000 shares of CSS common stock to each non-employee director of
        CSS
        on the last trading day of November of each year from 2006 to 2010. In
        accordance with the automatic grant provisions of the 2006 Plan, each of
        the
        options granted on November 30, 2006: (i) has an exercise price of $30.86
        per
        share, the closing price for shares of CSS common stock on the date of the
        grant; (ii) becomes exercisable in four equal installments, commencing on
        the
        first anniversary of the date of grant and annually thereafter; and (iii)
        expires five years after the date of grant. No consideration is required
        to be
        paid to the Company in connection with the issuance of options under the
        2006
        Plan, and none was received.
 
 On
        November 21, 2006, CSS issued 6,000 shares of its common stock ($.10 par
        value)
        to a member of the Board of Directors of CSS, upon such director’s exercise of
        stock options previously granted to such director pursuant to CSS’ 1995 Stock
        Option Plan for Non-Employee Directors (the “1995 Plan”). The aggregate purchase
        price for these 6,000 shares of CSS common stock was $96,480, which was paid
        in
        cash.
 
 On
        December 22, 2006, CSS issued 36,000 shares of its common stock ($.10 par
        value)
        to a member of the Board of Directors of CSS, upon such director’s exercise of
        stock options previously granted to such director pursuant to the 1995 Plan
        and
        CSS’ 2000 Stock Option Plan for Non-Employee Directors (the “2000 Plan”). The
        aggregate purchase price for these 36,000 shares of CSS common stock was
        $664,800, which was paid in cash.
 
 The
        options granted pursuant to the 1995 Plan, 2000 Plan and 2006 Plan were not
        registered under the Securities Act of 1933, as amended (the “Securities Act”),
        and the shares of CSS common stock issued upon exercise of the aforementioned
        options were not registered under the Securities Act. CSS believes that the
        issuance of the options, and the issuance of the aforementioned shares of
        CSS
        common stock in connection with the exercise of options, was exempt from
        registration under (a) Section 4(2) of the Securities Act as transactions
        not
        involving any public offering and such securities having been acquired for
        investment and not with a view to distribution, or (b) Rule 701 under the
        Securities Act as transactions made pursuant to a written compensatory benefit
        plan or pursuant to a written contract relating to compensation. All recipients
        had adequate access to information about CSS. CSS did not engage an underwriter
        in connection with the foregoing stock option grants and stock issuances.
  21
 ***Index***
  Share
        Repurchase Program
 
 A
        total
        of 9,200 shares were repurchased at an average price of $32.90 in the third
        quarter of fiscal 2007. As of December 31, 2006, there remained an outstanding
        authorization to repurchase 248,024 shares of outstanding CSS common stock
        as
        represented in the table below.
 
 Total
                  Number
                of
                  Shares
                Purchased(1)
              
              Average
                  Price
                Paid
                  Per Share
              
              Total
                  Number of
                Shares
                  Purchased as
                Part
                  of Publicly
                Announced
                  Program(2)
              
              Maximum
                Number
                  of Shares that May Yet Be Purchased Underthe
                  Program(2)October
                  1 through October 31, 2006
              
              
              -
              
              $
              -
              
              
              -
              
              
              257,224November
                  1 through November 30, 2006
              
              
              -
              
              
              -
              
              
              -
              
              
              257,224December
                  1 through December 31, 2006
              
              
              9,200
              
              
              32.90
              
              
              9,200
              
              
              248,024Total
                  Third Quarter
              
              
              9,200
              
              $
              32.90
              
              
              9,200
              
              
              248,024
 (1)
                All
                    share repurchases were effected in open-market transactions and
                    in
                    accordance with the safe harbor provisions of Rule 10b-18 of
                    the Exchange
                    Act.
 
 (2)
                The
                    Company’s Board of Directors authorized on February 18, 1998 the
                    repurchase of up to 1,000,000 shares of the Company’s common stock (the
                    “Repurchase Program”). Thereafter, the Company’s Board of Directors
                    increased the number of shares authorized to be repurchased by
                    the Company
                    pursuant to the Repurchase Program as follows: November 9, 1998
                    (500,000
                    additional shares); May 4, 1999 (500,000 additional shares);
                    September 28,
                    1999 (500,000 additional shares); September 26, 2000 (500,000
                    additional
                    shares); and February 27, 2003 (400,000 additional shares). As
                    a result of
                    the Company’s three-for-two stock split distributed on July 10, 2003, the
                    number of shares authorized for repurchase pursuant to the Repurchase
                    Program was automatically increased to 5,100,000 shares. The
                    aggregate
                    number of shares repurchased by the Company pursuant to the Repurchase
                    Program as of December 31, 2006 was 4,851,976 on a split-adjusted
                    basis.
                    An expiration date has not been established for the Repurchase
                    Program.
 
 22
 ***Index***
  Item6.
                  Exhibits
 
 Exhibit
                      10.1 CSS Industries, Inc. Severance Pay Plan
                      for Senior Management and Summary Plan
                      Description.
 
 Exhibit
                      10.2 Employment Agreement dated as of
                      November 21, 2006 between CSS Industries, Inc. and Robert
                      Collins.
 
 Exhibit
                      31.1 Certification of the Chief Executive
                      Officer of CSS Industries, Inc. required by Rule 13a-14(a)
                      under the
                      Securities Exchange Act of 1934.
 
 Exhibit
                      31.2 Certification of the Chief Financial
                      Officer of CSS Industries, Inc. required by Rule 13a-14(a)
                      under the
                      Securities Exchange Act of 1934.
 
 Exhibit
                      32.1 Certification of the Chief Executive
                      Officer of CSS Industries, Inc. required by Rule 13a-14(b)
                      under the
                      Securities Exchange Act of 1934 and 18 U. S. C. Section
                      1350.
 
 Exhibit
                      32.2 Certification of the Chief Financial
                      Officer of CSS Industries, Inc. required by Rule 13a-14(b)
                      under the
                      Securities Exchange Act of 1934 and 18 U. S. C. Section
                      1350.
 
 23
 ***Index***
 SIGNATURES
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 
 CSS
                INDUSTRIES, INC.(Registrant)Date:
                  February 1, 2007
              By:
              /s/Christopher
                  J. MunyanChristopher
                  J. MunyanPresident
                  and Chief Executive Officer(principal
                  executive officer)Date:
                  February 1, 2007
              By:
              /s/Clifford
                  E. PietrafittaClifford
                  E. PietrafittaVice
                  President - Finance and Chief Financial Officer(principal
                  financial and accounting officer)






24