**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

| **(Mark One)**                                   |   |                                                                                                |
|--------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
| **x**                                            |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**     |
| ** **                                       |   | ** **                                                                                          |
| **For the  Fiscal Year Ended December 30, 2006** |
|                                             |   | ** **                                                                                          |
| **Or**                                           |
| ** **                                       |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                       |   | ** **                                                                                          |
| **Commission file numbers:**                     |   | **333-135646-12**                                                                                   |   |
| ** **                                       |   | **001-12381**                                                                                       |   |
| ** **                                       |   | **333-135646-11**                                                                                   |   |
|                                                  |        |                                                                                                     |  |  |  |

**LINENSHOLDING CO.**

**LINENS**‘**NTHINGS, INC.**

**LINENS**‘**NTHINGS CENTER, INC.**

*(Exact names of registrants as specified in theircharters)*

| **Delaware**                         |   | **20-4192917**          |
|--------------------------------------|--------|-------------------------|
| **Delaware**                         |   | **22-3463939**          |
| **California**                       |   | **59-2740308**          |
| ** **                           |   | ** **              |
| *(States  or other jurisdictions of* |   | *(I.R.S.  Employer*     |
| *incorporation  or organization)*    |   | *Identification  Nos.)* |

**6Brighton Road, Clifton, New Jersey  07015**

*(Address of principal executive offices) (Zip Code)*

**(973) 778-1300**

*(Registrants’ telephone number,including area code)*

**Securities registered pursuant toSection 12(b) or 12(g) of the Act:**

None

Indicateby check mark if the registrants are well-known seasoned issuers, as defined inRule 405 of the Securities Act:

Yes o     No x

Indicateby check mark if the registrants are not required to file reports pursuant toSection 13 or 15(d) of the Act:

Yes o     No x

Indicateby check mark whether the registrants (1) have filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantswere required to file such reports), and (2) have been subject to suchfiling requirements for the past 90 days:

Yes x     No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrants’ knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K:     x

Indicateby check mark whether the registrants are large accelerated filers, acceleratedfilers, or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large AcceleratedFilers o     AcceleratedFilers o     Non-acceleratedFilers x

Indicate by checkmark whether the registrants are shell companies (as defined in Rule 12b-2of the Exchange Act):

Yes o     No x

Asof March 1, 2007, there were 13,013,000 shares of Linens Holding Co.common stock, $0.01 par value, outstanding; 1,000 shares of Linens ‘nThings, Inc. common stock, $0.01 par value, outstanding; and 100 shares ofLinens ‘n Things Center, Inc. common stock, no par value, outstanding.  None is publicly traded.

**DOCUMENTS INCORPORATED BYREFERENCE**

None

 

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**Table of Contents**
| Form 10-K    | ** ** | ** **                                                                                                          | ** ** | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Item No.** | ** ** | **Name of Item**                                                                                                    | ** ** | ** ** |
| ** **   | ** ** | **PART  I**                                                                                                         | ** ** | ** ** |
| Item 1.      |       | Business                                                                                                            |       |       |
| Item  1A.    |       | Risk  Factors                                                                                                       |       |       |
| Item 1B.     |       | Unresolved  Staff Comments                                                                                          |       |       |
| Item  2.     |       | Properties                                                                                                          |       |       |
| Item  3.     |       | Legal  Proceedings                                                                                                  |       |       |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                                |       |       |
| ** **   | ** ** | **PART II**                                                                                                         | ** ** | ** ** |
| Item 5.      |       | Market for  Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       |       |
| Item 6.      |       | Selected Financial  Data                                                                                            |       |       |
| Item 7.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |       |
| Item 7A.     |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       |       |
| Item 8.      |       | Financial  Statements and Supplementary Data                                                                        |       |       |
| Item 9.      |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |       |       |
| Item 9A.     |       | Controls and  Procedures                                                                                            |       |       |
| Item 9B.     |       | Other Information                                                                                                   |       |       |
| ** **   | ** ** | **PART III**                                                                                                        | ** ** | ** ** |
| Item 10.     |       | Directors,  Executive Officers and Corporate Governance                                                             |       |       |
| Item 11.     |       | Executive  Compensation                                                                                             |       |       |
| Item 12.     |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |       |
| Item 13.     |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       |       |
| Item 14.     |       | Principal  Accountant Fees and Services                                                                             |       |       |
| ** **   | ** ** | **PART IV**                                                                                                         | ** ** | ** ** |
| Item 15.     |       | Exhibits,  Financial Statement Schedules                                                                            |       |       |
|         |       | Signatures                                                                                                          |       |       |

 

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**EXPLANATORY NOTE**

On November7, 2005, Linens Merger Sub Co. was formed by affiliates of Apollo Management,L.P., National Realty & Development Corp. and Silver Point Capital FundInvestments LLC to serve as a holding company. On February 14, 2006, Linens Merger Sub Co. merged with and into Linens ‘n Things, Inc. in the merger described in Note 3 to theConsolidated Financial Statements included in this report, and Linens ‘n Things, Inc., as the surviving corporation, became awholly-owned subsidiary of Linens Holding Co. (the “Company”).  The merger was financed in part by theissuance of $650 million aggregate principal amount of Senior Secured FloatingRate Notes (the “Notes”) due 2014 by Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc., a wholly owned subsidiary of Linens ‘n Things, Inc.  TheNotes are guaranteed by the Company and each of its domestic subsidiaries(other than Linens ‘nThings, Inc. and Linens ‘nThings Center, Inc.).  This report alsocontains the consolidated financial statements of the Company’s predecessorentity, Linens ‘n Things,Inc. and Subsidiaries, as of December 31, 2005, and for each of the two fiscalyears then ended and the period January 1, 2006 to February 13, 2006.  The accompanying Consolidated FinancialStatements are those of Linens Holding Co. and its subsidiaries.  The Company has not presented separatefinancial statements for Linens ‘nThings, Inc. and its subsidiaries or Linens ‘n Things Center, Inc. and its subsidiaries (collectively, theissuers as described in Note 18 to the Consolidated Financial Statements)because management has determined that the differences in such financialstatements are minor.  Unless the context requires otherwise, “we,”“us,” “our” or the “Company” refer to Linens Holding Co. and its subsidiariesand, for periods prior to February 14, 2006, the Company’s predecessor and itssubsidiaries.

**FORWARD-LOOKING STATEMENTS**

This report may contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 (Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934) with respect to the Company’s financialcondition, results of operations and business that is not historicalinformation.  All statements, other thanstatements of historical fact, included in this report are forward-lookingstatements.  In particular, statementsthat the Company makes relating to its overall volume trends, industry forces,margin trends, anticipated capital expenditures and its strategies are forward-lookingstatements.  When used in this document,the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “plan”and similar expressions, as well as future or conditional verbs such as “will,” “should,” “would” and “could,”are intended to identify forward-looking statements.

Thesestatements are based on assumptions and assessments made by the Company’smanagement in light of its experience and its perception of historical trends,current conditions, expected future developments and other factors it believesto be appropriate.  The Company believesthere is a reasonable basis for its expectations and beliefs, but they areinherently uncertain, the Company may not realize its expectations and itsbeliefs may not prove correct.  Anyforward-looking statements are not guarantees of the Company’s futureperformance and are subject to risks and uncertainties that could cause actualresults, developments and business decisions to differ materially from thosedescribed or implied by any such forward-looking statements.  The Company undertakes no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events or otherwise. Such factors include, withoutlimitation: general economic conditions; changes in the retailing environmentand consumer spending habits; inclement weather and natural disasters;competition from existing and potential competitors; the amount of merchandisemarkdowns; loss or retirement of key members of management; increases in thecosts of borrowings and unavailability of additional debt or equity capital;impact of the Company’s substantial indebtedness on its operating income andits ability to grow; the cost of labor; labor disputes; increased healthcarebenefit costs; other costs and expenses; and other important factors that couldcause actual results to differ materially from those described or implied bythe forward-looking statements contained in this report.

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**PART I — FINANCIAL INFORMATION**

**Item 1. Business**

**About the Company**

Linens Holding Co, a Delaware corporation (the “Company”),together with its wholly owned consolidated subsidiaries, including Linens ‘n Things, Inc. and Linens ‘n ThingsCenter, Inc., is an entity that was formed in connection with the acquisitionof all of the outstanding shares of common stock of Linens ‘n Things, Inc. for $28.00 per share in cash, without interest, foraggregate consideration of approximately $1.3 billion.  The Company was incorporated on November 7,2005.

On November 7, 2005, Linens Merger Sub Co. was formed byaffiliates of Apollo Management, L.P., National Realty & Development Corp.and Silver Point Capital Fund Investments LLC (collectively, the “Sponsors”) toserve as a holding company.  On February14, 2006, Linens Merger Sub Co. merged with and into Linens ‘n Things, Inc. in the merger described in Note 3 to the ConsolidatedFinancial Statements included elsewhere in this report (the “Merger”), andLinens ‘n Things, Inc., as the surviving corporation, became awholly-owned subsidiary of Linens Holding Co.

Linens ‘n Things, Inc., a Delewarecorporation, was incorporated on September 10, 1996 and was a wholly ownedsubsidiary of CVS Corporation (“CVS”), formerly Melville Corporation, untilNovember 26, 1996, when CVS completed an initial public offering of theLinens ‘n Things, Inc. common stock.  Linens ‘n ThingsCenter, Inc., a California corporation and wholly owned subsidiary of Linens ‘n Things, Inc., was incorporated on January 12, 1996.

The Company is the second largest specialty retailer of hometextiles, housewares and home accessories in North America operating 571 storesin 47 U.S. states and six Canadian provinces as of December 30, 2006. TheCompany is a destination retailer, offering one of the broadest and deepestselections of high quality brand-name as well as private label home furnishingsmerchandise in the industry. The Company’s average store size of approximately33,000 gross square feet enables it to offer a more comprehensive product andbrand selection than department stores and other retailers that sell homefurnishings.  The Company believes itsstore format coupled with its knowledgeable sales assistance and attentiveservice to its customers, who the Company refers to as its guests, creates anenjoyable shopping experience. The Company’s primary target guest is femalebetween the ages of 25 and 55 who is fashion and brand conscious, hasgood-to-better income and focuses on the home as a reflection of herindividuality.

The Company is committed to providing its guests with aone-stop shopping destination for home furnishings. The Company’s extensivemerchandise offering enables its guests to select from a wide assortment ofstyles, brands, colors and designs across varying price points at competitivevalues. The Company’s “linens” product line includes home textiles such asbedding, towels, window treatments and table linens. Its “things” product lineincludes housewares and home accessories such as cookware, dinnerware,glassware, small appliances, candles, picture frames and storage and cleaningproducts. The Company offers a wide array of national home furnishing brands,including All-Clad, Braun, Calphalon, Conair, Croscill, Cuisinart, Henckels,Krups, KitchenAid, Nautica, OXO, Wamsutta and Yankee Candle. It also offersproducts under its LNT Home private label brand, which is designed tocomplement its brand name products by offering its guests quality merchandiseat value prices. The Company also carries a number of exclusive products,including several high-fashion home textile patterns from Waverly and the NateBerkus collection.

The Company’s store format features an efficient racetracklayout in a visually appealing format that encourages guests to shop the entirestore. It operates various store size formats generally ranging from 25,000 to40,000 gross square feet. This allows the Company to match the size of itsstores with the market potential of each location. The Company’s stores arelocated predominately in power strip centers adjacent to complementarybroad-based retail chains. In addition, its stores are generally located ingeographic trading areas with at least 150,000 people within a 5 to 10 mileradius and with demographic characteristics that match its target guestprofile.

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**Business Strategy**

The Company believes its underlying fundamentals are strong,including its well-known brand name and attractive real estate locations, andthe fundamentals of its industry are favorable. Under the leadership of Robert J. DiNicola, who assumed the role ofChairman and Chief Executive Officer in 2006, the Company intends to focus ongrowing its sales per square foot to improve the productivity of its existingstore base, which the Company believes is key to improving its profitabilityand cash flow.

Beginning in March 2006, the Company instituted a long-termthree phase multi-year plan to turn the Company around.  The first phase consists of getting back tobasics, which the Company is now deeply committed to.

As part of this committment, the Company intends to pursue thefollowing initiatives:

*** Improve ItsOverall Merchandise Assortments.***    The Company intends to maximize merchandiseproductivity by continuing to implement the following assortment planninginitiatives:

·                  Reduce its overall SKUs and increase thein-stock positions of its most popular merchandise;

·                  Re-allocate space in its stores to moreproductive categories; and,

·                  Selectively expand existing merchandisecategories and key vendor assortments as well as introduce new merchandiseproduct lines that better reflect the style preferences of its guests.

***Establish a KeyItem Program.***    TheCompany has established a “Best Bets” program in order to provide its guestssuperior value on the Company’s top 100 selling items. The Company prices thesekey items competitively and maintains deep in-stock positions to meet guestdemand. The Company believes that its key item program will help drive storetraffic, improve sales per square foot and strengthen the Linens ‘n Things brand over the long-term.

***Increase theEffectiveness of Its Marketing Expenditures.***    The Company hasimplemented an aggressive new, multi-tiered marketing campaign thatre-invigorates the Linens ‘nThings brand, emphasizes its commitment to its “Best Bets” program and drivestraffic to its stores. Its marketing expenditures were approximately$127.0 million in fiscal 2006, or 4.5% of net sales. The Company expectsmarketing expenditures in fiscal 2007 to be similar to the prior year,broadening its reach with a more diversified mix of marketing utilizingbroadcast media, preprint, newspaper advertising and direct mail. The Companybelieves that these changes, coupled with a greater emphasis on nationaladvertising, will be more effective in communicating its merchandising strategywhile attracting new guests into its stores and enhancing its brand.

***Improve ItsGuests’ Shopping Experience.***    The Company’s goal is to exceed its guests’expectations in every store, every day. It intends to achieve this goal bybuilding on its existing service philosophy and by creating a more invitingatmosphere for its guests. The Company believes it can make its guests’shopping experience more efficient and enjoyable through enhanced merchandisepresentation, including more stimulating product displays and clearer in-storesignage.

***ImproveIts Operating Free Cash Flow.***    TheCompany is highly committed to increasing its operating free cash flow. As aresult, it plans to reduce new store openings over the next few years and focuson improving the operations of its existing stores. During fiscal 2006, theCompany opened 31 new stores as opposed to an average of approximately 56 newstores per year during the three fiscal years preceding fiscal 2006.  The Company currently expects to openapproximately 20 new stores in 2007. As a result, the Company currently expectsits fiscal 2007 capital expenditures to be approximately $40 million, asopposed to $77.2 million in fiscal 2006. In addition, in connection with itsmerchandise assortment planning and sales productivity initiatives, the Companyexpects to improve its inventory turns and reduce its working capital. Its newbusiness strategy does not require any out of the ordinary or one-time capitalexpenditures.

***Realize ImprovedFinancial Performance as Recently Opened Stores Mature.***    As of December 30,2006, the Company operates 571 stores, 140 of which were opened since thebeginning of 2004. These 140 stores have not yet reached sales and store-levelEBITDA consistent with the Company’s stores that were

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opened before 2004. Store-level EBITDA represents operating profitderived for each store, before depreciation for all fixed assets located ateach store and amortization, where operating profit is based on each store’s actualsales less direct expenses excluding an allocation of overhead. Historically,new stores take four to five years to reach the financial performance of amature store. Accordingly, the Company expects its recently opened stores togenerate improved financial performance and contribute meaningfully to itsoverall net sales and store-level EBITDA as they mature over the next fewyears.

**Competitive Strength**

*** StrongBrand Name Recognition.***    The Linens ‘n Things brand name has a strongreputation as a leading provider of home furnishings. Its brand recognition isreinforced by its national footprint and highly visible store locations.Additionally, the Company utilizes extensive national and local advertisingthrough multiple formats to reinforce its guest recognition and support itspromotional events. Based on a study by Leo J. Shapiro & Associates,an independent market research firm, in May 2005, nine out of 10 U.S.households located in its markets recognize the Linens ‘n Things brand.

***Leading Destinationfor Home Furnishings.***    The Company is the second largest specialtyretailer of home textiles, housewares and home accessories in North America andoperates 571 stores in 47 U.S. states and six Canadian provinces with anaggregate of approximately 18.9 million gross square feet as of December30, 2006. With over 25,000 SKUs, the Company markets one of the broadest anddeepest selections of home furnishings in the industry, providing the Companywith a competitive advantage over department stores and mass merchants whooffer a more limited product selection. The Company’s more comprehensiveproduct and brand selection provides its guests with a one-stop shoppingdestination for their home furnishing needs.

***        WellMaintained Store Base with Attractive Real Estate.***    The Company’sportfolio of stores is primarily located in high traffic suburban locationsthat are convenient and accessible to its core guests and in close proximity toother high quality, national retailers. According to a study done by MapInfo inMarch 2004, the Company’s real estate is extremely competitive as tolocation and size with other national specialty retailers of home furnishings.The Company’s store base is up to date with an average age per store ofapproximately six years. The Company believes that the average age of its storebase minimizes its near-term maintenance and remodeling capital expenditurerequirements.

***        Strongand Diversified Vendor Relationships.***    The Company is one ofthe largest purchasers of home furnishings in the United States and hasdeveloped strong long-term relationships with its vendors, from whom itconsistently purchases large quantities of quality merchandise. The Companybelieves that its strong and diversified vendor relationships coupled with itsbuying power provides it a competitive advantage in the U.S. home furnishingsmarket. In addition, due to its broad range of branded products, the Company’ssuccess is not dependent on any one specific product or vendor. In fiscal 2006,no single vendor accounted for more than 8% of its purchases.

***        StrongGuest Base.***    TheCompany has cultivated a strong base of loyal guests who return to its storestime and again. This is complemented by its Internet website which allowsguests both to purchase its products and receive product information. TheCompany has a large customer database that it uses to reach its target gueststhrough, among other things, direct mail events. The Company defines activeguests as those who have visited its stores at least once in the last12 months. The Company has over 12.3 million active guests in itsdatabase, who on average visit its stores approximately 2.3 times each year. Tofurther strengthen its guest base, the Company also offers a private labelcharge card program, which has built-in loyalty programs to encourage morefrequent visits and allows it to more efficiently target its direct mailefforts.

**Products and Merchandising**

The Company offers quality home textiles, housewares and homeaccessories at compelling values. The Company’s extensive merchandise offeringof over 25,000 SKUs in an average store enables its guests to select fromwithin each of its major product lines a wide assortment of styles, brands,colors and designs that exceed the selection generally available in departmentstores. The Company’s “linens” product line includes

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home textiles such as bedding, towels, windowtreatments and table linens. Its “things” product line includes housewares,home accessories and storage and cleaning, such as cookware, dinnerware,glassware, small appliances, candles and picture frames. The Company iscommitted to maintaining a consistent in-stock inventory position and ensuringthat its stores carry a broad and deep merchandise selection.

The Company also intends to continue to implement itsassortment planning and space management initiatives to maximizeproductivity.  It will continue tore-allocate space in its stores to merchandise categories that better reflect guestdemand. This effort allows the Company the opportunity to maximize productivityby expanding high-growth categories.  Asa result, the Company’s stores now carry a deeper, more balanced selection ofmerchandise that more closely corresponds with the preferences of its guests.In addition, the Company’s merchandise is displayed with impactfulpresentations in groups of related product lines, and seasonal merchandise andimpulse items are prominently displayed in the front of the store. Thepresentation of its merchandise is designed to maximize customer convenienceand reinforce its guests’ impression that the Company offers a wide selection.For fiscal 2007, the Company intends to continue its focus on adding morenewness in its assortment by offering updated merchandise and building brands bothwithin a category and across categories. As part of its back to basicsapproach, the Company will continue to clear aged and non-producitveinventory, reinvesting those dollars into more productive categories,classifications and key items, particularly in support of the “Best Bets”program to highlight the top 100 best selling core items, reinvigorating thetextile side of the business with a concerted effort to focus on sheets,towels, pillows and comforters, and emphasizing tabletop beginning with a focuson dinnerware, glassware and flatware. In addition, the Company intends to focus on improving the in-storeexperience with enhanced merchandise presentation and clearer signage.

  Merchandise and sample brands offered in eachmajor department are highlighted below:

 
| **Department**       | ** ** | **Items Sold**                                                                                                                           | ** ** | **Sample Brands**                                                                                                     |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| Bath                 |       | Towels, shower curtains, waste baskets, bathroom  rugs and wall hardware                                                                 |       | Croscill, Nautica and Wamsutta                                                                                        |
| Home Accessories     |       | Decorative pillows, napkins, tablecloths, placemats,  lamps, gifts, picture frames, candles and framed art                               |       | Colonial Candle, Waverly and Yankee Candle                                                                            |
| Housewares           |       | Cookware, cutlery, kitchen gadgets, small electric  appliances (such as blenders and coffee makers), dinnerware, flatware and  glassware |       | All-Clad, Black & Decker, Braun, Calphalon,  Circulon, Cuisinart, Farberware, Henckels, KitchenAid, Krups and OXO |
| Storage and Cleaning |       | Closet-related items (such as hangers, organizers  and shoe racks), cleaning and laundry care products                                   |       | Bissell, Dyson, Euro-Pro, Hoover, Rowenta and  Rubbermaid                                                             |
| Bedding              |       | Sheets, comforters, comforter covers, bedspreads,  bed pillows, blankets and mattress pads                                               |       | Croscill, Liz Claiborne, Nautica, Wamsutta and  Waverly                                                               |
| Window Treatment     |       | Curtains, valances and window hardware                                                                                                   |       | Croscill, Nautica, Wamsutta and Waverly                                                                               |

 

The Company’s merchandise procurement is done centrally ratherthan in store operations. The Company utilizes an auto-replenishment system,whereby approximately 95% of its core products are replenished from acentralized monitoring system, accounting for approximately 60% of the Company’sreceipts.

**Guest Service and Marketing**

The Company treats every customer as a guest. The Company’sphilosophy is to enhance its guests’ entire shopping experience so that it willbecome the store of first choice for its guests’ home furnishing needs. Tofacilitate the ease of shopping, the Company’s assisted self-service culture iscomplemented by trained department specialists, zoned floor coverage, productinformation displays and videos, self-demonstrations and

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in-store product seminars. The entire store team istrained to be highly visible in order to assist guests with their selections.The use of modern technologies reduces the need for its associates to manage “backoffice” activities so that the majority of their time can be focused ongreeting and assisting guests and delivering attentive service. Sophisticatedmanagement systems that provide efficient guest service and the Company’s fairreturn policies are geared toward making each guest’s visit a convenient,efficient and pleasant experience.

**Sales Associates**

The Company seeks to maintain a sales force of knowledgeable,professional and well-trained sales associates to deliver personal attentionand service to its guests. The Company offers competitive wages and on-goingtraining and personnel development in order to attract and retain qualified,motivated associates committed to providing superior guest service. Training atthe sales associate level focuses on the areas of guest interaction, product knowledgeand store systems usage.

**Marketing and Advertising**

The Company uses its advertising programs tocommunicate, build and strengthen the Linens ‘n Thingsbrand. The Company has implemented an aggressive new, multi-tiered marketingcampaign that re-invigorates the Linens ‘n Thingsbrand, emphasizes the Company’s commitment to its “Best Bets” key-item programand drives traffic to its stores. The Company expects marketing expenditures infiscal 2007 to be similar to the prior year and to continue its initiativesstarted in fiscal 2006 to broaden its reach with a more diversified mix ofmarketing utilizing broadcast media, preprint and newspaper advertising anddirect mail. The Company believes that these changes, coupled with a greateremphasis on national advertising, will be more effective in communicating itsmerchandising strategy while attracting new guests into its stores andenhancing its brand. The Company focuses its advertising programs during keyselling seasons such as spring/summer, back-to-school and holidays. Inaddition, it utilizes its proprietary marketing database to track the buyinghabits of its guests.

**Private Label Charge Card**

To further strengthen its guest base and build guest loyalty,the Company offers a private label charge card program. Through a pointsprogram, guests receive enhanced value by using the card. The program alsoallows the Company to provide consistent and effective communication with itsguests, while increasing its information base of its guests’ purchasing patterns.Subject to customary exceptions, credit risk relating to this program is borneby GE Money, a top issuer of private label credit cards.

**Vendor Relationships**

The Company’s merchandise assortment consists of a wideselection of high quality, brand name fashion home textiles, housewares andhome accessories from both established and emerging vendors. The Companycommunicates with its vendors frequently, providing feedback on current demandfor their products. Many of the Company’s key vendors limit the number ofretail channels they use to sell their merchandise, and competition amongretailers to obtain and sell these key-vendor-sourced goods is intense. TheCompany’s relationships with its vendors have been a significant contributor toits past success. The Company monitors and evaluates the sales andprofitability performance of each vendor and adjusts its future purchasingdecisions from time to time based upon the results of this analysis. TheCompany has no guaranteed supply arrangements with its principal merchandisingsources.

The Company purchases its merchandise from a diverse vendorbase of approximately 1,200 suppliers, of which approximately 21% are locatedoverseas. In fiscal 2006, products supplied by the Company’s 25 largest vendorsrepresented approximately 40% of its purchases, with its top three vendorssupplying approximately 13% of its purchases and its largest single vendorsupplying approximately 8% of its purchases. The Company believes that thisbuying power and its ability to make centralized purchases generally allow it

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to acquire products at favorable terms. In addition,the breadth of the Company’s sourcing helps mitigate risks associated with asingle brand or designer.

**Store Operations**

***Store Management and Operations***

The Company places a strong emphasis on its people, theirdevelopment and their opportunity for advancement, and is committed tomaintaining a high internal promotion rate. The Company’s practice is to openeach new store with a seasoned management team, which usually includes managerswho have significant experience with its Company. Additionally, the Company’sstructured management-training program requires that each new manager learn allfacets of the business within the framework of a fully operational store. Thisprogram includes, among other things, product knowledge, merchandisepresentation, business and sales perspective, employee relations and manpowerplanning. At the sales associate level, the Company focuses its training onguest interaction, product knowledge and store systems usage. The Companybelieves that its policy of promoting from within, as well as the opportunitiesfor advancement from its store expansion program, serve as incentives toattract and retain quality individuals.

Linens ‘n Things’ stores are open seven daysa week, generally from 9:00 am to 9:30 pm Monday through Saturday and 10:00 amto 7:00 pm on Sunday unless affected by local laws.

**Distribution**

The Company currently operates distribution centers inShepherdsville, Kentucky; Swedesboro, New Jersey and Greensboro, NorthCarolina. It also uses third-party logistics companies to supplement itsdistribution centers. The Company believes that the utilization of centralizeddistribution centers has resulted in lower average freight expense, more timelycontrol of inventory shipments to stores and improved information flow. TheCompany also believes strong distribution support for its stores is a criticalelement in its strategy and is central to its ability to maintain a low costoperating structure.

The Company manages the distribution process centrally fromits corporate headquarters. Purchase orders issued by the Company areelectronically transmitted to nearly all of its suppliers. The Company plans tocontinue its efforts to ship as much merchandise through its distributioncenters as possible to ensure all benefits of its logistics strategy are fullyutilized. Continued growth will also facilitate new uses of electronic datainterchange technologies between its suppliers and the Company to exploit themost productive and beneficial use of its assets and resources. In order torealize greater efficiency, the Company also uses third-party freight carriersto ship its merchandise from its distribution centers to its stores.

**Management Information Systems**

The Company continually evaluates and upgrades its managementinformation systems to enhance the quantity, quality and timeliness ofinformation available to management. The Company believes its managementinformation systems have fully integrated its stores, headquarters anddistribution process. Over the last several years, the Company has madesignificant investments in technology to improve guest service such as Internetand online bridal and gift registry tools. The Company operates an IBM AS/400management information system that integrates all major aspects of itsbusiness, including sales, distribution, purchasing, inventory control,merchandise planning and replenishment and financial systems. Informationobtained from management information systems results in automatic inventoryreplenishment in response to specific requirements of each store, therebyimproving in-stock positions and enhancing guest service. The Company

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also utilizes hand-held scanners with inventory statusand price look-up capabilities, which allow its sales associates to remainaccessible to guests on the selling floor.

**Competition**

The U.S. retail home furnishings market is highly fragmented.The market includes many different types of retailers including, among others,department stores, mass merchandisers and discounters, specialty retailers,home improvement centers and warehouse clubs. The Company believes that itsability to compete successfully in its market is influenced by several factors,including price, breadth and quality of product selection, in-stockavailability of merchandise, effective merchandise presentation, guest serviceand superior store locations. The Company believes that it is well positionedto compete on the basis of these factors. Nevertheless, there can be noassurance that any or all of the factors that enable the Company to competefavorably will not be adopted by companies having greater financial and otherresources. The Company generally classifies its competition as follows:

*** Department Stores***

This category includes national and regional department storessuch as J.C. Penney Company Inc., Sears, Roebuck and Co., a wholly ownedsubsidiary of Sears Holdings Corporation, and the department store chainsoperated by Federated Department Stores, Inc. These retailers offer name brandmerchandise as well as their own private label furnishings. In general,department stores offer a more limited selection of home furnishingsmerchandise than the Company does.  Theprices offered by department stores during off-sale periods generally aresignificantly higher than those of the Company and during on-sale periods arecomparable to or slightly higher than those of the Company.

*** Mass Merchandisers***

This category includes companies such as Wal-Mart Stores, Inc.and Target Corporation. Fashion home furnishings generally represent only asmall portion of the total merchandise sales in these stores; however, thischannel of distribution makes up the largest portion of home furnishings sales.These stores generally offer a more limited merchandise selection with fewerhigh quality name brands and lower quality merchandise at lower price points.In addition, these mass merchandisers typically have more limited guest servicestaffing than the Company does.

*** Specialty Stores/Retailers***

This category includes large format home furnishings retailersincluding Bed Bath & Beyond, Inc., Home Goods, a division of TJXCompanies, Inc. and smaller format retailers such as Pier One Inc.,Crate & Barrel and Williams-Sonoma, Inc. The Company estimatesthat the large format stores range in size from approximately 25,000 to 70,000gross square feet offering home furnishing merchandise selection ofapproximately 15,000 to 40,000 SKUs. These retailers attempt to develop loyalguests and increase guest traffic by providing a single outlet to satisfy theguest’s household needs. The smaller format retailers generally offer a morelimited selection of merchandise within a specific niche and generally range insize from 2,000 to 20,000 gross square feet.

*** Other Retailers***

This category includes mail order retailers, such as Domestications;off-price retailers, such as Kohl’s Corporation; the T.J. Maxx and Marshall’sdivisions of the TJX Companies, Inc.; home improvement stores, such as TheHome Depot, Inc. and Lowe’s Companies, Inc.; warehouse clubs, such asCostco Wholesale Corporation and Sam’s Club and smaller local retail stores.These retailers, with the exception of off-price retailers, generally offer amore limited selection of merchandise. Off-price retailers typically offercloseout or out of season name brand merchandise at competitive prices.

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**Seasonality and Inflation**

The Company’s business is subject to substantial seasonalvariations. Historically, the Company has realized a significant portion of itsnet sales and, prior to the Merger before the Company became highly leveraged,substantially all of its net income for the year during the third and fourthquarters. The Company’s quarterly results of operations may also fluctuatesignificantly as a result of a variety of other factors, including the timingof new store openings. The Company believes this is the general patternassociated with its segment of the retail industry and expects that thispattern will continue in the future. Consequently, comparisons between quartersare not necessarily meaningful and the results for any quarter are notnecessarily indicative of future results.

The Company does not believe that its operating results havebeen materially affected by inflation during the past year. There can be noassurance; however, that the Company’s operating results will not be affectedby inflation in the future.

**Intellectual Property**

The Company uses “Linens ‘n Things”and “LNT” as trademarks and as service marks in connection with retailservices. The Company has registered the “Linens ‘n Things”and “LNT” marks with both the United States Patent and Trademark Office and theCanadian Intellectual Property Office. The Company believes that the name “Linens‘n Things” and its related marks are important elements of its business. Itscorporate website address is*www.lnt.com.*

**Employees**

As of December 30, 2006, the Company employed approximately18,500 individuals, of whom approximately 7,300 were full-time employees and11,200 were part-time employees. None of its employees is represented by aunion, and the Company believes that it has a good relationship with itsemployees.

**Government Regulation**

The Company’s operations are affected by numerous federal andstate laws that impose disclosure and other requirements upon the origination,servicing and enforcement of credit accounts and limitations on the maximumamount of finance charges that may be charged by a credit provider. In additionto its proprietary credit cards, credit to its guests is also provided throughthird parties such as American Express, Visa and MasterCard. Any change in theregulation of credit that would materially limit the availability of credit toits guest base could adversely affect the Company’s results of operations orfinancial condition.

The Company’s and its competitors’  practices are subject to review in theordinary course of business by the Federal Trade Commission and are subject tonumerous federal and state laws. Additionally, the Company is subject tocertain customs, truth-in-advertising and other laws, including consumerprotection regulations that regulate retailers generally and/or govern theimportation, promotion and sale of merchandise. The Company undertakes tomonitor changes in these laws and believes that it is in material compliancewith all applicable state and federal regulations with respect to suchpractices.

**Foreign Sales**

The Company’s current international business is in Canada. Thefollowing table represents a summary of net sales and long-lived assets:

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| ** **                             | ** ** | **February 14, 2006 to  December 30, 2006** | ** ** | **January 1, 2006 to   February 13, 2006** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                             | ** ** | **(in millions)**                                               | ** ** |
| Net sales from  stores located within: |       |                                                                 |       |                                                                     |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| United States                          |       | $                                                                    | 2,346.2    |                                                                     | 92.6       | %                    | $          | 267.5                |       | 93.9 | % | $ | 2,535.5 |   | 94.1 | % | $ | 2,537.5 |   | 95.3 | % |
| Canada                                 |       | 188.2                                                                |       | 7.4                                                                      | %          | 17.5                 |       | 6.1                  | %          | 159.2 |   | 5.9 | % | 124.0 |   | 4.7 | % |
| Total                                  |       | $                                                                    | 2,534.4    |                                                                     | 100.0      | %                    | $          | 285.0                |       | 100.0 | % | $ | 2,694.7 |   | 100.0 | % | $ | 2,661.5 |   | 100.0 | % |
| Long-lived  assets(1)(2)               |       |                                                                 |       |                                                                     |       |                 |       |                 |       |   |   |   |   |   |   |   |   |
| United States                          |       | $                                                                    | 922.3      |                                                                     | 93.8       | %                    | $          | 1,010.9              |       | 94.3 | % | $ | 601.2 |   | 93.6 | % | $ | 573.9 |   | 94.4 | % |
| Canada                                 |       | 60.9                                                                 |       | 6.2                                                                      | %          | 61.1                 |       | 5.7                  | %          | 41.2 |   | 6.4 | % | 34.0 |   | 5.6 | % |
| Total                                  |       | $                                                                    | 983.2      |                                                                     | 100.0      | %                    | $          | 1,072.0              |       | 100.0 | % | $ | 642.4 |   | 100.0 | % | $ | 607.9 |   | 100.0 | % |
|                                   |       |                                                                 |       |                                                                     |       |                 |       |                 |       |   |   |   |   |   |   |   |   |

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*(1)*Includesproperty and equipment, net of accumulated depreciation; identifiableintangible assets, net of accumulated amortization; goodwill and deferredfinancing cost and other noncurrent assets, net.

(2)  Amounts presented at February13, 2006 are after purchase accounting adjustments in connection with theacquisition of Linens ‘n Things, Inc.

**Available Information**

Prior to the consummation of the Merger on February 14, 2006,when the common stock of Linens ‘n Things,Inc. was publicly traded on the New York Stock Exchange, the Company madeavailable free of charge through its website, *www.lnt.com*,all materials that Linens ‘n Things, Inc. filedelectronically with the SEC, including annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as soon as reasonably practicable after electronicallyfiling such materials with, or furnishing them to, the SEC.

As a result of becoming a privately-held company upon theconsummation of the Merger and the issuance in a private placement of theSenior Secured Floating Rate Notes due 2014, the Company was not required tofile these reports with the SEC.  However,in accordance with the indenture governing these notes, reports were preparedon a basis that was equivalent to, but not filed with, the SEC, and suchreports were furnished to noteholders by making them available on the Company’swebsite.  In August 2006 the notes wereexchanged for new notes with terms that were identical to the original notesexcept that the exchange notes were registered under the Securities Act.  At such time, the Company once again becamesubject to filing obligations with the SEC pursuant to the Securities ExchangeAct.  The Company has made available freeof charge through its website all materials subsequently filed by the Companyelectronically with the SEC, including its Registration Statement on Form S-4,quarterly reports on Form 10-Q and current reports on Form 8-K, and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act, as soon as reasonably practicable after electronicallyfiling such materials with, or furnishing them to, the SEC.

Investors may also read and copy any materials filed by theCompany with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,Room 1580, Washington, DC  20549.  You may obtain information on the operationof the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internetwebsite, *www.sec.gov*, that contains reports,proxy and information statements and other information which the Company or itspredecessor, Linens ‘n Things, Inc., filed electronicallywith the SEC.

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**Item 1A. Risk Factors**

The following risks comprise all the material risks of which theCompany is aware of; however, these risks and uncertainties may not be the onlyones the Company faces.  Additional risksand uncertainties not presently known to the Company or that it currentlybelieves are immaterial may also adversely affect the Company’s business orfinancial performance.  The followingrisks could materially harm the Company’s business, financial condition, futureresults of operations and cash flow.

**Risks Related to theCompany’s Business**

***TheCompany’s profitability would be adversely affected if its merchandiseselections do not match guest preferences.***

The retail industry is subject to changing merchandise trendsand consumer preferences. The Company’s success depends in large part on itsability to identify merchandise trends as well as to anticipate, gauge andreact to changing consumer demands in a timely manner. The Company cannot giveassurance that its merchandise selections will accurately reflect thepreferences of its guests at any given time. In addition, any decline in thepopularity or quality of any of its key brands could adversely affect itsbusiness. Furthermore, the products the Company sells often require long leadtimes to order and must appeal to consumers whose preferences cannot bepredicted with certainty and often change rapidly. Consequently, the Companymust stay abreast of changing lifestyle and consumer trends and anticipatetrends and fashions that will appeal to its guests. If the Companymiscalculates the market for its merchandise or the purchasing preferences ofits guests, its business and financial results could be adversely affected.

***TheCompany does not have long-term contracts with any of its vendors and if the Companyis unable to purchase suitable merchandise in sufficient quantities atcompetitive prices, it may be unable to offer a merchandise mix that isattractive to its guests and its sales may be harmed.***

Third-party vendors manufacture virtually all of the productsthat the Company offers. In fiscal 2006, the Company purchased its merchandisefrom approximately 1,200 vendors. Many of the Company’s key vendors limit thenumber of retail channels they use to sell their merchandise and competitionamong retailers to obtain and sell these goods is intense. In addition, nearlyall of the brands of its top vendors are sold by competing retailers, and someof its top vendors also have their own dedicated retail stores. Moreover, theCompany typically buys products from its vendors on a purchase order basis. TheCompany has no long-term purchase contracts with any of its vendors and,therefore, has no contractual assurances of continued supply, pricing or accessto products, and any vendor could change the terms upon which they sell to theCompany or discontinue selling to the Company at any time. In fiscal 2006,products supplied by its 25 largest vendors represented approximately 40% ofits purchases, with its top three vendors supplying approximately 13% and its largestsingle vendor supplying approximately 8% of its purchases for the year.

If the Company’s relationships with its vendors are disrupted,it might not be able to acquire the merchandise the Company requires insufficient quantities or on terms acceptable to it. Any inability to acquiresuitable merchandise would have a negative effect on the Company’s business andoperating results because it would be missing products from its merchandise mixunless and until alternative supply arrangements were made, resulting indeferred or lost guest sales.

***Delaysin receipt of merchandise in connection with either the manufacturing orshipment of such merchandise could affect the Company’s performance.***

Virtually all of the Company’s merchandise is delivered to itby its vendors as finished goods and is manufactured in numerous locations. TheCompany’s vendors rely on third party carriers to deliver merchandise to itsdistribution facilities. In addition, the Company’s success depends on itsability to efficiently source and distribute merchandise to its retail storesand online guests. Events such as labor 

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disputes, natural disasters, availability of rawmaterials, vendor financial liquidity, inclement weather, work stoppages orboycotts affecting the manufacturing or transportation sectors could increasethe cost or reduce the supply of merchandise available to the Company and couldadversely affect its results of operations. Upon the loss of one or more of itsvendors, the Company may not be able to develop relationships with new vendors,and products from alternative sources, if available, may be more expensive orof a different or inferior quality from the ones the Company currently sells.

In addition, a significant portion of the Company’smerchandise is currently sourced by it or by its domestic suppliers fromforeign vendors. As a result, events resulting in the disruption of trade fromother countries or the imposition of additional regulations relating to dutiesupon imports could cause significant delays or interruptions in the supply ofits merchandise or increase its costs, either of which could have a materialadverse effect on its business. Examples of such events include:

·                  political unrest, terroristactivities, war or other hostilities.

·                  strikes and labor problems;

·                  economic upheaval;

·                  import duties and quotas; and

·                  loss or change in “Most Favored Nation”status of the United States with a particular foreign country.

An increase in the cost to manufacture, or a disruption inshipment to the Company of, foreign-sourced products could decrease its salesand profitability.

***TheCompany’s future growth and profitability could be adversely affected if itsadvertising and marketing programs are not effective in generating sufficientlevels of customer awareness and traffic.***

The Company relies heavily on print advertising, includingdirect mail, to promote new store openings, to increase consumer awareness ofits product offerings and pricing and to drive store traffic. In addition, theCompany relies and will increasingly rely on other forms of media advertising.The Company’s future growth and profitability will depend in large part uponthe effectiveness and efficiency of its advertising and marketing programs. Inorder for its advertising and marketing programs to be successful, it must:

·                  effectively manage advertising and marketingcosts in order to maintain acceptable operating margins and return on itsmarketing investment; and

·                  convert customer awareness into actual storevisits and product purchases.

The Company’s planned advertising and marketing expendituresmay not result in increased total or comparable store sales or generatesufficient levels of product awareness. The Company may not be able to manageits advertising and marketing expenditures on a cost-effective basis.

There are a limited number of companies capable ofdistributing the Company’s direct mail advertising at the volume levels itrequires. If any of these companies cease operations, or if their expenses(e.g., postage, printing and paper costs) increase substantially, then it islikely that the Company’s advertising expenses will increase, which will have anegative effect on its business and operating results.

***Weak economicconditions may significantly impact discretionary consumer spending and reducethe Company’s sales and profitability.***

Most of the products that the Company sells are not consumernecessities. Purchases of the Company’s merchandise are largely dependent upondiscretionary spending by its guests. A number of external economic factorscould affect purchases by its guests of the type of merchandise it offers,including:

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·                  disposable income or consumer confidence infuture economic conditions;

·                  general economic and business conditions; and

·                  increased interest rates or consumer debtlevels.

Decreases in consumer confidence and consumer spending couldadversely impact the Company’s sales and results of operations. Reducedconsumer spending may also require increased markdowns and increasedpromotional expenses, which would adversely impact its results of operations.

***Competitive factors could reduce theCompany’s sales and profitability.***

The U.S. retail home furnishings market is highly fragmentedand intensely competitive. The Company competes with many different types of retailers,including among others department stores, mass merchandisers and discounters,specialty retail stores, home improvement centers, warehouse clubs and otherretailers. Some of the Company’s competitors sell many of the same products andbrands that it sells. The competitive challenges facing the Company include:

·                  anticipating and quickly responding tochanging consumer demands;

·                  increasing customer awareness and traffic toits stores;

·                  variety and fashion of the products itoffers;

·                  maintaining favorable brand recognition andachieving customer perception of value;

·                  effectively marketing and competitivelypricing its products to its target guests; and

·                  competing with entities that havesubstantially greater financial and other resources than the Company does.

Competition by existing or future competitors, includingaggressive price competition, could result in the need to reduce the Company’sprices or increase its spending and could result in a decrease in its sales andprofitability and require a change in its operating strategies.

***Attrition among the Company’s buyers or keysales associates could adversely affect its financial performance and itsgrowth.***

The Company’s success is largely dependent on the efforts andabilities of its buyers and key sales associates. The Company’s ability to meetits labor needs generally is subject to numerous factors, including theavailability of a sufficient number of qualified persons in the work force,unemployment levels, the wages and benefits it pays, prevailing wage rates,changing demographics, health and other insurance costs and changes inemployment legislation. If the Company were to lose buyers or key salesassociates and not promptly fill their positions with comparably qualifiedindividuals, its ability to benefit from long-standing relationships with keyvendors or to provide relationship-based guest service may suffer. The Companycannot give assurance that it will not suffer significant attrition among itscurrent buyers or key sales associates. The loss of these individuals couldadversely affect its business.

***The Company may not be successful inopening and operating new stores profitably or making its recently openedstores profitable.***

Although at a decreased rate as compared to prior years, theCompany plans to open a number of new stores as part of its growth strategy.There are many risks inherent in its store expansion strategy, and the Companycannot give assurance that it will be able to achieve its expansion goals. TheCompany’s ability to 

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grow its store base and operate its new and recentlyopened stores profitably will be affected by many factors, including:

·                  risks inherent in constructing, furnishingand supplying a store in a timely and cost effective manner, includingobtaining necessary permits and zoning approvals;

·                  integrating the new store into itsdistribution network;

·                  its ability to maintain financing oncommercially reasonable terms;

·                  its ability to identify and secure favorablesites for its new stores in well-trafficked areas and to negotiate satisfactoryrent and other lease terms;

·                  the competition for favorable store sites;

·                  the presence of other complementary retailoutlets at the locations where the Company opens its new stores;

·                  the proximity of its competitors’ stores;

·                  the impact on sales at its existing stores ifthe Company locates new stores in the same market;

·                  its ability to invest in and expand itsdistribution, information technology, management and logistics infrastructureto support a continually increasing store base;

·                  its ability to attract, train and retain goodand experienced store managers and store personnel for its new stores; and

·                  acceptance of its new stores in markets wherethe Company has limited or no existing presence.

The Company intends to open additional stores in new markets,as well as in existing markets, in fiscal years 2007, 2008 and beyond. The new markets the Company enters may havedifferent competitive conditions, consumer trends and discretionary spendingpatterns than its existing markets, which may cause the Company’s stores inthese new markets to be less successful than stores in its existing markets.

Where the Company adds stores into its existing markets, itmay not be able to attract sufficient new customers to these new stores and, inaddition, these new stores may have the effect of reducing sales from theCompany’s existing stores in those markets, which may have an adverse effect onits results of operations.

The Company cannot give assurance that its new or recentlyopened stores will meet its internal financial operating targets or that itwill be able to operate its new or recently opened stores profitably.  The Company also cannot give assurance thatthe operating results of its new or recently built stores will be comparable tothe operating results of its mature existing stores.

***A disruption in the operation of theCompany’s distribution centers would impact its ability to deliver merchandiseto its stores, which could adversely impact its sales and its results ofoperations.***

The Company’s inventory is generally shipped by its suppliersto one of its three distribution centers, which are located in Shepherdsville,Kentucky; Swedesboro, New Jersey and Greensboro, North Carolina. At itsdistribution centers, the merchandise is processed, sorted and shipped to itsstores. Events such as fire or other catastrophic events, any malfunction ordisruption of its centralized information systems or shipping problems mayresult in delays or disruptions in the timely distribution of merchandise toits stores, which could adversely impact the Company’s sales and its results ofoperations. Additionally, increases in variable expenses such as fuel costsassociated with its distribution operations may adversely impact the Company’sresults of operations.

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***The Company’s revenues and cashrequirements are affected by the seasonal nature of its business.***

The Company’s business is subject to substantial seasonalvariations.  Historically, the Companyhas realized a significant portion of its net sales for the year during thethird and fourth quarters, with a majority of net sales realized in the fourthquarter.  The Company’s quarterly resultsof operations may also fluctuate significantly as a result of a variety ofother factors, including the timing of new store openings, holiday spendingpatterns and general economic conditions. The Company believes this is the typical pattern associated with itssegment of the retail industry, and the Company expects this pattern willcontinue in the future.  In anticipationof its peak selling season, the Company incurs substantial additional costs,including additional inventory, payroll and advertising costs.  If for any reason the Company’s sales duringthe fourth quarter of any year were significantly below expectations, itsresults of operations for that full year would be materially adverselyaffected.

***A problem with the Company’smanagement information systems could impact its flow of product and informationand adversely affect its operating productivity and results of operations.***

The Company relies heavily upon its existing managementinformation systems in operating and monitoring all aspects of its business,including sales, warehousing, distribution, purchasing, inventory control,merchandise planning and replenishment and its financial systems.  The bulk of the Company’s managementinformation systems are centrally located at its headquarters, with offsitebackup at other locations.  Any extendeddisruption in the operation of the Company’s management information systemscould have an adverse effect on its operating productivity and results ofoperations.

Furthermore, to keep pace with changing technology, theCompany must continuously provide for the design and implementation of new informationtechnology systems as well as enhancements of its existing systems.  Any failure to adequately maintain and updatethe information technology systems supporting the Company’s sales operations orinventory control could prevent it from processing and delivering merchandise,which could adversely affect its business.

***The Company’s business can beaffected by extreme or unseasonable weather conditions.***

Extreme weather conditions in the areas in which the Company’sstores are located could adversely affect its business.  For example, heavy snowfall, rainfall orother extreme weather conditions over a prolonged period might make itdifficult for the Company’s guests to travel to its stores and thereby reduceits sales and profitability.  The Company’sbusiness is also susceptible to unseasonable weather conditions.  For example, extended periods of unseasonablywarm weather temperatures during the winter seasons could render a portion ofthe Company’s inventory incompatible with those conditions.  Reduced sales from extreme or prolongedunseasonable weather conditions would adversely affect the Company’s business.

***Acts of terrorism could adverselyaffect the Company’s business.***

The economic downturn that followed the terrorist attacks ofSeptember 11, 2001 had a material adverse effect on its business. Anyfurther acts of terrorism or other future conflict may disrupt commerce andundermine consumer confidence, cause a downturn in the economy generally, causeconsumer spending or shopping center traffic to decline or reduce the desire ofits guests to make discretionary purchases. Any of the foregoing factors couldnegatively impact the Company’s sales revenue, particularly in the case of anyterrorist attack targeting retail space, such as a shopping center.Furthermore, an act of terrorism or war, or the threat thereof, couldnegatively impact the Company’s business by interfering with its ability toobtain merchandise from foreign manufacturers. Any future inability to obtainmerchandise from its foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectits business.

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***The Company is subject to numerousregulations that could affect its operations.***

The Company is subject to customs, truth-in-advertising andother laws, including consumer protection regulations and zoning and occupancyordinances, which regulate retailers generally and/or govern the importation,promotion and sale of merchandise and the operation of retail stores andwarehouse facilities.  Although theCompany undertakes to monitor changes in these laws, if these laws changewithout its knowledge, or are violated by importers, designers, manufacturersor distributors, the Company could experience delays in shipments and receipt ofgoods or be subject to fines or other penalties under the controllingregulations, any of which could adversely affect its business.

***If the Company is unable to enforce its intellectual propertyrights, or if it is accused of infringing on a third party’s intellectualproperty rights, its profitability may be adversely affected*****.**

The Company and its subsidiaries currently own its trademarksand service marks, including the “Linens ‘n Things” and “LNT” marks.  The Company’s trademarks and service marksare registered with both the United States Patent and Trademark Office and theCanadian Intellectual Property Office. The laws of some foreign countries do not protect proprietary rights tothe same extent as do the laws of the United States.  Moreover, the Company is unable to predictthe effect that any future foreign or domestic intellectual propertylegislation or regulation may have on its existing or future business.  The loss or reduction of any of the Company’ssignificant proprietary rights could have an adverse effect on its business.

Additionally, third parties may assert claims against theCompany alleging infringement, misappropriation or other violations of theirtrademarks, copyrights or patents (including with respect to allegedproprietary designs) or other proprietary rights, whether or not the claimshave merit.  Claims like these may betime consuming and expensive to defend and could result in the Company beingrequired to cease using the trademark, copyright or patent, design or otherrights and selling the allegedly infringing products or to acquire licenses tocontinue using such intellectual property. This might have an adverse affect on the Company’s sales or businessoperations and cause it to incur significant litigation costs and expenses.

***If the Company significantlyoverestimates its sales, its profitability may be adversely affected.***

The Company makes decisions regarding the purchase of itsmerchandise well in advance of the season in which it will be sold, generallysix months to one year.  If the Company’ssales during any season, particularly a peak season, are significantly lowerthan it expects for any reason, the Company may not be able to adjust itsexpenditures for inventory and other expenses in a timely fashion and may be leftwith a substantial amount of unsold inventory. If that occurs, the Company may be forced to rely on markdowns orpromotional sales to dispose of excess inventory.  This could have an adverse effect on theCompany’s margins and operating income. At the same time, if the Company fails to purchase a sufficient quantityof merchandise or if its vendors do not have the capacity to handle its newpurchase commitments, it may not have an adequate supply of products to meetguest demand.  This may cause the Companyto lose sales or adversely affect its reputation.

***Changes in its credit card arrangements,applicable regulations and consumer credit patterns could adversely impact theCompany’s ability to facilitate the provision of consumer credit to its guestsand adversely affect its business.***

The Company maintains a proprietary credit card programthrough which credit is extended to guests under the “Linens ‘n Things”name.  Changes in the Company’sproprietary credit card arrangements that adversely impact its ability tofacilitate the provision of consumer credit may adversely affect itsperformance.  Credit card operations aresubject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider.  Any effect of theseregulations or change in the regulation of credit arrangements that wouldmaterially limit the availability of credit to the Company’s guest base couldadversely affect its business. In addition, changes in credit card use, payment

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patterns and default rates may result from a variety ofeconomic, legal, social and other factors that the Company cannot control or predictwith certainty.

***Failure to maintain competitiveterms under the Company’s loyalty programs could adversely affect its business.***

As part of its strategy, the Company intends to formalize andmaintain loyalty programs that are designed to cultivate long-termrelationships with its customers and enhance the quality of service the Companyprovides to its customers.  The Companymust constantly monitor and update the terms of its loyalty programs so that itcontinues to meet the demands and needs of its customers and remainscompetitive with loyalty programs offered by its competitors.  The Company’s failure to provide qualityservice and competitive loyalty programs to its customers could adverselyaffect its business.

***Ifthe Company is unable to renew or replace its store leases or enter into leasesfor new stores on favorable terms, or if any of its current leases areterminated prior to the expiration of their stated term and it cannot findsuitable alternate locations, its growth and profitability could be harmed.***

The Company leases all of its store locations. The Company’scurrent leases expire at various dates through 2029 subject, in many cases, torenewal options for periods ranging from five to 20 years in total.  The Company’s ability to renew any expiredlease or, if such lease cannot be renewed, its ability to lease a suitablealternate location, and its ability to enter into leases for new stores onfavorable terms will depend on many factors which are not within the Company’scontrol, such as conditions in the local real estate market, competition fordesirable properties and its relationships with current and prospectivelandlords.  If the Company is unable torenew existing leases or lease suitable alternate locations, or enter intoleases for new stores on favorable terms, its growth and its profitability maybe significantly harmed.

***Restrictions contained in some of the Company’s leasesrelating to change of control of the Company may make any change of controlmore difficult or impair the Company’s ability to retain such leases in theevent of a change of control.***

Some of the Company’s leases contain, and leases related tonew stores may contain, various restrictions relating to a change of control ofthe Company.  In such cases, a change of controlof the Company without the consent of the landlord may result in a violation ofthe terms of such lease, thereby exposing it to potential damages or leasetermination.  This, in turn, could harmthe Company’s growth and profitability. The presence of such provisions may also make any change of control inthe future more difficult.

***The Company has identified certainissues relating to its internal controls and procedures, which, if not remediedeffectively, could have an adverse effect on its business.***

As of December 30, 2006, the Company’s control procedures didnot include adequate review over the completeness and accuracy of the incometax accounts to ensure compliance with generally accepted accountingprinciples.  The Company out-sources thepreparation of the income tax provision to a third party and did not apply athorough review to detect misstatements. This deficiency resulted in material errors in the Company’s preliminaryincome tax provision in the 2006 consolidated financial statements.  The Company corrected the provision forincome taxes and related balances prior to the issuance of the financialstatements.  Accordingly, managementdetermined that this condition constitutes a material weakness.

 A material weakness ininternal control over financial reporting is a control deficiency (within themeaning of the Public Company Accounting Oversight Board (“PCAOB”) AuditingStandard No. 2), or combination of control deficiencies, that adversely affectsa company’s ability to initiate, authorize, record, process or report externalfinancial data reliably in accordance with GAAP that results in there beingmore than a remote likelihood that a material misstatement of the annual orinterim financial statements will not be prevented or detected.

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Although the Company has taken certain actions to address thisissue, if it is unable to identify and remedy all such issues promptly andeffectively, it could have a material adverse effect on its business, resultsof operations and financial condition. Maintaining effective control over financial reporting is necessary forthe Company to produce reliable financial reports and is important in helpingto prevent financial fraud.  If theCompany’s management or its independent registered public accounting firm wereto conclude again in the future that its internal control over financialreporting was ineffective, investors could lose confidence in the Company’sreported financial information.

***The Company is indirectly owned andcontrolled by the Sponsors, and their interests as equity holders may conflictwith creditors.***

The Company is indirectly owned and controlled by theSponsors, and the Sponsors have the ability to elect all of the members of itsboard of directors and thereby control its policies and operations, includingthe appointment of management, future issuances of its common stock or othersecurities, the payment of dividends, if any, on its common stock, theincurrence of debt by the Company, amendments to its certificate ofincorporation and bylaws and the entering into of extraordinary transactions.The interests of the Sponsors may not in all cases be aligned with theinterests of noteholders. For example, if the Company encounters financialdifficulties or is unable to pay its indebtedness as it matures, the interestsof its equity holders might conflict with the interests of noteholders. Inaddition, the Company’s equity holders may have an interest in pursuingacquisitions, divestitures, financings or other transactions that, in theirjudgment, could enhance their equity investments, even though such transactionsmight involve risks to noteholders. Furthermore, the Sponsors may in the futureown businesses that directly or indirectly compete with the Company. One ormore of the Sponsors also may pursue acquisition opportunities that may becomplementary to the Company’s business, and as a result, those acquisitionopportunities may not be available to the Company.  So long as the Sponsors continue to own asignificant amount of the Company’s combined voting power, even if such amountis less than 50%, they will continue to be able to strongly influence oreffectively control the Company’s decisions.

**Risks Related to theCompany’s Substantial Debt**

***The Company’s substantial leveragemay impair its financial condition and prevent it from fulfilling itsobligations under the Notes.***

 The Company has a substantial amount of indebtedness,which could have important consequences to investors, including:

·                  making it more difficult for the Company tosatisfy its obligations with respect to the Notes;

·                  increasing the Company’s vulnerability togeneral adverse economic and industry conditions by making it more difficultfor it to react quickly to changing conditions;

·                  limiting the Company’s ability to obtainadditional financing to fund future working capital, capital expenditures,acquisitions and other general corporate requirements;

·                  requiring a substantial portion of theCompany’s cash flow from operations for the payment of interest on itsindebtedness and reducing the Company’s ability to use its cash flow to fundworking capital, capital expenditures, acquisitions and general corporaterequirements;

·                  exposing the Company to risks inherent ininterest rate fluctuations because some of the Company’s borrowings will be atvariable rates of interest, which could result in a higher interest expense inthe event of increases in interest rates;

21

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·                  limiting the Company’s flexibility inplanning for, or reacting to, changes in its business, and the industry inwhich it operates; and

·                  placing the Company at a competitivedisadvantage compared with its competitors that have less indebtedness.

***Despite current indebtedness levels,the Company and its subsidiaries may still be able to incur substantially moreindebtedness. This could further exacerbate the risks associated with itssubstantial leverage.***

Subject to specified limitations, the indenture governing theNotes and the credit agreement governing its asset-based revolving creditfacility permits the Company and its subsidiaries to incur substantialadditional indebtedness, including $600 million of borrowings under theCompany’s asset-based revolving credit facility that ranks equally with theNotes. If new indebtedness is added to the Company’s and its subsidiaries’current indebtedness levels, the risks described above could intensify.

***Covenant restrictions under theCompany’s indebtedness may limit its ability to operate its business.***

The indenture governing the Notes and the credit agreementgoverning the Company’s asset-based revolving credit facility do, and itsfuture indebtedness agreements may, contain covenants that may restrict theCompany’s ability to finance future operations or capital needs or to engage inother business activities. The Company’s indenture and its asset-basedrevolving credit facility restrict, among other things, its ability and theability of its restricted subsidiaries to:

·                  incur, assume or guarantee additionalindebtedness;

·                  issue redeemable stock and preferred stock;

·                  repurchase capital stock;

·                  make other restricted payments including,without limitation, paying dividends and making investments;

·                  create liens;

·                  redeem debt that is junior in right ofpayment to the Notes;

·                  sell or otherwise dispose of assets, includingcapital stock of subsidiaries;

·                  enter into agreements that restrict dividendsfrom subsidiaries;

·                  enter into mergers or consolidations;

·                  enter into transactions with affiliates; and

·                  enter into sale/leaseback transactions.

In addition, the Company’s asset-based revolving creditfacility requires it to maintain specified financial ratios and meet certainfinancial condition tests if excess availability under the Credit Facility isless than $75 million. Events beyond the Company’s control, including changesin general economic and business conditions, may affect its ability to meetthose financial ratios and financial condition tests. The Company cannot giveassurance that it will meet those tests or that the lenders will waive anyfailure to meet those tests. A breach of any of these covenants would result ina default under the Company’s indenture and the asset-based revolving creditfacility. If an event of default under its asset-based revolving creditfacility occurs, the lenders could terminate all commitments to lend and electto declare all amounts outstanding thereunder, together with accrued interest,to be immediately due and payable. If the Company were unable to pay suchamounts, the lenders could proceed against the collateral pledged to them. TheCompany has pledged its inventory, accounts receivable, cash, securities, othergeneral intangibles and the capital stock of certain subsidiaries to thelenders on a first-priority basis. In such an event, the Company cannot giveassurance that it 

22

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would have sufficient assets to pay amounts due on theNotes. As a result, an investor may receive less than the full amount that theinvestor would be otherwise entitled to receive on the Notes.

***The Company will require asignificant amount of cash, and its ability to generate sufficient cash dependsupon many factors, some of which are beyond its control.***

The Company’s ability to make payments on and refinance itsindebtedness and to fund working capital needs and planned capital expendituresdepends on its ability to generate adequate cash flow in the future. To someextent, this is subject to general economic, financial, competitive,legislative and regulatory factors and other factors that are beyond itscontrol. For example, the Company’s need to stock substantial inventory couldincrease its working capital needs. The Company cannot give assurance that itsbusiness will continue to generate cash flow from operations at current levelsor that its cash needs will not increase. If the Company is unable to generatesufficient cash flow from operations in the future to service its indebtednessand meet its other needs, it may have to refinance all or a portion of itsexisting indebtedness, obtain additional financing, reduce expenditures that itdeems necessary to its business or sell assets. The Company cannot giveassurance that any refinancing of this kind would be possible or that anyadditional financing could be obtained or could be obtained on commerciallyreasonable terms. The inability to obtain additional financing could have amaterial adverse effect on the Company’s financial condition and on its abilityto meet its obligations to an investor under the Notes.

***Variable rate indebtedness subjectsthe Company to interest rate risk, which could cause its debt serviceobligations to increase significantly.***

Certain of the Company’s borrowings, primarily borrowingsunder its asset-based revolving credit facility and the Notes, are, and areexpected to continue to be, at variable rates of interest and expose theCompany to interest rate risk. If interest rates increase, the Company’s debtservice obligations on the variable rate indebtedness would increase eventhough the amount borrowed remained the same, and its net income woulddecrease. Borrowings under the Company’s asset-based revolving credit facilitybear interest at a rate equal to, at its option, either (a) an alternatebase rate determined by reference to the higher of (1) the base rate ineffect on such day and (2) the federal funds effective rate plus 0.50% or(b) a LIBOR rate, with respect to any Eurodollar borrowing, determined byreference to the costs of funds for U.S. dollar deposits for the interestperiod relevant to such borrowing adjusted for certain additional costs, ineach case plus an applicable margin that is subject to adjustment periodically.The initial applicable margin for borrowings under the Company’s asset-basedrevolving credit facility was 0% with respect to alternate base rate borrowingsand 1.50% with respect to LIBOR borrowings. As of December 30, 2006 suchmargins remained at the intial levels established.  The applicable fixed margin with respect tothe Notes was a percentage per annum equal to 5.625%. Assuming all revolvingloans are fully drawn, each quarter point change in interest rates would resultin a $3.1 million change in annual interest expense on its asset-basedrevolving credit facility and the Notes. Pursuant to the indenture governingthe Notes, the Company is required to enter into interest rate swaps, involvingthe exchange of floating for fixed rate interest payments, or other forms ofderivative transactions, to reduce interest rate volatility.   In July 2006 the Company entered into twoderivative financial instruments to reduce interest rate volatility throughJanuary 15, 2009; however, beyond this date, the Company may not be able tosuccessfully enter into interest rate swaps, or other forms of derivativetransactions, on commercially reasonable terms or at all.

**Item 1B. Unresolved SEC Staff Comments**

None.

23

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**Item 2. Properties**

The Company leases its corporate headquarters, which islocated at 6 Brighton Road, in Clifton, New Jersey.  In December 2005, the Company exercised anoption to have the right to purchase this building on or before December 1,2006.  After reviewing several financingalternatives, the Company chose to assign its right to purchase to a thirdparty who subsequently purchased the building. Concurrent with the acquisition of the building by the third-party, theCompany terminated its existing lease and entered into a new lease with a 20year primary lease term providing for fixed rent during the first seven yearsand certain tenant-driven refinancing options at the end of the seventh yearconsisting of an outright purchase, prepaying rent in one lump sum for theremaining 13 years or replacing the landlord’s mortgage with a successormortgage.  As of December 31, 2006, theCompany operated 571 stores in 47 U.S. states and six Canadian provinces.  The Company’s stores generally range in size from25,000 to 40,000 gross square feet.  TheCompany’s stores are predominately located in power strip centers containingother complementary broad-based retail chains. The Company currently leases all of its existing stores and expects thatits policy of leasing rather than owning will continue.

***Distribution Centers***

The Company owns its Greensboro, North Carolina distributioncenter and leases its Swedesboro, New Jersey and Shepherdsville, Kentuckydistribution centers.  Combined totalsquare footage for these Company-operated facilities is approximately 1.2million.  Both the New Jersey andKentucky distribution centers can be expanded.

***Leased Properties***

At December 30, 2006, the Company leased the real property ofall 571 of its stores.  The aggregate rentpaid for fiscal 2006 was $289.9 million.  The Company believesthat none of its leases is individually material to it.  The Company has non-cancelable operatingleases, primarily for retail stores, which expire through 2029.  The Company’s leases provide for originallease terms that generally range from 10 to 20 years and most of the leasesprovide for one or more renewal options ranging from five to 20 years intotal.  Generally leases provide forscheduled rent increases and many of the leases provide for contingent rent(based upon store sales exceeding stipulated amounts).  Most of the Company’s leases require it topay costs such as real estate taxes and common area maintenance costs.

The table below sets forth the number and location of theCompany’s 536 stores in the United States as of December 30, 2006:

24

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| State         | ** ** | **Number of Stores** | ** ** | **State**      | ** ** | **Number of Stores** |
|---------------|------------|----------------------|------------|----------------|------------|----------------------|
| Alabama       |       | 6                    |       | Nebraska       |       | 3                    |
| Arizona       |       | 15                   |       | Nevada         |       | 4                    |
| Arkansas      |       | 4                    |       | New Hampshire  |       | 5                    |
| California    |       | 63                   |       | New Jersey     |       | 23                   |
| Colorado      |       | 13                   |       | New Mexico     |       | 3                    |
| Connecticut   |       | 13                   |       | New York       |       | 30                   |
| Delaware      |       | 1                    |       | North Carolina |       | 19                   |
| Florida       |       | 45                   |       | North Dakota   |       | 1                    |
| Georgia       |       | 20                   |       | Ohio           |       | 14                   |
| Idaho         |       | 2                    |       | Oklahoma       |       | 4                    |
| Illinois      |       | 25                   |       | Oregon         |       | 7                    |
| Indiana       |       | 9                    |       | Pennsylvania   |       | 17                   |
| Iowa          |       | 1                    |       | Rhode Island   |       | 4                    |
| Kansas        |       | 3                    |       | South Carolina |       | 7                    |
| Kentucky      |       | 4                    |       | South Dakota   |       | 1                    |
| Louisiana     |       | 7                    |       | Tennessee      |       | 9                    |
| Maine         |       | 5                    |       | Texas          |       | 52                   |
| Maryland      |       | 6                    |       | Utah           |       | 3                    |
| Massachusetts |       | 21                   |       | Vermont        |       | 1                    |
| Michigan      |       | 12                   |       | Virginia       |       | 12 (1)               |
| Minnesota     |       | 7                    |       | Washington     |       | 13                   |
| Mississippi   |       | 2                    |       | West Virginia  |       | 1                    |
| Missouri      |       | 9                    |       | Wisconsin      |       | 8                    |
| Montana       |       | 2                    |       |           |       |                 |

----

(1) For reportingpurposes, District of Columbia is included in Virginia total stores.  This is consistent with the prior year.

25

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The table below sets forth the number and location of theCompany’s 35 stores in Canada as of December 30, 2006:

| Province         | ** ** | **Number of  Stores** | ** ** |
|------------------|------------|----------------------------|------------|
| Alberta          |       | 9                          |       |
| British Columbia |       | 6                          |       |
| Manitoba         |       | 1                          |       |
| Nova Scotia      |       | 1                          |       |
| Ontario          |       | 17                         |       |
| Saskatchewan     |       | 1                          |       |

 

The Company believes that it will be able to negotiateacceptable extensions of the leases for those locations that it intends tocontinue operating.  Beyond terminationof the Company’s contractual lease obligations through the end of the term,early termination of these leases would not result in significant penalty tothe Company.  A total of 11 leases willbe expiring in fiscal 2007 or 2008.

When appropriate, the Company has chosen to sell and thenlease-back certain properties.  Factorsleading to this decision include alternative desires for use of cash andminimalization of the risks associated with owning the property, especiallychanges in the valuation due to population shifts, urbanization and proximityto high volume streets.

The following table sets forth information concerning theCompany’s store expansion program during the past five years:
| ** **       | ** ** | ** **          | ** ** | ** **          | ** ** | **Total Square Footage  (In Thousands)** | ** ** | **Store Count**  | ** ** |
|------------------|------------|---------------------|------------|---------------------|------------|---------------------------------------------------------|------------|-----------------------|------------|
| **Fiscal  Year** | ** ** | **Store  Openings** | ** ** | **Store  Closings** | ** ** | **Beginning  of Year**                             | ** ** | **End  of Year** | ** ** | **Beginning  of Year** | ** ** | **End  of Year** | ** ** |
| 2002             |       | 55                  |       | 7                   |       | 11,980                                                  |       | 13,607                |       | 343 |   | 391 |   |
| 2003             |       | 58                  |       | 9                   |       | 13,607                                                  |       | 15,106                |       | 391 |   | 440 |   |
| 2004             |       | 54                  |       | 2                   |       | 15,106                                                  |       | 16,702                |       | 440 |   | 492 |   |
| 2005             |       | 55                  |       | 5                   |       | 16,702                                                  |       | 18,071                |       | 492 |   | 542 |   |
| 2006             |       | 31                  |       | 2                   |       | 18,071                                                  |       | 18,928                |       | 542 |   | 571 |   |

 

**Item 3. Legal Proceedings**

The Company is involved in various claims and legal,regulatory and administrative actions arising in the ordinary course ofbusiness, including actions before the Equal Employment OpportunityCommission.  In the opinion ofmanagement, the ultimate disposition of these matters is not expected to have amaterial adverse effect on the Company’s consolidated financial position,results of operations or liquidity.

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

None.

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**PART II**

**Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

Prior to the Merger, the common stock of Linens ‘n Things,Inc., par value $0.01 (the “Predecessor Common Stock”) was listed on the NewYork Stock Exchange.  Its trading symbolwas LIN.

In connection with the closing of the Merger, the PredecessorCommon Stock was converted into the right to receive $28.00 per share, in cash,without interest, for aggregate consideration of approximately $1.3 billion.

The last trading day of the Predecessor Common Stock wasFebruary 14, 2006.  On the following daythe stock was delisted from the NYSE and a Form 25 was filed with the SEC bythe NYSE to strike the Predecessor Common Stock from listing and registrationthereon.

As a result of the Merger, the Company’s common stock is privatelyheld, and there is no established trading market for its stock. As of the dateof the filing of this report, there were four holders of record of the Company’scommon stock.

***Dividends***

The Company has not declared dividends on its commonstock for the two most recent fiscal years. The indenture governing the Notes and the credit agreement governing theCompany’s asset-based revolving credit facility contain covenants thatrestrict the Company’s ability to pay dividends.

**Securities Authorized for Issuance under Equity CompensationPlans**

The following table sets forth information about the Company’s commonstock that may be issued upon exercise of options, warrants and rights underall of the Company’s equity compensation plans as of December 30, 2006.
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                                      | ** ** |
| Equity  compensation plans approved by security holders     |       | 786,946                                                                                                                                              |       | $                                                                                                           | 50.00      |                                                                                                                                                                                                         | 420,352    |   |
| Equity  compensation plans not approved by security holders |       | 53,000                                                                                                                                               |       | $                                                                                                           | 50.00      |                                                                                                                                                                                                         | 726,702    |   |
| Total.                                                      |       | 839,946                                                                                                                                              |       | $                                                                                                           | 50.00      |                                                                                                                                                                                                         | 1,147,054  |   |

 

***Stock Option Plan***

On February 14, 2006, the board of directors andstockholders of the Company adopted the Linens Holding Co. Stock OptionPlan.  The plan provides employees ordirectors of the Company or its subsidiaries, who are in a position to contributeto the long-term success of these entities, with options to acquire shares inthe Company to aid in attracting, retaining and motivating persons ofoutstanding ability.  The plan wasamended in March 2006 to increase the number of shares of common stock,par value $0.01 per share, of the 

27

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Companyavailable for issuance under the Plan to 1,157,298 shares.  If any shares reserved for an option areforfeited or any option otherwise terminates without a payment being made tothe optionee in the form of stock, the shares underlying such option will alsobecome available for future option grants under the plan.  The stock options granted under the plan toeach optionee are equally divided between a “Time Option” and a “PerformanceOption,” as those terms are defined in the standard form of option grantletter.  The options expire seven yearsafter the date of grant.

*Director Options*

On June 13, 2006, the board of directors of the Companyapproved and adopted a director compensation policy, which provided for thegrant to the Chairman of the Board and each non-employee director, upon firstelection to the board of directors, of a non-qualified stock option to purchasea minimum of 5,000 shares of the Company’s common stock, such number to bedetermined by the board of directors in its discretion, and such grants to bemade outside of the Linens Holding Co. Stock Option Plan and to be fullyexercisable upon grant.  The directoroptions as contemplated in the director compensation policy were alsoauthorized and approved by the stockholders of the Company in June 2006.

*Investment Options*

In connection with three purchases of shares of common stockfrom the Company by directors or executive officers in the year ended December30, 2006, the board of directors of the Company approved the grant of anon-qualified stock option to purchase the same number of shares at an exerciseprice equal to the purchase price per share. Each of these options grant was fully exercisable on the date ofgrant.  These options were made outsideof the Linens Holding Co. Stock Option Plan.

**Item6.  Selected Financial Data**

The following table sets forth select consolidated historicalfinancial information.  This informationshould be read in conjunction with the Consolidated Financial Statements of theCompany and related Notes thereto and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” appearing elsewhere herein.

As a result of the transactions related to the Merger, thefinancial results for the 52 weeks ended December 30, 2006 have been separatelypresented in the table below between the “Successor Entity,” covering theperiod February 14, 2006 through December 30, 2006, and the “PredecessorEntity,” covering the period January 1, 2006 through February 13, 2006, whichis the date of the consummation of the Merger. The results for the comparable periods in the prior years are presentedunder “Predecessor Entity.”

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**Five-Year FinancialSummary (dollars in thousands, except for ratios and store data)**
| ** **                                                       | ** ** | **Successor**                                      | ** **    | ** ** | ** ** | **Predecessor**                           | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|---------------|------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **February **                                 | ** **    | ** ** | ** ** | **January 1, **                 | ** ** | **Fiscal Year Ended(1)** | ** ** |
| ** **                                                       | ** ** | **14, 2006 to  December  30, 2006** | ** **    | ** ** | ** ** | **2006 to  February 13,  2006** | ** ** | **December 31,  2005** | ** ** | **January 1,  2005(2)** | ** ** | **January 3,  2004** | ** ** | **January 4,  2003** | ** ** |
| **Income Statement Data:**                                       |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Net sales                                                        | ** ** | **$**                                              | **2,534,365** | ** ** | ** ** | ** **                                | **$**      | **284,971** | ** ** | **$** | **2,694,742** | ** ** | **$** | **2,661,469** | ** ** | **$** | **2,395,272** | ** ** | **$** | **2,184,716** | ** ** |
| Cost  of sales, including buying and distribution costs          |       | 1,557,011                                          |          |       |       | 180,675                                   |       | 1,595,394 |   | 1,589,700 |   | 1,426,880 |   | 1,308,524 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Gross profit                                                     | ** ** | **977,354**                                        | ** **    | ** ** | ** ** | **104,296**                               | ** ** | **1,099,348** | ** ** | **1,071,769** | ** ** | **968,392** | ** ** | **876,192** | ** ** |
|                                                             | ** ** | ** **                                         | ** **    | ** ** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general and  administrative expenses                    |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Fixed  asset impairment                                          |       | 27,992                                             |          |       |       | —                                    |       | 4,059 |   | 900 |   | — |   | — |   |
| Identifiable  intangible asset impairment                        |       | 3,119                                              |          |       |       | —                                    |       | — |   | — |   | — |   | — |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Other  selling, general and administrative expenses              |       | 1,040,023                                          |          |       |       | 174,138                                   |       | 1,033,462 |   | 969,579 |   | 846,826 |   | 764,590 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
|                                                             |       | 1,071,134                                          |          |       |       | 174,138                                   |       | 1,037,521 |   | 970,479 |   | 846,826 |   | 764,590 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating (loss) profit                                          | ** ** | **(93,780**                                        | **)**         | ** ** | ** ** | **(69,842**                               | **)**      | **61,827** | ** ** | **101,290** | ** ** | **121,566** | ** ** | **111,602** | ** ** |
| Interest  income                                                 |       | (190                                               | )             |       |       | (668                                      | )          | (894 | ) | (542 | ) | (169 | ) | (79 | ) |
| Interest  expense                                                |       | 79,795                                             |          |       |       | —                                    |       | 4,860 |   | 3,903 |   | 4,001 |   | 5,588 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
|  (Loss) income before (benefit) provision for  income taxes |       | (173,385                                           | )             |       |       | (69,174                                   | )          | 57,861 |   | 97,929 |   | 117,734 |   | 106,093 |   |
| (Benefit) provision for  income taxes                            |       | (66,852                                            | )             |       |       | (21,270                                   | )          | 21,879 |   | 37,408 |   | 44,975 |   | 40,508 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                                | ** ** | **$**                                              | **(106,533**  | **)**      | ** ** | ** **                                | **$**      | **(47,904** | **)** | **$** | **35,982** | ** ** | **$** | **60,521** | ** ** | **$** | **72,759** | ** ** | **$** | **65,585** | ** ** |
|                                                             | ** ** | ** **                                         | ** **    | ** ** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other Financial Data:**                                        |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (4)                                              |       | 75,744                                             |          |       |       | (14,170                                   | )          | 175,158 |   | 229,052 |   | 216,934 |   | NA |   |
| Depreciation and  amortization                                   |       | 114,509                                            |          |       |       | 12,642                                    |       | 90,270 |   | 81,318 |   | 71,348 |   | 60,124 |   |
| Capital expenditures                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| New  stores                                                      |       | 43,090                                             |          |       |       | 10,055                                    |       | 95,008 |   | 79,254 |   | 82,806 |   | 80,667 |   |
| Existing  stores and Other                                       |       | 23,190                                             |          |       |       | 901                                       |       | 33,904 |   | 31,189 |   | 30,765 |   | 30,932 |   |
| Total  capital expenditures                                      |       | 66,280                                             |          |       |       | 10,956                                    |       | 128,912 |   | 110,443 |   | 113,571 |   | 111,599 |   |
| Cash interest expense                                            |       | 58,577                                             |          |       |       | 135                                       |       | 4,851 |   | 4,018 |   | 3,888 |   | 5,945 |   |
| Ratio of earnings to fixed  charges(3)                           |       | (0.05                                              | )x            |       |       | (5.09                                     | )x         | 1.66 | x | 2.23 | x | 2.65 | x | 2.59 | x |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| **Store Data:**                                                  |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Number of stores (at period  end)                                |       | 571                                                |          |       |       | 542                                       |       | 542 |   | 492 |   | 440 |   | 391 |   |
| Total  gross square footage (000’s) (at period end)         |       | 18,928                                             |          |       |       | 18,071.                                   |       | 18,071 |   | 16,702 |   | 15,106 |   | 13,607 |   |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Average net sales per store  (000’s)                        |       | $                                                  | 4,600         |       |       |                                      | $          | 500 |   | $ | 5,200 |   | $ | 5,600 |   | $ | 5,700 |   | $ | 5,900 |   |
| Net sales per average  square foot                               |       | $                                                  | 137           |       |       |                                      | 16         |   | $ | 156 |   | $ | 166 |   | $ | 167 |   | $ | 171 |   |
| Comparable net sales(5)(6)                                       |       | (0.7                                               | )%            |       |       | NA                                        |       | (6.0 | )% | 1.8 | % | 1.3 | % | 3.0 | % |
|                                                             |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at period  end****):**                     |       |                                               |          |       |       |                                      |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                        |       | $                                                  | 12,526        |       |       |                                      | $          | 90,333 |   | $ | 158,158 |   | $ | 204,009 |   | $ | 136,129 |   | $ | 86,605 |   |
| Working capital                                                  |       | 428,043                                            |          |       |       | 507,899                                   |       | 537,516 |   | 519,686 |   | 458,519 |   | 369,221 |   |
| Total assets                                                     |       | 1,857,934                                          |          |       |       | 1,614,744                                 |       | 1,650,834 |   | 1,591,884 |   | 1,467,456 |   | 1,277,123 |   |
| Senior  secured notes and other long-term debt                   |       | 689,876                                            |          |       |       | 2,131                                     |       | 2,139 |   | 2,196 |   | — |   | 1,831 |   |
| Total shareholders’ equity(7)                               |       | 544,743                                            |          |       |       | 831,858                                   |       | 849,863 |   | 809,353 |   | 737,377 |   | 646,733 |   |

 

29

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| **Cash Flow**               |   |       |   |   |   |    |   |     |   |     |   |     |   |     |   |
|-----------------------------|--------|------------|--------|--------|--------|---------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Cash provided by (used in): |   |       |   |   |   |    |   |     |   |     |   |     |   |     |   |
| Operating  activities       |   | $          | 2,202  |   |   |    | $      | (61,956  | )      | $        | 79,097 |     | $      | 167,259  |   | $ | 151,167 |   | $ | 110,141 |   |
| Investing  activities       |   | (1,266,865 | )      |   |   | (10,956 | )      | (128,912 | )      | (110,443 | )      | (113,571 | )      | (111,599 | )      |
| Financing  activities       |   | 1,277,249  |   |   |   | 4,962   |   | 3,803    |   | 10,200   |   | 11,375   |   | 72,704   |   |
|                             |        |            |        |        |        |         |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |

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*(1)*Fiscal years2005, 2004 and 2003 were 52-week periods. Fiscal year 2002 was a 53-weekperiod.

*(2)*Fiscal year2004 results include the implementation of the provisions of EITF 02-16, whichreduced the Company’s net income in fiscal 2004 by $13.3 million net oftax.

*(3)*For purposesof calculating the ratio of earnings to fixed charges, earnings represent netincome (loss) from continuing operations before income taxes plus fixedcharges. Fixed charges include interest expense, including amortization of debtissuance costs and one third of rental expense which management believes isrepresentative of the interest component of rental expense.

*(4)*EBITDArepresents net income (loss) before provision (benefit) for income taxes,interest expense, net and depreciation and amortization. Adjusted EBITDArepresents EBITDA further adjusted to exclude non-cash and unusual items.Management uses EBITDA and Adjusted EBITDA as additional tools to assess theCompany’s operating performance. Management considers EBITDA and AdjustedEBITDA to be useful measures in highlighting trends in the Company’s businessand in analyzing the profitability of similar enterprises. It is also used as ameasurement for the calculation of management incentive compensation.Management believes that EBITDA and Adjusted EBITDA are effective, when used inconjunction with net income, in evaluating asset performance anddifferentiating efficient operators in the industry. Furthermore, managementbelieves that EBITDA and Adjusted EBITDA provide useful information to, and iscommonly used by, investors, analysts and others to measure operating performanceand because it provides insights into management’s evaluation of the Company’sresults of operations. EBITDA and Adjusted EBITDA (as calculated withcontractually specified adjustments) are also one of the key measures used incalculating compliance with covenants in the Company’s new asset-basedrevolving credit facility and its notes. Non-compliance with financialcovenants could prevent the Company from engaging in certain activities orresult in a default under its asset-based revolving credit facility or itsnotes.

EBITDA and Adjusted EBITDA are not measures of financialperformance under GAAP, are not intended to represent cash flow from operationsunder GAAP and should not be used as an alternative to net income as anindicator of operating performance or to cash flow from operating, investing orfinancing activities as a measure of liquidity. Management compensates for thelimitations of using EBITDA and Adjusted EBITDA by using it only to supplementthe Company’s GAAP results to provide a more complete understanding of thefactors and trends affecting its business. Each of EBITDA and Adjusted EBITDAhas its limitations as an analytical tool, and investors should not considerthem in isolation or as a substitute for analysis of the Company’s results asreported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDA are:

·                  EBITDAand Adjusted EBITDA do not reflect the Company’s cash used for capitalexpenditures;

·                  althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated or amortized often will have to be replaced and EBITDA and AdjustedEBITDA do not reflect the cash requirements for such replacements;

·                  EBITDAand Adjusted EBITDA do not reflect changes in, or cash requirements for, theCompany’s working capital requirements;

·                  EBITDAand Adjusted EBITDA do not reflect the cash necessary to make payments ofinterest or principal on the Company’s indebtedness; and

·                  EBITDAand Adjusted EBITDA do not reflect non-recurring expenses which qualify asextraordinary such as one-time write-offs to inventory and reserve accruals.

While EBITDA and Adjusted EBITDA are frequently used as a measure ofoperations and the ability to meet indebtedness service requirements, they arenot necessarily comparable to other similarly titled captions of othercompanies due to potential inconsistencies in the method of calculation.

30

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Thefollowing table reconciles EBITDA and Adjusted EBITDA as presented above, tonet loss (income) as presented in the Company’s Consolidated Statements ofOperations and in accordance with GAAP (dollars in thousands):
| ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** **                                                 | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **February 14,  2006 to  December 30,  2006** | ** ** | ** ** | ** ** | **January 1,  2006 to  February 13,  2006** | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** | **January 4,  2003** | ** ** |
| ** **                                                   | ** ** | **Successor**                                                | ** ** | ** ** | ** ** | **Predecessor**                                            | ** ** | **Predecessor**                 | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
| Net (loss) income                                            |       | $                                                            | (106,533   | )          |       |                                                       | $          | (47,904                         | )          | $ | 35,982 |   | $ | 60,521 |   | $ | 72,759 |   | NA |   |
| Income tax (benefit)  provision                              |       | (66,852                                                      | )          |       |       | (21,270                                                    | )          | 21,879                          |       | 37,408 |   | 44,975 |   | NA |   |
| Interest expense (income),  net                              |       | 79,605                                                       |       |       |       | (668                                                       | )          | 3,966                           |       | 3,361 |   | 3,832 |   | NA |   |
| Depreciation and  amortization                               |       | 114,509                                                      |       |       |       | 12,642                                                     |       | 90,270                          |       | 81,318 |   | 71,348 |   | NA |   |
|                                                         |       |                                                         |       |       |       |                                                       |       |                            |       |   |   |   |   |   |   |
| **EBITDA**                                                   | ** ** | **20,729**                                                   | ** ** | ** ** | ** ** | **(57,200**                                                | **)**      | **152,097**                     | ** ** | **182,608** | ** ** | **192,914** | ** ** | **NA** | ** ** |
| Non-cash rent  expense(a)                                    |       | 10,739                                                       |       |       |       | 534                                                        |       | 4,739                           |       | 7,978 |   | 8,052 |   | NA |   |
|                                                         |       |                                                         |       |       |       |                                                       |       |                            |       |   |   |   |   |   |   |
| Non-cash lease  transactions(m)                              |       | (2,112                                                       | )          |       |       | —                                                     |       | —                          |       | — |   | — |   | NA |   |
| Non-cash  landlord allowance amortization(b)                 |       | (875                                                         | )          |       |       | (2,959                                                     | )          | (21,633                         | )          | (19,968 | ) | (17,283 | ) | NA |   |
|                                                         |       |                                                         |       |       |       |                                                       |       |                            |       |   |   |   |   |   |   |
| Cash  landlord allowances received(c)                        |       | 6,004                                                        |       |       |       | 1,277                                                      |       | 28,697                          |       | 29,096 |   | 30,410 |   | NA |   |
|                                                         |       |                                                         |       |       |       |                                                       |       |                            |       |   |   |   |   |   |   |
| **EBITDA after rent-related adjustments**                    | ** ** | **34,485**                                                   | ** ** | ** ** | ** ** | **(58,348**                                                | **)**      | **163,900**                     | ** ** | **199,714** | ** ** | **214,093** | ** ** | **NA** | ** ** |
| Transaction  expenses(d)                                     |       | 1,824                                                        |       |       |       | 31,730                                                     |       | 3,322                           |       | — |   | — |   | NA |   |
| Non-cash  fixed asset impairment charge(e)                   |       | 27,992                                                       |       |       |       | —                                                     |       | 4,059                           |       | 900 |   | 760 |   | NA |   |
| Non-cash  identifiable intangible asset impairment charge(n) |       | 3,119                                                        |       |       |       | —                                                     |       | —                          |       | — |   | — |   | NA |   |
| Non-cash  fixed asset writeoff(o)                            |       | 671                                                          |       |       |       | —                                                     |       | 1,433                           |       | 2,209 |   | 1,265 |   | NA |   |
| Non-cash  stock-based compensation(f)                        |       | 37                                                           |       |       |       | 3,143                                                      |       | 1,243                           |       | 510 |   | 816 |   | NA |   |
| Accounting  change for vendor allowances(g)                  |       | —                                                       |       |       |       | —                                                     |       | —                          |       | 21,468 |   | — |   | NA |   |
| Non-recurring  consulting expenses(h)                        |       | —                                                       |       |       |       | —                                                     |       | 5,412                           |       | 4,251 |   | — |   | NA |   |
| Accelerated  payment of stock option(i)                      |       | —                                                       |       |       |       | 9,305                                                      |       | —                          |       | — |   | — |   | NA |   |
| Stock-based  compensation expense(p)                         |       | 4,263                                                        |       |       |       | —                                                     |       | —                          |       | — |   | — |   | NA |   |
|                                                         |       |                                                         |       |       |       |                                                       |       |                            |       |   |   |   |   |   |   |
| Executive  severance(j)                                      |       | 3,353                                                        |       |       |       | —                                                     |       | —                          |       | — |   | — |   | NA |   |
| Visa/MasterCard  litigation settlement(k)                    |       | —                                                       |       |       |       | —                                                     |       | (2,211                          | )          | — |   | — |   | NA |   |
| Gain on sale of  lease(l)                                    |       | —                                                       |       |       |       | —                                                     |       | (2,000                          | )          | — |   | — |   | NA |   |
| ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** **                                                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Adjusted EBITDA**                                          | ** ** | **$**                                                        | **75,744** | ** ** | ** ** | ** **                                                 | **$**      | **(14,170**                     | **)**      | **$** | **175,158** | ** ** | **$** | **229,052** | ** ** | **$** | **216,934** | ** ** | **$** | **NA** | ** ** |
|                                                              |            |                                                              |            |            |            |                                                            |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

*(a)*Representsthe straight-line effect of scheduled rent increases over the expected leaseterm..

*(b)*Non-cashlandlord allowance amortization represents the amortization of cash allowancesreceived from landlords at inception of leases. Non-cash landlord allowanceamortization has the effect of reducing rent expense.

* (c)*Represents cash allowances received from landlords at inception of leases.

*(d)*Transactioncosts represent legal and other merger-related expenses.

*(e)*Representsthe non-cash accelerated write-down of the book value of certainunderperforming fixed assets.

*(f)*Representsnon-cash compensation expense related to predecessor period restricted stockgrants.

31

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*(g)*Prior toJanuary 4, 2004, certain funds received from vendors were reflectedimmediately as a reduction of advertising expense in SG&A or cost of sales.Effective January 4, 2004, in connection with the implementation of EITF02-16, the Company treats these vendor funds as a reduction in the cost ofinventory and, as a result, these funds are recognized as a reduction to costof sales when the inventory is sold. The effect of the implementation of EITF02-16 was to reduce pre-tax income by $21.5 million for the fiscal yearended January 1, 2005.

*(h)*Representsnon-recurring consulting costs related to a strategic corporate profitabilityproject that began in 2004 and was completed in 2005 and that was significantlygreater in scope and costs than what the Company typically incurs or is expectedto incur.

* (i)*Represents acceleration of compensation expense related to stock optiongrants, as a result of the acquisition of the Company by the Sponsors.

*(j)*Chargesrelated to severance for a former executive coupled with individuals affectedunder the Company’s cost containment initiative.

*(k)*Representsthe Company’s share of the Visa/MasterCard antitrust litigation settlement.

*(l)*Representsnon-recurring gain from sale of favorable lease.

(m) Represents non-cash unfavorable lease amortization forleases valued below market as a result of the acquisition of the Company byApollo.

(n) Represents the non-cash accelerated write-down of certainidentifiable intangible assets.

(o) Represents the non-cash disposal of fixed assets forlocations that have closed.

(p) Represents share-based compensation expense related tostock option grants under Statement of Financial Accounting StandardsNo. 123 (Revised 2004), *“Share-Based Payment”*.

*(5)*Comparablenet sales include the Company’s internet sales and sales for its storesbeginning on the first day of the month following the13th fullmonth of sales.  In the case of a storeto be permanently closed, such store’s sales are not considered comparable oncethe store closing process has commenced.

(6) For the 52-week period ended December 30, 2006.

(7) The balance at December 31, 2005 includes the cumulativeeffect of the adoption of SEC Staff Accounting Bulletin No. 108 — see Note 2 tothe consolidated financial statements — *Adoption of StaffAccounting Bulletin No. 108.*

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*The following discussion of theCompany’s financial condition and results of operations should be read inconjunction with its audited historical consolidated financial statements andrelated notes thereto appearing elsewhere in this report.  The results described below are notnecessarily indicative of the results to be expected in any future periods.This discussion contains forward-looking statements based on the Company’scurrent expectations, which are inherently subject to risks and uncertainties.Actual results may differ significantly from those projected in suchforward-looking statements due to a number of factors. The Company undertakesno obligation to update or revise any forward-looking statement.*

**Introduction**

The Company, together with its wholly owned consolidatedsubsidiaries, including Linens ‘n Things, Inc. and Linens ‘n Things Center,Inc., is an entity that was formed in connection with the February 2006acquisition of all of the outstanding shares of common stock of Linens ‘nThings, Inc. for $28.00 per share in cash, without interest, for aggregateconsideration of approximately $1.3 billion.

On November 7, 2005, Linens Merger Sub Co. was formed byaffiliates of the Sponsors to serve as a holding company.  On February 14, 2006, Linens Merger Sub Co.merged with and into Linens ‘n Things, Inc. in the merger described in Note 3to the Consolidated Financial Statements included elsewhere in this report, andLinens ‘n Things, Inc., as the surviving corporation, became a wholly ownedsubsidiary of the Company.

The Company is the second largest specialty retailer of hometextiles, housewares and home accessories in North America operating 571 storesunder the Linens ‘n Things, Inc. banner in 47 U.S. states and six Canadianprovinces at December 30. 2006.  Duringfiscal 2006, the Company opened 31 new stores and closed two stores, increasingits total net square footage by 4.7% to approximately 18.9 million.

Net sales consist of gross sales to customers net of returns,discounts and incentives.  Provisions forestimated future sales returns are recorded in the period that the relatedsales are recorded. The Company determines the amount of provision based onhistorical information. Sales discounts, coupons, cash rebates and othersimilar incentives are recorded as a reduction of sales revenue in the periodwhen the related sales are recorded.

**Acquisition of the Company by Apollo Management, L.P.Together with Certain Co-Investors**

On November 8, 2005, Linens Merger Sub Co. and its parentcompany, Linens Holding Co., entered into an Agreement and Plan of Merger withLinens ‘n Things, Inc. pursuant to which, on February 14, 2006,Linens Merger Sub Co. was merged with and into Linens ‘n Things, Inc.,with Linens ‘n Things, Inc. as the surviving corporation.  In connection with the Merger, each share ofcommon stock of Linens ‘n Things, Inc. (other than shares held in treasuryor owned by Linens Merger Sub Co., its parent company or any affiliate ofLinens Merger Sub Co. and other than shares held by stockholders who properlydemanded and perfected appraisal rights) was converted into the right toreceive $28.00 in cash, without interest, for aggregate consideration ofapproximately $1.3 billion.  As thesurviving corporation in the Merger, Linens ‘n Things, Inc. assumed byoperation of law all of the rights and obligations of Linens Merger Sub Co.,including those under certain senior secured floating rate notes and the notes’related indenture.  Linens ‘n ThingsCenter, Inc., a direct wholly owned subsidiary of Linens ‘nThings, Inc., was a co-issuer of the notes.

Affiliates of the Sponsors collectively contributedapproximately $648 million as equity to Linens Merger Sub Co. immediatelyprior to the Merger.

The Sponsors financed the purchase of Linens ‘nThings, Inc. and paid related fees and expenses through the offering ofthe senior secured floating rate notes, the equity investment described aboveand excess cash on hand at Linens ‘n Things, Inc.

These transactions, including the Merger and payment of anycosts related to these transactions, are collectively referred to herein as the“Transactions.”  In connection with theTransactions, Linens ‘n Things, Inc. incurred significant indebtedness andbecame highly leveraged.

Immediately following the Merger, Linens ‘n Things, Inc.became a wholly owned subsidiary of Linens Holding Co.  Linens Holding Co. is an entity that wasformed in connection with the Transactions and has no assets or liabilitiesother than the shares of Linens Merger Sub Co. and its rights and obligationsunder and in 

33

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connection with the merger agreement with Linens ‘nThings, Inc. and the equity commitment letters and debt financingcommitment letters provided in connection with the Transactions.

The closing of theMerger occurred simultaneously with:

·      the closing ofthe note offering;

·      the closing ofLinens ‘n Things, Inc.’s new $600 million asset-based revolvingcredit facility;

·      the termination ofLinens ‘n Things, Inc.’s existing $250 million unsecured revolvingcredit facility and CAD $40 million unsecured credit facility agreements;and

·      the equityinvestments described above.

Linens ‘n Things, Inc. did not draw on its newasset-based revolving credit facility at closing.

As a result of the Merger, all of Linens ‘n Things, Inc.’sissued and outstanding capital stock was acquired by Linens Holding Co.  At such time, investment funds associatedwith or designated by the Sponsors acquired approximately 99.7% of the commonstock of Linens Holding Co. through an investment vehicle controlled by ApolloManagement V, L.P., or one of its affiliates, and Robert J. DiNicola, theCompany’s Chairman and Chief Executive Officer, acquired the remaining 0.3%.

As a result of becoming a privately-held company upon theconsummation of the Transactions and the issuance in a private placement of thesenior secured floating rate notes, Linens ‘n Things, Inc. delisted its sharesof common stock from the New York Stock Exchange, deregistered underSection 12 of the Securities Exchange Act upon the filing of a Form 25with the SEC and was no longer required to file reports with the SEC.  However, in accordance with the indenturegoverning these notes, reports were prepared on a basis that was equivalent to,but not filed with, the SEC, and such reports were furnished to noteholders bymaking them available on the Company’s website. In September 2006 the notes were exchanged for new notes with terms thatwere identical to the original notes except that the exchange notes wereregistered under the Securities Act upon the filing of a Form S-4 and a relatedamendment in July 2006 and August 2006, respectively, with the SEC.  At such time, the Company once again becamesubject to a filing obligation with the SEC.

**Effect of the Transactions**

The acquisition ofLinens ‘n Things, Inc. is being accounted for as a business combination usingthe purchase method of accounting, whereby the purchase price (includingliabilities assumed) was preliminarily allocated to the assets acquired basedon their estimated fair market values at the date of acquisition.  The purchase price paid by the Company toacquire Linens ‘n Things, Inc. and related preliminary purchase accountingadjustments were “pushed down” and recorded in Linens ‘n Things, Inc. and itssubsidiaries’ financial statements and resulted in a new basis of accountingfor the “successor” period beginning on the day the Transactions werecompleted.  As a result, the purchaseprice and related costs were allocated to the estimated fair values of theassets acquired and liabilities assumed at the time of the acquisition based onmanagement’s best estimates, which were based in part on the work of third-partyappraisers engaged to perform valuations of certain of the tangible andintangible assets acquired.  In essence,as presented in the table below, the Company’s assets and liabilities wereadjusted to fair value as of the closing date of the Transactions, and theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.

34

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The following table presents the initial preliminary allocation of theexcess of cost of acquisition over net assets acquired as of the closing dateof the Transactions (in thousands):
| *Cost of  Acquisition*                                           | * * | * * | * *  | * *  | * *  |
|------------------------------------------------------------------|----------|----------|-----------|-----------|-----------|
| Cash paid                                                        |     | $        | 1,295,834 |      |      |   |
| Transaction  costs                                               |     | 22,824   |      |      |      |
|                                                             |     |     |      |      |      |
| Cost of acquisition                                              |     |     |      | $         | 1,318,658 |   |
|                                                             |     |     |      |      |      |
| *Net  Assets Acquired:*                                          | * * | * * | * *  | * *  | * *  |
| Historical net  assets                                           |     | 831,858  |      |      |      |
| Add: deferred  rent reversed                                     |     | 252,236  |      |      |      |
| Less: new basis  of accounting for previous ownership percentage |     | (1,112   | )         |      |      |
| Less: historical  goodwill                                       |     | (18,126  | )         |      |      |
| Write-off  Southern Linens                                       |     | (252     | )         |      |      |
|                                                             |     |     |      |      |      |
| Net assets acquired                                              |     |     |      | 1,064,604 |      |
|                                                             |     |     |      |      |      |
| Excess of cost  of acquisition over net assets acquired          |     |     |      | $         | 254,054   |   |
|                                                             |     |     |      |      |      |
| *Allocated  to:*                                                 | * * | * * | * *  | * *  | * *  |
| Property and  equipment                                          |     |     |      | $         | (57       | ) |
| Definite-lived  intangible assets                                |     |     |      | 38,330    |      |
| Indefinite-lived  intangible assets                              |     |     |      | 122,688   |      |
| Unfavorable  lease liability                                     |     |     |      | (20,000   | )         |
| Goodwill                                                         |     |     |      | 265,985   |      |
| Deferred Income  taxes                                           |     |     |      | (152,892  | )         |
|                                                             |     |     |      |      |      |
|                                                             |     |     |      | $         | 254,054   |   |
|                                                                  |          |          |           |           |           |  |  |

 

Intangibleassets identified in the preliminary purchase price allocation above includedthe following
| *Definite-lived intangible assets (liabilities)*                                    |   |    |    |
|-------------------------------------------------------------------------------------|--------|---------|---------|
| Credit card customer relationships and customer list  (estimated life 3 to 5 years) |   | $       | 10,542  |   |
| Favorable leases (average life 5 years)                                             |   | 27,788  |    |
| Unfavorable leases (average life 8 years)                                           |   | (20,000 | )       |
| *Indefinite-lived  intangible assets*                                               |   |    |    |
| Trademark and  trade names                                                          |   | $       | 122,688 |   |

 

As presented in the above table, the Company’s assetsand liabilities were adjusted to fair value as of the closing date of theTransactions, and the excess of the total purchase price over the fair value ofthe Company’s net assets was allocated to goodwill.  The following tablepresents an analysis of the change in goodwill.

| (in thousands)                                                        | ** ** | **Amount** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|
|                                                                       |       |       |       |
| Balance at  December 31, 2005 (predecessor entity)                         |       | $          | 18,126     | (1) |
| Purchase  accounting adjustments from preliminary allocation               |       | 259,309    |       |
|                                                                       |       |       |       |
| Initial  preliminary balance at February 14, 2006                          |       | 277,435    |       |
| SAB 108  adjustment (see note 2 to the consolidated financial statements)  |       | (11,450    | )          |
|                                                                       |       |       |       |
| Balance at  February 14, 2006 (successor entity)                           |       | 265,985    |       |
| Pre-existing tax  adjustments                                              |       | 1,885      |       |
| Pre-existing  book adjustments, net                                        |       | (618       | )          |
| Book adjustment  for returned deposit on building purchase option assigned |       | 722        |       |
| Other — foreign  currency translation                                 |       | (144       | )          |
|                                                                       |       |       |       |
| Balance at  December 30, 2006 (successor entity)                           |       | $          | 267,830    |   |
|                                                                       |       |       |       |

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(1)             Thepredecessor entity goodwill has been written-off in purchase accounting.

 

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In connection withthe Transactions, the Company incurred significant additional indebtedness,including $650 million aggregate principal amount on the Senior SecuredFloating Rate Notes due 2014 (the “Notes”) issued by two of the Company’ssubsidiaries, which have increased the Company’s interest expense.  The Company’s depreciation and amortizationexpense has also increased significantly, primarily due to increases in thefair values of its tangible assets and amortizable intangible assets as adirect result of these adjustments.

**Overview of Business**

The Company is adestination retailer, offering one of the broadest and deepest selections ofhigh quality brand-name as well as private label home furnishings merchandisein the industry. The Company’s average store size of approximately 33,000 grosssquare feet enables it to offer a more comprehensive product and brandselection than department stores and other retailers that sell homefurnishings. The Company believes its store format coupled with itsknowledgeable sales assistance and attentive service to its customers, whom theCompany refers to as “guests,” creates an enjoyable shopping experience. TheCompany’s primary target guest is female between the ages of 25 and 55 who isfashion and brand conscious, has good-to-better income and focuses on the homeas a reflection of her individuality.

The Company’s financial performance is significantlyaffected by the Transactions.  Theincurrence of long-term debt to finance the Transactions results inmaterially higher interest expense and the application of purchase accountingresults in significantly higher depreciation and amortization, which make thenet income (loss) 

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ofthe Company not comparable to those of the Predecessor Entity before theTransactions. None of these effects of the acquisition affect the Company’sunderlying fundamentals, which management believes remain strong, including itsstrong brand name recognition and attractive real estate locations.  Effective upon the consummation of theTransactions, Robert J. DiNicola became the Company’s new Chairman and ChiefExecutive Officer. Mr. DiNicola is a 34-year veteran of the retailindustry, with extensive experience in retail, including home furnishings.Previously, Mr. DiNicola served as Executive Chairman of General NutritionCenters, Inc. and as Chairman and Chief Executive Officer of ZaleCorporation. Under the leadership of Mr. DiNicola, the Company intends tofocus on growing its sales per square foot and improving the productivity ofits existing store base, which it believes are key to improving itsprofitability and cash flow. The Company plans to capitalize on its nationalpresence and use its leverage and its buying power in the long-term and itsmarketing skills in the short-term to help drive the Company to the appropriatelevel of business.  Since the completionof the acquisition, the Company has begun to implement a long-term, threephase multi-year plan to restore the Company to a competitive position within themarketplace. The overriding operating philosophy of the Company in the firstphase of the plan has been to go “back to basics.”  During this first phase, the Company will betaking steps necessary to rebuild the core business.

As a result of theTransactions, the current year’s financial results for the 52 weeks endedDecember 30, 2006 have been separately presented in the Consolidated Statementsof Operations between the “Predecessor Entity”, covering the period January 1,2006 through February 13, 2006 and the “Successor Entity” covering the periodFebruary 14, 2006 through December 30, 2006. The results for the comparable periods in the prior years are presentedunder “Predecessor Entity.”  Forcomparative purposes, the Company combined the two periods in its discussionbelow for the 52 weeks ended December 30, 2006. This combination is not a GAAP presentation.  However, the Company believes thispresentation is useful to provide the reader a more accurate comparison.

Net salesincreased 4.6% to $2.8 billion in fiscal 2006 compared to $2.7 billion infiscal 2005.  For fiscal 2006, comparablenet sales decreased 0.7% versus a 6.0% decrease in fiscal 2005 (as adjusted toconform with the current year’s presentation which no longer excludes anyperiods during which stores are temporarily closed).

The followingtable sets forth the results and percentage of net sales included in theCompany’s Consolidated Statements of Operations for the period February 14,2006 to December 30, 2006 and the period January 1, 2006 to February 13, 2006(collectively, “fiscal 2006”), the 52-week period ended December 31, 2005 (“fiscal2005”) and the 52-week period ended January 1, 2005 (“fiscal 2004”):

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| ** **                                                | ** ** | **February 14, 2006 to  December 30, 2006(1)  (Successor)** | ** ** | ** ** | ** ** | **January 1, 2006 to  February 13, 2006  (Predecessor)** | ** ** | **Fiscal Year Ended  December 31, 2005  (Predecessor)** | ** ** | **Fiscal Year Ended  January 1, 2005  (Predecessor)(2)** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | ** **                                                                        | ** ** | ** **                                                                  | ** ** | ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(dollars in thousands)**                      | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | ** **                                                                        | ** ** | ** **                                                                  | ** ** | ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                                |       | $                                                                                    | 2,534,365  |       | 100.0      | %                                                                                 |       |                                                                        | $          | 284,971                                                                      |       | 100.0 | % | $ | 2,694,742 |   | 100.0 | % | $ | 2,661,469 |   | 100.0 | % |
| Cost  of sales                                            |       | 1,557,011                                                                            |       | 61.4       | %          |                                                                              |       | 180,675                                                                     |       | 63.4                                                                         | %          | 1,595,394 |   | 59.2 | % | 1,589,700 |   | 59.7 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Gross  profit                                             |       | 977,354                                                                              |       | 38.6       | %          |                                                                              |       | 104,296                                                                     |       | 36.6                                                                         | %          | 1,099,348 |   | 40.8 | % | 1,071,769 |   | 40.3 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses:             |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Fixed asset impairment                                    |       | 27,992                                                                               |       | 1.1        | %          |                                                                              |       | —                                                                      |       | —                                                                       |       | 4,059 |   | 0.1 | % | 900 |   | — |   |
| Identifiable intangible asset impairment                  |       | 3,119                                                                                |       | 0.1        | %          |                                                                              |       | —                                                                      |       | —                                                                       |       | — |   | — |   | — |   | — |   |
| Other selling, general and administrative expenses        |       | 1,040,023                                                                            |       | 41.1       | %          |                                                                              |       | 174,138                                                                     |       | 61.1                                                                         | %          | 1,033,462 |   | 38.4 | % | 969,579 |   | 36.5 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
|                                                      |       | 1,071,134                                                                            |       | 42.3       | %          |                                                                              |       | 174,138                                                                     |       | 61.1                                                                         | %          | 1,037,521 |   | 38.5 | % | 970,479 |   | 36.5 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Operating  (loss) profit                                  |       | (93,780                                                                              | )          | (3.7       | )%         |                                                                              |       | (69,842                                                                     | )          | (24.5                                                                        | )%         | 61,827 |   | 2.3 | % | 101,290 |   | 3.8 | % |
| Interest  expense (income), net                           |       | 79,605                                                                               |       | 3.1        | %          |                                                                              |       | (668                                                                        | )          | (0.2                                                                         | )%         | 3,966 |   | 0.2 | % | 3,361 |   | 0.1 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| (Loss) income before (benefit) provision for income taxes |       | (173,385                                                                             | )          | (6.8       | )%         |                                                                              |       | (69,174                                                                     | )          | (24.3                                                                        | )%         | 57,861 |   | 2.1 | % | 97,929 |   | 3.7 | % |
| (Benefit) provision for income taxes                      |       | (66,852                                                                              | )          | (2.6       | )%         |                                                                              |       | (21,270                                                                     | )          | (7.5                                                                         | )%         | 21,879 |   | 0.8 | % | 37,408 |   | 1.4 | % |
|                                                      |       |                                                                                 |       |       |       |                                                                              |       |                                                                        |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                         |       | $                                                                                    | (106,533   | )          | (4.2       | )%                                                                                |       |                                                                        | $          | (47,904                                                                      | )          | (16.8 | )% | $ | 35,982 |   | 1.3 | % | $ | 60,521 |   | 2.3 | % |

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*(1)*

TheConsolidated Financial Statements for the period after February 13, 2006are presented on a different basis than that for the periods beforeFebruary 14, 2006, as a result of the application of purchase accountingas of February 14, 2006 and therefore are not comparable.

*(2)*

Resultsof operations for fiscal 2004 include the implementation of the provisions ofEITF 02-16, “Accounting by a Customer (Including a Reseller) for CertainConsideration Received from a Vendor” (“EITF 02-16”), which negatively impactedthe Company’s fiscal 2004 net income by $13.3 million. EITF 02-16 had noimpact on the Company’s net cash flows.

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The Company uses anumber of key indicators of financial condition and operating performance toevaluate the performance of its business, including the following:
| ** **                                  | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** **                                                                 | ** ** | **Fiscal Year Ended**            | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Key Performance Indicators**    | ** ** | **February 14, 2006 to  December 31, 2006  (Successor)** | ** ** | ** ** | ** ** | **January 1, 2006 to  February 13, 2006**(Predecessor) | ** ** | **December 31,  2005  (Predecessor)** | ** ** | **January 1,  2005  (Predecessor)** | ** ** |
| Net sales  growth(1)                        |       | 4.6                                                                               | %          |       |       | N/A                                                                        |       | 1.2                                        | %          | 11.1 | % |
| Comparable net  sales growth(1)             |       | (0.7                                                                              | )%         |       |       | N/A                                                                        |       | (6.0                                       | )%         | 1.8 | % |
| Net sales per  average square foot          |       | $                                                                                 | 137        |       |       |                                                                       | $          | 16                                         |       | $ | 156 |   | $ | 166 |   |
| Average net sales per store (in millions)   |       | $                                                                                 | 4.6        |       |       |                                                                       | $          | 0.5                                        |       | $ | 5.2 |   | $ | 5.6 |   |
| Gross profit as  a % of net sales           |       | 38.6                                                                              | %          |       |       | 36.6                                                                       | %          | 40.8                                       | %          | 40.3 | % |
| SG&A as a %  of net sales(3)            |       | 42.3                                                                              | %          |       |       | 61.1                                                                       | %          | 38.5                                       | %          | 36.5 | % |
| SG&A per  average square foot(4)        |       | $                                                                                 | 57.97      |       |       |                                                                       | $          | 9.64                                       |       | $ | 59.90 |   | $ | 60.70 |   |
| Operating (loss) profit as a% of net sales. |       | (3.7                                                                              | )%         |       |       | (24.5                                                                      | )%         | 2.3                                        | %          | 3.8 | % |
| Net (loss)  income as a % of sales          |       | (4.2                                                                              | )%         |       |       | (16.8                                                                      | )%         | 1.3                                        | %          | 2.3 | % |
| Inventory  turnover(2)                      |       | 2.0                                                                               |       |       |       | N/A                                                                        |       | 2.0                                        |       | 2.1 |   |
| Inventory per  square foot                  |       | $                                                                                 | 41.90      |       |       |                                                                       | $          | 45.35                                      |       | $ | 43.57 |   | $ | 42.82 |   |
| Net square footage  growth(1)               |       | 4.7                                                                               | %          |       |       | N/A                                                                        |       | 8.2                                        | %          | 10.6 | % |

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(1) — amount in the Successorcolumn represent growth for the entire 52-week period ended December 30, 2006.

(2) — amount in the Successorcolumn represents turnover for the entire 52-week period ended December 30,2006.

(3) — fixed asset impairment,identifiable intangible asset impairment and transaction expenses incurredduring the periods February 14, 2006 to December 30, 2006 and January 1, 2006to February 13, 2006 increased these percentage compared to other periodspresented as follows:
|                                           | ** ** | **February 14, 2006 to  December 30, 2006 (**Successor) | ** ** | ** ** | ** ** | **January 1, 2006 to  February 13, 2006**(Predecessor) | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------|------------|
| Fixed asset  impairment                   |       | 1.1                                                                              | %          |       |       | —                                                                          | %          |
| Identifiable  intangible asset impairment |       | 0.1                                                                              | %          |       |       | —                                                                          | %          |
| Transaction  expenses                     |       | 0.1                                                                              | %          |       |       | 15.4                                                                            | %          |
| All other  SG&A                       |       | 41.0                                                                             | %          |       |       | 45.7                                                                            | %          |

 

(4) — detailed as follows for the periodsFebruary 14, 2006 to December 30, 2006 and January 1, 2006 to February 13,2006:
| Fixed asset  impairment                   |   | $ | 1.51  |   |   |   | $ | — |   |
|-------------------------------------------|--------|---|-------|--------|--------|--------|---|--------|--------|
| Identifiable  intangible asset impairment |   | $ | 0.17  |   |   |   | $ | — |   |
| Transaction  expenses                     |   | $ | 0.10  |   |   |   | $ | 2.43   |   |
| All other SG&A                        |   | $ | 56.19 |   |   |   | $ | 7.21   |   |

 

Followingcompletion of the Merger on February 14, 2006, the Company developed itsinitial plans to focus on growing its sales per square foot and improving theproductivity of its existing store base, which it believes is key to improvingits profitability and cash flow. The Company laid the groundwork to improve itsoverall merchandise assortment, establish a formalized key item program,increase the effectiveness and diversify the mix of its marketing expenditures,improve its guests shopping experience with consistent store execution andimprove its operating free cash flow.

The Company’sfocus on improving merchandise began with its efforts to clear aged anddiscontinued merchandise in order to re-invest in more productive merchandiseand to develop its key item program.  Inthe first quarter of 2006, the Company increased its inventory reserve by $10million for markdowns related to the efforts to clear aged and discontinuedmerchandise.  During the second quarter,the Company had cleared enough aged and discontinued merchandise to completelyutilize the incremental reserve established in the previous quarter. Inventoryper square foot decreased 3.8% to $41.90 in fiscal 2006 compared to $43.57 infiscal 2005 as the 

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Company has eliminatedinventory it considers to be non-core while maintaining appropriate depth toensure that its in-stock position remained strong in its core offerings.

The Companylaunched the “Best Bets” program during the year to feature its top-100 bestselling core items within its stores with enhanced marketing and improvedin-stock levels.  These items areconsidered important traffic drivers in establishing consistency with in-stockexecution and in solidifying the Company’s value proposition with itscustomers.  The Company also improved itsstore execution standards, focusing on its top-101 stores as a means to bothenhance productivity and customer satisfaction. Additional programs undertaken were focused on reinvigorating itstextile and tabletop categories, re-focusing its marketing campaign toemphasize key items and value, and reducing the overall sku level to free upinventory dollars.

Comparable storesales for the full year 2006 were (0.7)% versus (6.0)% for the full year2005.  The Company’s sales performance inthe 2006 period after the acquisition resulted in relatively flat comparablestore sales for the second, third and fourth quarters of 0.3%, 0.2% and (0.2)%,respectively.  This compares to (7.0)%,(10.5)% and (2.3)% for the second, third and fourth quarters of 2005,respectively.  With the focus onrepositioning its inventories and driving traffic to its stores, higher thanexpected markdown activity resulted in a negative impact to its gross margin of240 basis points for 2006.  The SG&Arate increased over the prior year due primarily to the deleveraging of higheroccupancy and other costs in the face of negative comparable store sales andhigher depreciation and amortization expense as a result of the implementationof purchase accounting.  In response tothe higher year-over-year SG&A rate, the Company implemented a moredisciplined strategy to reduce its cost structure.  In January 2007, the Company undertookinitiatives that are expected to result in approximately $25 million of costsavings in 2007 from the elimination of certain excess administrative expenses.

The Company slowedits square footage growth in fiscal 2006 and continued to refine its stores’ designin order to improve the guest shopping experience and improve its stores’productivity. In fiscal 2007, the Company expects to open approximately 20 newstores, primarily consisting of stores that it has already committed toopening, as opposed to opening 31 new stores in fiscal 2006 and an average ofapproximately 56 new stores per year during the immediate three fiscal yearspreceding fiscal 2006.  Additionally,real estate typically has a 12 to 18 month lead-time, and although theCompany believes that there are ample real estate opportunities, it willcontinue to be selective in executing its real estate strategy.

**Consolidated Results of Operations**

*Impactof Adoption of SFAS No. 123 (Revised 2004)*

In connection withthe adoption of SFAS No. 123 (Revised 2004) on January 1, 2006 the Company isnow required to recognize compensation expense in fiscal 2006 in theConsolidated Statements of Operations related to the fair value of its employeeshare-based options.  By theCompany’s election to use the modified prospective method of transition, priorperiods have not been restated.  Prior toadopting SFAS No. 123 (Revised 2004), the Company applied the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25 andrelated interpretations.  All employeestock options were granted at or above the grant date market price.  Accordingly, for fiscal 2005 and fiscal 2004,the Company did not recognize compensation expense for stock option grants andamortized compensation expense for restricted stock unit grants at fair marketvalue at the date of grant over specified vesting periods.  Prior to the beginning of fiscal 2006, theCompany disclosed the pro-forma effect on net income related to the expensingof options as a note to its Consolidated Financial Statements.

Forthe period January 1, 2006 to February 13, 2006, the Company recognizedapproximately $9.3 million and $3.2 million of total unrecognized compensationcost as of December 31, 2005 related to stock option grants and restrictedstock unit awards, respectively, under the Linens ‘n Things, Inc. stock optionplans.  The consummation of the Mergeraccelerated the recognition of compensation cost, and, accordingly, all of thiscost was included in selling, general and administrative expense in theConsolidated Statements of Operations during the period January 1, 2006 toFebruary 13, 2006.  In connection withthe Merger, the Company adopted the Linens Holding Co. Stock Option Plan.  The compensation cost that has been chargedagainst income for stock option grants to eligible employees of the Company andits subsidiaries was $4.3 million during the period February 14, 2006 toDecember 30, 2006 and is included in selling, general and administrativeexpense in the Consolidated Statements of Operations.

The followingdiscusses the Consolidated Results of Operations for each of the 52-weekperiods ended December 30, 2006 (“fiscal 2006”), December 31, 2005 (“fiscal2005”) and January 1, 2005 (“fiscal 2004”).  For 

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comparative purposes in itsdiscussion below, for fiscal 2006 the Company combined the “Predecessor Entity”covering the period January 1, 2006 through February 13, 2006 and the “SuccessorEntity” covering the period February 14, 2006 through December 30, 2006.  This combination is not a GAAPpresentation.  However, the Companybelieves this presentation is a more meaningful presentation for the reader andprovides a more accurate comparison, except with respect to net income, which,as noted above, is not comparable as a result of the significant change in theCompany’s capital structure following the Transactions.

**Fiscal 2006 compared With Fiscal2005**

*Net Sales*

Net sales forfiscal 2006 were $2,819.3 million, an increase of 4.6% over fiscal 2005 netsales of $2,694.7 million, primarily as a result of new store openingsoffset by a 0.7% decrease in comparable net sales. The Company opened 31 newstores and closed two stores in fiscal 2006, compared with opening 55 storesand closing five stores in fiscal 2005. Net square footage increased 4.7% to 18.9 million atDecember 30, 2006 compared with 18.1 million at December 31, 2005.

Comparable netsales decreased 0.7% for fiscal 2006 compared with a decrease of 6.0% in fiscal2005. Comparable net sales percentages are based on total net sales. Comparablenet sales include the Company’s Internet sales and sales for its storesbeginning on the first day of the month following the 13th full month ofsales.  Prior to fiscal 2006, stores thatwere closed for a number of days in a particular month were excluded fromcomparable net sales if it would have caused meaningful disparity in sales overthe prior period. In fiscal 2006, this policy was amended to always include alltemporarily closed stores.  Accordingly,all disclosures of comparable net sales have been restated for fiscal year 2005and fiscal year 2004 in order to conform to the amended policy.  In the case of a store to be permanentlyclosed, such store’s sales are not considered comparable once the store closingprocess has commenced.  The improvementin comparable net sales as compared with the decrease last year is primarilyattributable to higher guest traffic, which was positively impacted by therepositioning of the Company’s marketing program, offset by a decrease inaverage transaction value due to markdowns associated with the Company’sefforts to clear nonproductive and aged inventory.

The Company’saverage net sales per store were $5.1 million in fiscal 2006 and$5.2 million in fiscal 2005.  Theslight decrease in average net sales per store is attributable to thecomparable net sales decrease of 0.7% for fiscal 2006.

The Company’s corebusiness strategy is to offer a broad and deep selection of high quality brandname “linens” (e.g., bedding, towels and table linens) and “things” (e.g.,housewares and home accessories) merchandise. For fiscal 2006, net sales of “linens”merchandise increased approximately 2.4% compared to a decrease of 2.7% infiscal 2005, while net sales of “things” increased approximately 7.5% comparedto a 6.1% increase in the prior year. While the Company has shown improvement over the previous year, itstextile business remained challenging. As part of its back-to-basics initiative, the Company has undertaken aconcerted effort to improve its core textiles businesses beginning with itssheet, towel, pillow and comforter programs.

The Company’sproprietary merchandise accounted for approximately 12.5% of fiscal 2006 sales.The Company’s proprietary product is an important point of differentiation fromits competitors, providing its guests with high value merchandise in categoriesthat the Company believes are underserved by national brand names.

*GrossProfit*

Gross profit forfiscal 2006 was $1,081.7 million, or 38.4% of net sales, compared with$1,099.3 million, or 40.8% of net sales, for fiscal 2005. The decrease ingross profit as a percentage of net sales was primarily caused by increasedmarkdowns and lower mark-on.  Themarkdowns were associated with the Company’s efforts to sell nonproductive andaged inventory in order to transition to newer assortments, expand the “BestBets” program to highlight the top 100 best selling core items and drivetraffic to the stores.

*Expenses*

SG&A expensesconsist of store selling expenses, occupancy costs, advertising expenses,corporate office expenses, impairment charges and costs related to theTransactions.  SG&A expenses forfiscal 2006 were $1,245.3 million, or 44.2% of net sales, compared with$1,037.5 million or 38.5% of net sales, for fiscal 2005.   Excluding impairment charges and costsrelated to the Transactions, SG&A expenses were 41.5% of net sales.  This 

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increase in SG&A(excluding impairment charges and costs related to the Transactions) as apercentage of net sales is primarily due to the deleveraging of higheroccupancy and other costs in the face of negative comparable store sales andhigher depreciation and amortization expense as a result of the implementationof purchasing accounting.  As a result,SG&A per average square foot (excluding impairment charges and costsrelated to the Transactions) increased 5.6% to $63.24 in fiscal 2006 comparedto $59.90 in fiscal 2005.

Operating loss forfiscal 2006 was $163.6 million, or (5.8%) of net sales, compared with anoperating profit of $61.8 million, or 2.3% of net sales for fiscal2005.  Operating loss for fiscal 2006 wasincreased by impairment charges of approximately $31.1 million and costsrelated to the Transactions of approximately $45.8 million.

Net interestexpense in fiscal 2006 was $78.9 million compared to $4.0 million infiscal 2005. The significant increase in interest expense is principally due tothe additional interest expense associated with the Notes issued on February14, 2006.  In addition, approximately$3.9 million of deferred financing cost related to the Notes and the Company’snew asset-based credit facility has been recognized in interest expense.  Furthermore, higher average borrowingsrequired to fund working capital needs and an increase in average borrowinginterest rates offset by lower average investment balances also contributed tothe overall increase in net interest expense

The Companyrecorded an income tax benefit of $88.1 million for fiscal 2006, compared withincome tax expense of $21.9 million for fiscal 2005.  Primarily due to additional expenses relatedto the Merger, including interest expense on the Notes, a loss was generated infiscal 2006 with a resulting fiscal 2006 tax benefit rate of 36.3% compared toa fiscal 2005 tax expense rate of 37.8%. The lower fiscal 2006 benefit rate was due to Merger-relatednon-deductible expenses.           

*Net Income*

The Company’s netloss for fiscal 2006 was $154.4 million compared with net income of$36.0 million for fiscal 2005.  Asnoted above, the net loss for fiscal 2006 is not comparable to the net incomefor fiscal 2005 due to the significant change in the capital structure and theincreased depreciation and amortization associated with purchase accounting inconnection with the Transactions.

**Fiscal 2005 Compared With Fiscal 2004**

*Net Sales*

Net sales forfiscal 2005 were $2,694.7 million, an increase of 1.2% over fiscal 2004net sales of $2,661.5 million, primarily as a result of new store openingsoffset by a decrease in comparable net sales. The Company opened 55 stores andclosed five stores in fiscal 2005, compared with opening 54 stores and closingtwo stores in fiscal 2004. Net square footage increased 8.2% to18.1 million at December 31, 2005 compared with 16.7 million atJanuary 1, 2005.

Comparable netsales decreased 6.0% for fiscal 2005 compared with an increase of 1.8% infiscal 2004.  The decrease in comparablenet sales is primarily attributable to a decrease in guest traffic as furtherdiscussed in the following paragraph.

The Company’saverage net sales per store were $5.2 million in fiscal 2005 and$5.6 million in fiscal 2004. The external retail environment waschallenging as the company was faced with a softening home furnishingsindustry. Improving its merchandise assortment and maintaining its focus ontrend-merchandising and brand building remained a high priority throughout theyear, but the initiatives undertaken to inject more newness and freshness inits assortment was not as effective as was originally hoped for. The Companyunderestimated the impact of these initiatives on guest traffic, transactionconversion and the disruption to the organization as a whole, which ultimatelyled to the inconsistencies in its financial performance and the decline ofcomparable net sales. Throughout the year, guest response to its marketingcontent and vehicles was weaker than planned, and changes to its distributiondid not generate the level of traffic that was originally anticipated.

The Company’s corebusiness strategy is to offer a broad and deep selection of high quality brandname “linens” (e.g., bedding, towels and table linens) and “things” (e.g.,housewares and home accessories) merchandise. For fiscal 2005, net sales of “linens”merchandise decreased approximately 3% compared to the prior year, while netsales of “things” increased approximately 6% over the prior year. The increasein net sales for “things” merchandise resulted primarily from the continuedexpansion of product categories within the “things” business and its continuedstrength in its functional housewares business. The Company’s textile businessremained challenging due to the 

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large number ofassortment changes during the year, the impact of which was further compoundedby inventory in-stock deficiencies caused by vendor late deliveries.

The Company’sproprietary merchandise accounted for approximately 15% of fiscal 2005 sales.Its proprietary product is an important point of differentiation from theCompany’s competitors, providing its guests with high value merchandise incategories that the Company believes are underserved by national brand names.

*GrossProfit*

Gross profit forfiscal 2005 was $1,099.3 million, or 40.8% of net sales, compared with$1,071.8 million, or 40.3% of net sales, for fiscal 2004. Increases ingross margin from improved markup through lower merchandise acquisition costswere largely offset by an increase in markdowns associated with theacceleration of the Company’s transitions to newer assortments.

*Expenses*

SG&A expensesconsist of store selling expenses, occupancy costs, advertising expenses andcorporate office expenses. SG&A expenses for fiscal 2005 were$1,037.5 million, or 38.5% of net sales, compared with$970.5 million, or 36.5% of net sales, for fiscal 2004. The increase inSG&A as a percent of net sales is primarily due to the impact of thecompany’s flat sales performance compared to the previous year. Although newstore additions increased fixed costs, such as occupancy, the company respondedwith reductions in certain variable expenses, such as store payroll andcorporate overhead. As a result, SG&A per average square foot declinedapproximately 1.3% to $59.90 in fiscal 2005 compared to $60.70 in fiscal 2004.

Operating profitfor fiscal 2005 was $61.8 million, or 2.3% of net sales, compared with$101.3 million, or 3.8% of net sales for fiscal 2004.

Net interestexpense in fiscal 2005 was $4.0 million compared to $3.4 million infiscal 2004.  An increase in interestexpense, due to higher average borrowings required to fund working capitalneeds and an increase in average borrowing interest rates, was partially offsetby a decrease in interest expense due to the termination of the trade payablesarrangement with General Electric Capital Corporation and an increase ininterest income from short-term investments due to higher average interestrates.

The Company’sincome tax expense for fiscal 2005 was $21.9 million, compared with$37.4 million for fiscal 2004. Due to a change in the mix of earningswithin jurisdictions, its effective tax rate for fiscal 2005 declined to 37.8%compared to 38.2% for the same period last year.

*Net Income*

As a result of thefactors described above, net income for fiscal 2005 was $36.0 millioncompared with $60.5 million for fiscal 2004.

**Liquidity and Capital Resources**

In connection withthe Transactions, the Company had significant transaction expenses during thefiscal year ended December 30, 2006 and incurred $650 million of debt throughthe issuance of the Notes.  As ofDecember 31, 2005, the Company had no indebtedness outstanding except for a$2.1 million mortgage note obligation. Cash outlays for the payment of interest are significantly higher in thecurrent fiscal year compared to the last fiscal year as a result of the Notes.

*Senior Secured Floating Rate Notes due 2014*

The Notes consistof $650 million aggregate principal amount of Senior Secured Floating RateNotes due 2014 of Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc. (the“Issuers”).  The Notes bear interest at aper annum rate equal to LIBOR plus 5.625%, which is paid every three months onJanuary 15, 2006, April 15, 2006, July 15, 2006 and October 15, 2006 commencingApril 15, 2006.  The interest rate on theNotes is reset quarterly.  The Notesmature on January 15, 2014.  As ofDecember 30, 2006, the interest rate on the Notes was 11.0%, based on a LIBORrate of 5.4%.

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On July 7, 2006the Issuers entered into a zero cost interest rate collar agreement to hedgethe cash flows associated with the LIBOR component of the interest rate on theNotes.  On July 7, 2006 the Issuers alsopurchased a one-year forward-starting interest rate cap agreement which takeseffect on January 15, 2008.

The Notes areguaranteed on a senior basis by the Company and by certain of the Company’sdomestic subsidiaries other than the Issuers (collectively, the “NoteGuarantors”).  All obligations under theNotes, and the guarantees of those obligations, are secured by first-priorityliens on all of the Company’s and Note Guarantors’ equipment, intellectualproperty rights and related general intangibles and the capital stock of theIssuers and certain subsidiaries and by second-priority liens on the Issuers’and the Note Guarantors’ inventory, accounts receivable, cash, securities andother general intangibles.  The lien oncapital stock may be released under certain circumstances.  As a result of the filing and effectivenessof a registration statement on Form S-4, and amendment thereto, with the SECwith respect to the Notes, the Issuers and the NoteGuarantors became subject to applicable SEC rules with respect toinformation required to be included in the prospectus in the registrationstatement.  To the extent that the securities of any Issueror guarantor constitute collateral for the Notes and the value of thesecurities equals or exceeds 20% of the principal amount, or $130million of the Notes, separate financial statements of the Issueror guarantor would be required under these SEC rules to be includedin the Company’s SEC filings.  The indenture that governs the Notesprovides, however, with respect to any direct or indirect subsidiary of Linens ‘nThings, Inc., that the securities of the subsidiary are released from the lienon capital stock on the date that the lien triggers this separatefinancial statement requirement.  Accordingly, for any subsidiarywith securities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to thosesecurities.  The lien on the capital stock of Linens ‘n Things, Inc.remains in place.

Ifthe Issuers sell certain assets or experience specific kinds of changes incontrol, the Issuers must offer to repurchase the Notes.  The Issuers may, at their option, redeem theNotes at any time on or after January 15, 2008 at pre-determined prices.  Prior to January 15, 2008, the Issuersmay, at their option, redeem up to 35% of the Notes with the proceeds ofcertain sales of its equity or of its subsidiaries.  Prior to January 15, 2008, the Issuersmay, at their option, redeem the Notes at a price equal to 100% of theprincipal amount of the Notes plus a “make-whole” premium.

*Senior Secured Asset-Based Revolving CreditFacility Agreement*

Concurrent withthe closing of the Merger in February 2006, the Issuers also entered into a newsenior secured asset-based revolving credit facility agreement (the “CreditFacility”) with third-party institutional lenders which expires February 14,2011.  The Credit Facility providessenior secured financing of up to $600 million, subject to a borrowing baseconsisting of certain eligible inventory and receivables, minus certain reserves.  A portion of the Credit Facility, not toexceed $40 million, is also available to a Canadian subsidiary of the Companysubject to the Canadian borrowing base. The Credit Facility replaced the $250 million senior revolving creditfacility amended November 2004, which allowed for up to $50 million inborrowings from additional lines of credit outside the agreement, including CAD$40 million covering the Company’s Canadian operations.

Borrowings underthe Credit Facility bear interest at a rate equal to, at the Borrowers’ option,either (a) an alternate base rate determined by reference to the higher of(1) the base rate in effect on such day and (2) the federal fundseffective rate plus 0.50% or (b) a LIBOR rate, with respect to anyEurodollar borrowing, determined by reference to the costs of funds for U.S.dollar deposits for the interest period relevant to such borrowing adjusted forcertain additional costs, in each case plus an applicable margin.  Inaddition to paying interest on outstanding principal under the Credit Facility,the Company is required to pay a variable rate commitment fee in respect of theunutilized commitments thereunder.

The CreditFacility contains certain customary affirmative covenants and events ofdefault, but does not require the Company to comply with any financial ratiomaintenance covenants unless the excess availability under the Credit Facilitydoes not exceed $75 million.  During theperiod February 14, 2006 to December 30, 2006, the Company always maintainedexcess availability under the Credit Facility above $75 million and,accordingly, is not subject to compliance with certain financial ratiomaintenance covenants as of December 30, 2006. The Company is not obligatedunder any formal or informal compensating balance requirements.

As of December 30,2006, the Issuers had (i) $37.8 million in borrowings outstanding underthe Credit Facility at an average interest rate of 8.3%; (ii) $81.2 million ofletters of credit outstanding issued under the Credit Facility, which includesstandby letters of credit and import letters of credit used for merchandisepurchases; and (iii) $403.9 million of additional availability under the CreditFacility.

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Allobligations under the Credit Facility, and the guarantees of those obligations,are secured, subject to certain exceptions, by substantially all of the Company’s,the Issuers’ and the subsidiary guarantors’ assets, including: (1) afirst-priority security interest in inventory, accounts receivable, cash,securities and other general intangibles; and (2) a second-priority securityinterest in equipment, intellectual property rights and related generalintangibles and all of the capital stock of the Issuers and the capital stockof certain subsidiaries.

*Mortgage Note*

TheCompany also has an 8.2% fixed-rate mortgage note on the land and building ofone of the Company’s closed stores. Under the mortgage note terms, the Company is required to make 96 equalpayments of principal and interest, with a final principal payment of approximately$1.6 million in August 2012.

*Historical*

The Company’sprimary uses of cash are working capital requirements, new store expenditures,new store inventory purchases and debt service requirements.  The Company funds its operations through acombination of internally generated cash from operations and from borrowingsunder its asset-based revolving Credit Facility.  However, the Company’s ability to fund futureoperating expenses and capital expenditures and its ability to make scheduledpayments of interest on, to pay principal on or refinance indebtedness and tosatisfy any other present or future debt obligations will depend on futureoperating performance which will be affected by general economic, financial andother factors beyond the Company’s control.

As a result of the Transactions, the cash flow results for the fiscalyear ended December 30, 2006 have been separately presented in the ConsolidatedStatements of Cash Flows split between the “Successor Entity” covering theperiod February 14, 2006 to December 30, 2006 and the “Predecessor Entity”,covering the period January 1, 2006 to February 13, 2006.  The comparable period results for the prioryear are presented under “Predecessor Entity.” For comparative purposes, the Company combined the two periods fromJanuary 1, 2006 to December 30, 2006 in its discussion below.  This combination is not a GAAPpresentation.  However, the Companybelieves this combination is useful to provide the reader a more accuratecomparison and is provided to enhance the reader’s understanding of cash flowsfor the periods presented.

Net cash provided by operating activities for the period February 14,2006 to December 30, 2006 was $2.2 million and net cash used in operatingactivities for the period January 1, 2006 to February 13, 2006 was $62.0million.  Net cash used in operatingactivities for the combined 52-week period ended December 30, 2006 was $59.8million compared with $79.1 million provided by operating activities for thecomparable period last year.  Thechange in net cash used in operating activities is due to additional costsincurred by the Company resulting from the consummation of the Transactions, anincrease in interest payments associated with the Notes and the timing ofvendor payments, which was offset in part by a decline in inventory spend dueto the Company’s inventory repositioning efforts.  Inventory per square foot decreased 3.8% to$41.90 compared to $43.57 in fiscal 2005 as the Company has eliminatedinventory it considers to be non-core while maintaining appropriate depth toensure that its in-stock position remained strong in its core offerings.

Net cash used ininvesting activities for the periods February 14, 2006 to December 30, 2006 andJanuary 1, 2006 to February 13, 2006 was $1,266.8 million and $11.0 million, respectively.  Net cash used in investing activities for the combined 52-week period ended December30, 2006 was $1,277.8 millioncompared with $128.9 million used in investing activities for the comparableperiod last year.  Excluding acquisitioncost in connection with the Transactions, net cash used in investing activitiesfor the 52-week period ended December 30, 2006 was $72.3 million, a decrease from the prior year due to fewer newstore openings.  The Company currentlyestimates capital expenditures will be approximately $40 million in fiscal2007, primarily to open approximately 20 new stores and to maintain existingstores, and for system enhancements and other capital additions.  For the 52-week period ended December30, 2006 such amounts totaled approximately $53.1 million, $17.9 million and$6.2 million to open new stores, to maintain existing stores and for systemenhancements and other capital additions, respectively.

Net cash providedby financing activities for the periods February 14, 2006 to December 30, 2006and January 1, 2006 to February 13, 2006 was $1,277.2 million and $5.0 million, respectively.  Net cash provided by financing activities forthe combined 52-week period endedDecember 30, 2006 was $1,282.2million compared with $3.8 million provided by financing activities for thecomparable period last year.  Theincrease is due to the 

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issuance of the Notes,the issuance of Company stock primarily to the Sponsors in connection with theTransactions and a net increase in borrowings under the Credit Facility to fundworking capital needs.

Managementregularly reviews and evaluates its liquidity and capital needs.  The Company experiences peak periods for itscash needs generally during the second quarter and fourth quarter of the fiscalyear.  As the Company’s businesscontinues to grow and its current store expansion plan is implemented, suchpeak periods may require increases in the amounts available under the CreditFacility from those currently existing and/or other debt or equityfunding.  Management currently believesthat the Company’s cash flows from operations and its availability under theCredit Facility will be sufficient to fund its expected capital expenditures,working capital and non-acquisition business expansion requirements as theybecome due; however, no assurance can be given that it will be able to obtain access to increases to the CreditFacility or additional capacity from new credit facilities in the future shouldthey become necessary.

**Off-Balance Sheet Arrangements**

The Company doesnot have any transactions or relationships that could be considered materialoff-balance sheet arrangements.

**ContractualCommitments**

Thefollowing table summarizes existing contractual obligations requiring the useof cash, as of December 30, 2006:

 

 
| **Payments Due By Period  (in millions)** | ** ** |
|-------------------------------------------|------------|
| **Contractual Obligations**          | ** ** | **Total** | ** ** | **Less  Than  1 Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **More  Than  5 Years** | ** ** |
| Operating  leases—real property      |       | $ | 2,559.5 |   | $ | 292.6 |   | $ | 592.8 |   | $ | 569.1 |   | $ | 1,105.0 |   |
| Operating  leases—personal property  |       | 11.1 |   | 4.7 |   | 5.1 |   | 1.3 |   | — |   |
| Total operating leases(1)                 |       | 2,570.6 |   | 297.3 |   | 597.9 |   | 570.4 |   | 1,105.0 |   |
| Inventory  purchases                      |       | 264.1 |   | 264.1 |   | — |   | — |   | — |   |
| New store  capital additions              |       | 5.8 |   | 5.8 |   | — |   | — |   | — |   |
| Long-term debt  obligations(2)            |       | 1,324.4 |   | 87.5 |   | 173.7 |   | 197.2 |   | 866.0 |   |
| Total                                     |       | $ | 4,164.9 |   | $ | 654.7 |   | $ | 771.6 |   | $ | 767.6 |   | $ | 1,971.0 |   |

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(1)             Asof December 30, 2006, the Company has fully executed leases for 23 storesplanned to open in fiscal 2007 and 2008 for which aggregate minimum rentalpayments over the term of the leases is approximately $101.6 million. Thetable above includes payments for stores that had fully executed leases as ofDecember 30, 2006.

TheCompany also has assigned property at a retail location in which it guaranteesthe payment of rent over the specified lease term in the event of non-performance.As of December 30, 2006 the maximum potential amount of future payments theCompany could be required to make under such guarantee is approximately$0.5 million.

(2)             Long-termdebt obligations include senior notes and the asset-based revolving creditfacility through their respective maturity dates and monthly payments ofprincipal and interest for a mortgage on the land and building of one of theCompany’s closed stores.  Floatinginterest rate payments related to the senior notes and the asset-basedrevolving credit facility are included in the above table.  Any future indebtedness under the asset-basedrevolving credit facility, which will significantly increase the Company’slong-term liabilities, is not included.

**Seasonality**

TheCompany’s business is subject to substantial seasonal variations. Historically,the Company has realized a significant portion of its net sales and, prior tothe Merger before the Company became highly leveraged, substantially all of itsnet income for the year during the third and fourth quarters. The Company’squarterly results of operations may also fluctuate significantly as a result ofa variety of other factors, including the timing of new store openings. TheCompany believes this is the general pattern associated with its segment of theretail industry and expects that this pattern will continue in the future.Consequently, comparisons between quarters are not necessarily meaningful andthe results for any quarter are not necessarily indicative of future results.

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**Accounting Pronouncements**

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities - Including an Amendment of FASB Statement No. 115”*(“SFAS No. 159”).  SFAS No. 159 permits,but does not require, companies to report at fair value the majority ofrecognized financial assets, financial liabilities and firm commitments.  Under this standard, unrealized gains andlosses on items for which the fair value option is elected are reported inearnings at each subsequent reporting date. The Company is currently assessing the effect SFAS No. 159 may have, ifany, on its consolidated financial statements when it becomes effective onJanuary 1, 2008.

InSeptember 2006, the FASB issued Statement of Financial Accounting StandardsNo. 158, “**Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88,106, and 132(R)****”**(“SFAS No. 158”). SFAS No. 158 requires, among otheritems, recognition of the overfunded or underfunded status of an entity’sdefined benefit postretirement plan as an asset or liability, respectively, inthe balance sheet, requires the measurement of defined benefit postretirementplan assets and obligations as of the end of the employer’s fiscal year, andrequires recognition of changes in funded status of defined benefit postretirementplans in the year in which the changes occur in other comprehensiveincome.  SFAS No. 158 is effective forfiscal years ending after June 15, 2007 and early application is encouraged.  The adoption of SFAS No. 158 is not expectedto have a material effect on the Company’s financial position or results ofoperations.

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “*Fair ValueMeasurements*” (“SFAS No. 157”) which is effective for fiscal yearsbeginning after November 15, 2007 and for interim periods within thoseyears.  This statement defines fairvalue, establishes a framework for measuring fair value and expands the relateddisclosure requirements.  The Company is in the process of determining the effect, if any,that the adoption of SFAS No. 157 will have on its financial statements.

InSeptember 2006, the SEC staff issued Staff Accounting BulletinNo. 108, “*Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*” (“SAB No. 108”). This SAB provides guidance on the consideration of the effects of prioryear misstatements in quantifying current year misstatements for the purpose ofa materiality assessment.  SABNo. 108 establishes an approach that requires quantification of financialstatement errors based on the effects on each of the Company’s financialstatements and related financial statement disclosures.  The SAB permits existing public companies torecord the cumulative effect of initially applying this approach in the firstyear ending after November 15, 2006 by recording the necessary correctingadjustments to the carrying values of assets and liabilities as of thebeginning of that year with the offsetting adjustment recorded to the openingbalance of retained earnings. Additionally, the use of the cumulative effect transition methodrequires detailed disclosure of the nature and amount of each individual errorbeing corrected through the cumulative adjustment and how and when itarose.  At December 31, 2006, the Companyrecorded an adjustment under SAB No. 108 (see Note 2 to the ConsolidatedFinancial Statements — “Adoption of SEC Staff Accounting Bulletin No. 108”).

In July2006, the FASB issued FASB Interpretation No. 48, *“Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”*(“FIN No. 48”).  FIN No. 48 prescribes arecognition threshold and measurement process for recording in the financialstatements uncertain tax positions taken or expected to be taken in a taxreturn in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Tax positions must meet a more-likely-than-notrecognition threshold at the effective date to be recognized upon the adoptionof FIN No. 48 and in subsequent periods. Additionally, FIN No. 48 provides guidance on derecognition,classification, accounting in interim periods, interest and penalties anddisclosure requirements for uncertain tax positions.  The accounting provisions of FIN No. 48 areeffective for the Company beginning in fiscal year 2007.  The Company, in its opening balance sheet for2007, is required to reflect, as cumulative adjustments to the Company’sretained earnings, the impact of  FIN No.48 on its income tax accruals for all prior years subject to adjustment byfederal, state, local and foreign taxing authorities (open years).  The Company has undertaken an analysis of allmaterial tax positions in its tax accruals for all open years and hasidentified all of its outstanding tax positions and estimated the transitionamounts with respect to each item at the effective date.  The Company has determined that no materialadjustment to Shareholders’ Equity will be required as a result of applying FINNo. 48.  The Company will continue itspolicy of classifying interest on tax liabilities as part of its provision forincome taxes.

InJune 2006, the FASB’s Emerging Issues Task Force reached a consensus on IssueNo. 06-3, “*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should be Presented in the Income Statement (That Is,Gross versus Net Presentation)*” (“EITF 06-3”).  EITF 06-3 includes sales, use, value-addedand some excise taxes that are assessed by a governmental authority on specificrevenue-producing transactions between a 

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seller and acustomer.  EITF 06-3 requires disclosureof the method of accounting for the applicable assessed taxes and the amount ofassessed taxes included in revenues if such taxes are accounted for under thegross method.  EITF 06-3 is effective forboth interim and annual periods beginning in fiscal year 2007.  EITF 06-3 will not impact the Company’smethod for recording these applicable assessed taxes because the Company hashistorically presented sales excluding such taxes.

**Impact of Inflation**

The Company doesnot believe that its operating results have been materially affected byinflation during the preceding three years. There can be no assurance, however,that the Company’s operating results will not be affected by inflation in thefuture.

**Critical Accounting Policies**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts and timing of revenues and of expenses during the reportingperiods.  The Company bases its estimateson historical experience and on other assumptions that it believes to berelevant under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. The Company’s management believes thefollowing critical accounting estimates involve significant estimates andjudgments inherent in the preparation of the Consolidated FinancialStatements.  The Company bases theseestimates on historical results and various other assumptions believed to bereasonable at the time.   Managementdiscussed the development and selection of these critical accounting estimateswith the audit committee of the board of directors.

*BusinessCombination*

On February 14,2006, the Company acquired all of the outstanding common stock of the Company’spredecessor entity, Linens ‘n Things, Inc., for total cash consideration ofapproximately $1.3 billion.  Theacquisition of Linens ‘n Things, Inc. was accounted for as a businesscombination using the purchase method of accounting, whereby the purchase price(including liabilities assumed) was preliminarily allocated to the assetsacquired based on their estimated fair market values at the date ofacquisition.  The purchase price paid byLinens Holding Co. to acquire the Company and related preliminary purchaseaccounting adjustments were “pushed down” and recorded in Linens ‘n Things,Inc. and its subsidiaries’ financial statements and resulted in a new basis ofaccounting for the “successor” period beginning on the day the acquisition wascompleted.  As a result, the purchaseprice and related costs were preliminarily allocated to the estimated fairvalues of the assets acquired and liabilities assumed at the time of theacquisition based on management’s best estimates, which were based in part onthe work of third-party appraisers engaged to perform valuations of certain ofthe tangible and intangible assets acquired. In essence, the Company’s assets and liabilities were adjusted to fairvalue as of the closing date of the Transactions, and the excess of the totalpurchase price over the fair value of the Company’s net assets was allocated togoodwill.

*Valuationof Inventory:*

Merchandiseinventory is a significant portion of the Company’s balance sheet, representingapproximately 42.7% of total assets at December 30, 2006. Inventories arevalued using the lower of cost or market value, determined by the retailinventory method (“RIM”). Under RIM, the valuation of inventories at cost andthe resulting gross margins are determined by applying a calculatedcost-to-retail ratio to the retail value of inventories. RIM is an averagingmethod that is used in the retail industry due to its practicality. Inherent inRIM calculations are certain significant management judgments and estimatesincluding, among others, merchandise mark-on, mark-up, markdowns and shrinkagebased on historical experience between the dates of physical inventories, allof which significantly impact the ending inventory valuation at cost. Themethodologies utilized by the Company in its application of RIM are consistentfor all periods presented.  Suchmethodologies include the development of the cost-to-retail ratios, thedevelopment of shrinkage reserves and the accounting for price changes. At anyone time, inventories include items that have been written down to the Company’sbest estimate of their realizable value. Factors considered in estimatingrealizable value include the age of merchandise and anticipated demand. Actualrealizable value could differ materially from this estimate based upon futurecustomer demand or economic conditions.

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*SalesReturns*

The Companyestimates future sales returns and records a provision in the period that therelated sales are recorded based on historical return rates.  Should actual returns differ from the Company’sestimates, the Company may be required to revise estimated sales returns.  Although these estimates have not variedmaterially from historical provisions, estimating sales returns requiresmanagement judgment as to changes in preferences and quality of products beingsold, among other things; therefore, these estimates may vary materially in thefuture.  The sales returns calculationsare regularly compared with actual return experience.  In preparing its Consolidated FinancialStatements as of December 30, 2006 and December 31, 2005, the Company’s salesreturns reserve was approximately $5.9 million and $7.1 million, respectively.

*Impairmentof Long-Lived Assets (including Goodwill)*

In accordance with SFAS No. 144, “Accounting forImpairment or Disposal of Long-Lived Assets,” long-lived assets, such asproperty and equipment and purchased intangible assets subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be fully recoverable.  Recoverability of assets to be held and usedis determined by a comparison of the carrying amount of an asset to theestimated undiscounted future cash flows expected to be generated by theasset.  If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized for the amount that the carrying value of the asset exceeds the fairvalue of the asset, which is determined by discounting the future cash flowsexpected to be generated by the asset.

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets,” goodwill and intangible assets that have indefiniteuseful lives are tested annually for impairment.  These assets are tested for impairment morefrequently if events and circumstances indicate that the assets might beimpaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.  For goodwill, the impairmentdetermination is made at the reporting unit level and consists of two steps.First, the Company determines the fair value of a reporting unit and comparesit to its carrying amount. Second, if the carrying amount of a reporting unitexceeds its fair value, an impairment loss is recognized for any excess of thecarrying amount of the reporting unit’s goodwill over the implied fair value ofthe goodwill. The implied fair value of goodwill is determined by allocatingthe fair value of the reporting unit in a manner similar to a purchase priceallocation, in accordance with FASB Statement No. 141, “BusinessCombinations”. The residual fair value after this allocation is the impliedfair value of the reporting unit goodwill. The Company’s judgments regardingthe existence of impairment indicators are based on market conditions andoperational performance.  Future eventscould cause the Company to conclude that impairment indicators exist and thatthe value of long-lived assets and goodwill is impaired.  As of December 30, 2006 and December 31,2005, the Company’s net book value for property and equipment was approximately$530.8 million and $612.2 million, respectively, goodwill was approximately$267.8 million and $18.1 million, respectively, and identifiable intangibleassets, net was $150.0 million and $1.3 million, respectively.  The increase in goodwill and identifiableintangible assets, net was primarily due to the acquisition.

Duringthe periods February 14, 2006 to December 30, 2006, fiscal 2005 and fiscal2004, the Company determined that the carrying value of certain assets exceededtheir related estimated future undiscounted cash flows.  As a result, the Company reduced the carryingvalue of property and equipment to their fair value by approximately $28.0 million,$4.1 million and $0.9 million for the periods February 14, 2006 to December 30,2006, fiscal 2005 and fiscal 2004, respectively.  The related impairment loss was recognized inSelling, General and Administrative Expenses on the Company’s ConsolidatedStatement of Operations.  In addition,during the period February 14, 2006 to December 30, 2006, the Company reducedthe carrying value of favorable leases included in identifiable intangibleassets, net by approximately $3.1 million with a corresponding charge toSelling, General and Administrative Expenses.

*StoreClosure Costs*

In fiscal 2001,the Company recorded a pre-tax restructuring and asset impairment charge of$37.8 million ($23.7 million after-tax) related to the closing of certainunder-performing stores.  As of December30, 2006 and December 31, 2005, the Company had $3.6 million and $5.4 million,respectively, remaining related to this reserve.  The Company has closed all of the initiallyidentified stores other than one store, which the Company decided to keep openand whose reserve was reversed.  TheCompany continues to negotiate and/or explore lease buyouts or 

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sublease agreements forcertain of these stores as well as evaluate reopening stores previouslyclosed.  Fiscal 2006 usage consists of payments forlease commitments totaling $3.2 million. The 2006 activity also includes the reversal of estimated leasecommitment costs of approximately $0.3 million as these reserves were notneeded, offset by an increase to lease commitment costs of approximately $1.7million due to changes in estimates based on current negotiations.  Final settlement of these reserves ispredominantly a function of negotiations with unrelated third parties, and, assuch, these estimates may be subject to change in the future.

*Self-Insurance*

TheCompany purchases third party insurance for workers’ compensation, medical andgeneral liability costs that exceed certain limits for each type of insuranceprogram. The Company is responsible for the payment of claims under theseinsured excess limits. The Company establishes accruals for its insuranceprograms based on available claims data and historical trend and experience, aswell as loss development factors prepared by third party actuaries. The Companyevaluates the accruals and the underlying assumptions periodically and makesadjustments as needed. The ultimate cost of these claims may vary from theestablished accrual.  While the Companybelieves that the recorded amounts are adequate, there can be no assurance thatchanges to management’s estimates will not occur due to limitations inherent inthe estimate process. The ultimate cost of these claims may be greater than orless than the established accrual. The accrued obligation for theseself-insurance programs was approximately $16.2 million as of December 30,2006 and $14.7 million for fiscal year 2005.

*Stock-based Compensation*

SFAS No. 123(Revised 2004) requires the recognition of compensation expense in theConsolidated Statements of Operations related to the fair value of employeeshare-based options. Determining the fair value of share-based awards at thegrant date requires judgment, including estimating the expected term that stockoptions will be outstanding prior to exercise, the associated volatility andthe amount of share-based awards expected to be forfeited prior to vesting.Prior to adopting SFAS No. 123 (Revised 2004), on January 1, 2006 theCompany applied the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, and related Interpretations, inaccounting for its share-based compensation plans. All employee stock optionswere granted at or above the grant date market price. Accordingly, nocompensation cost was recognized for fixed stock option grants prior toJanuary 1, 2006.

*DerivativeFinancial Instruments*

Inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” (“SFAS No. 133”), as amended, the Company had designatedcertain derivative instruments entered into on July 7, 2006 as cash flow hedgesand recognizes the fair value of the instruments on the Consolidated BalanceSheet.  Gains and losses that result fromchanges in the fair value of the hedge are either recognized in income tooffset the gain or loss on the hedged item, or deferred and reported as acomponent of Accumulated Other Comprehensive (Loss) or Income in Stockholders’Equity on the Consolidated Balance Sheet and subsequently recognized in incomewhen the hedged item affects net income. The ineffective portion of the change in fair value of a hedge is recognizedin income immediately.  There was nohedge ineffectiveness during the period from inception of the derivativearrangement on July 7, 2006 to December 30, 2006.

*IncomeTaxes*

The Company usesthe asset and liability method to account for its income taxes.  Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to the differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to be applied to the taxable income in the year in which temporarydifferences are expected to be recovered or settled.  The effect of achange in tax rates on deferred tax assets and liabilities is recognized in thestatement of operations in the period that includes the enactment date.

Determiningthe provision for income taxes and related accruals, deferred tax assets andliabilities requires judgment.  There aretransactions and calculations arising in the ordinary course of business wherethe ultimate tax outcome is uncertain.  Additionally, tax returns filed bythe Company are subject to audit by various tax authorities. Although theCompany believes that its estimates are reasonable, actual results could differfrom these estimates.

50

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*Litigation*

The Companyrecords an estimated liability related to various claims and legal actionsarising in the ordinary course of business, which is based on availableinformation and advice from outside counsel where applicable. As additionalinformation becomes available, the Company assesses the potential liabilityrelated to its pending claims and may adjust its estimates accordingly.

*AccountingControl Deficiency*

As ofDecember 30, 2006, the Company’s control procedures did not include adequatereview over the completeness and accuracy of the income tax accounts to ensurecompliance with generally accepted accounting principles.  The Company out-sources the preparation ofthe income tax provision to a third party and did not apply a thorough reviewto detect misstatements.  This deficiencyresulted in material errors in the Company’s preliminary income tax provisionin the 2006 consolidated financial statements. The Company corrected the provision for income taxes and relatedbalances prior to the issuance of the financial statements.  Accordingly, management determined that thiscondition constitutes a material weakness.

A materialweakness in internal control over financial reporting is a control deficiency(within the meaning of the Public Company Accounting Oversight Board (“PCAOB”)Auditing Standard No. 2), or combination of control deficiencies, thatadversely affects a company’s ability to initiate, authorize, record, processor report external financial data reliably in accordance with GAAP that resultsin there being more than a remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected.

Although theCompany has taken certain actions to address these issues, if it is unable toidentify and remedy all such issues promptly and effectively, it could have amaterial adverse effect on the Company’s business, results of operations andfinancial condition. Maintaining effective control over financial reporting isnecessary for the Company to produce reliable financial reports and isimportant in helping to prevent financial fraud. If the Company’s management orits independent registered public accounting firm were to conclude again in thefuture that the Company’s internal control over financial reporting wasineffective, investors could lose confidence in its reported financialinformation.

**Item 7A.  Quantitative and Qualitative Disclosures AboutMarket Risk**

The Company continuously evaluates the market riskassociated with its financial instruments. Market risks relating to the Company’s operations result primarily fromchanges in interest rates.  The Companydoes not engage in financial transactions for trading or speculative purposes.

Since the 2005 fiscal year, market risk exposure hassignificantly increased due to the issuance of the Notes in connection with theMerger and Transactions.

**Interest Rate Risk**

The Company’s financial instruments include cash andcash equivalents and borrowings under the Credit Facility and the Notes.  The asset-based revolving credit facility andthe Notes carry floating rate interest and, therefore, the Company’sConsolidated Statement of Operations and the Consolidated Statement of CashFlows for fiscal 2007 will be exposed to changes in interest rates.  As of December 30, 2006, the Company had$37.8 million in borrowings under the Credit Facility at an average interestrate of 8.3% and $650 million aggregate principal amount in Notes at aninterest rate of 11.0%, based on a LIBOR rate of 5.4%.  As of December 30, 2006 a one percentagepoint change in floating rate interest would cause an increase to interestexpense of approximately $6.9 million.

The Company employs derivative financial instruments tomanage its exposure to interest rate changes and to limit the volatility andimpact of interest rate changes on earnings and cash flows.

51

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The Company does not enter into other derivativefinancial instruments for trading or speculative purposes.  The Company faces credit risk if thecounterparties to these transactions are unable to perform theirobligations.  However, the Company seeks tominimize this risk by entering into transactions with counterparties that aremajor financial institutions with high credit ratings.

On July 7, 2006 the Issuers entered into a zero costinterest rate collar agreement to hedge the cash flows associated with theLIBOR component of the interest rate on the Notes.  The collar agreement provides for payments tobe made to or received from the counterparty where the rate in effect for theNotes is below 4.45% or above 6.51% for a given reset period.  Such payments represent the differencebetween the rates stated above in the collar agreement and those in effect onthe Notes for the given reset period. Payment and reset dates under the collar agreement are matched exactlyto those of the Notes.  The collar agreementhas an ultimate maturity of January 15, 2008. At the inception of the collar agreement, the Company determined thatthe hedging relationship would have no ineffectiveness, and the Company willcontinue to verify and document that the critical terms of the hedginginstrument and the hedged item are exactly matched.  At December 30, 2006, the notional amount ofdebt related to the collar agreement was $650 million and the fair value of thecollar agreement was approximately a $0.1 million liability.

On July 7, 2006 the Issuers also purchased a one-yearforward-starting interest rate cap agreement which takes effect on January 15,2008.  The cap agreement provides forpayments to be received from the counterparty where the rate in effect on aLIBOR-based borrowing arrangement is above 6.51% for a given reset period.  Payment and reset dates under the capagreement are matched exactly to those of the LIBOR-based borrowingarrangement.  The cap agreement has anultimate maturity of January 15, 2009. The Company paid a premium of $700,000 to purchase the capagreement.  The cap agreement consists oftwo components, a forward contract and an interest rate cap agreement.  The Company’s intent is to hedge the cashflow associated with the LIBOR component of the interest rate on a LIBOR-basedborrowing arrangement beyond 6.51% for the period January 15, 2008 throughJanuary 15, 2009.  The forward contractenables the Company to achieve this objective. The Company will assess the effectiveness of the forward contractquarterly.  Once the forward contractbecomes an interest rate cap agreement, effectiveness will be assessed anddocumented as a new relationship.  Theinterest rate cap agreement is expected to be perfectly effective at such time,and the Company will continue to subsequently verify and document that thecritical terms of the interest rate cap agreement and the hedged item continueto match exactly over the remaining life of the relationship.  At December 30, 2006, the notional amount ofdebt related to the cap agreement was $650 million and the fair value of theinstrument was approximately a $0.1 million asset.

The Company has determined that the collar agreementand the cap agreement have been appropriately designated and documented as cashflow hedges under SFAS No. 133.  Duringthe period from inception of the derivative arrangements on July 7, 2006 toDecember 30, 2006, the Company has recorded a loss of approximately $0.7 ($0.4million, net of tax) in Accumulated Other Comprehensive (Loss) Income relatedto the changes in fair value of the hedges. The collar agreement and the cap agreement had no ineffectiveness andprovided no amounts received or paid under the hedges that affected net lossduring the period.  Both agreements areexpected to have no ineffectiveness during their contractual lives.

**Foreign Currency Risk**

The Company enters into some purchase obligationsoutside of the United States, which are predominately settled in U.S. dollars,and therefore, the Company does not have a material exposure to foreigncurrency exchange risks.  The Companyoperated 35 stores in Canada as of December 30, 2006.  The Company believes its foreign currencytranslation risk is not material, as a hypothetical 10% strengthening orweakening of the U.S. dollar relative to the Canadian dollar would notmaterially affect the Company’s results from operations or cash flow.  As of December 30, 2006 and for the fiscalyear then ended the Company did not hedge against foreign currency risks.

 

52

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**Item 8.  Financial Statements and Supplementary Data**

The financial statements and financial information required bythe Item are included below.  Thefinancial statements are indexed under Item 15(a)(1).

**Report of Independent Registered Public Accounting Firm**

----

 

The Board of Directors and Shareholders

Linens Holding Co.:

We have auditedthe accompanying consolidated balance sheets of Linens Holding Co. andsubsidiaries (the Company) as of December 30, 2006 (Successor Period) and December31, 2005 (Predecessor Period), and the related consolidated statements ofoperations, shareholders’ equity and comprehensive income and cash flows forthe period February 14, 2006 to December 30, 2006 (Successor Period), theperiod January 1, 2006 to February 13, 2006 (Predecessor Period) and each ofthe years ended December 31, 2005 and January 1, 2005 (PredecessorPeriod).  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 30,2006 (Successor Period) and December 31, 2005 (Predecessor Period), and therelated consolidated statements of operations, shareholders’ equity andcomprehensive income and cash flows for the period February 14, 2006 toDecember 30, 2006 (Successor Period), the period January 1, 2006 to February13, 2006 (Predecessor Period) and for each of the years ended December 31, 2005  and January 1, 2005 (Predecessor Period), inconformity with U.S. generally accepted accounting principles.

As discussed in Notes 2and 13 to the consolidated financial statements, the Company changed its methodof accounting for share-based payments in 2006 and as discussed in Note 2, theCompany changed its method of quantifying errors in 2006.

**/s/ KPMG LLP**

 

New York, New York

March 26, 2007

53

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands)**

** **
| ** **                                                     | ** ** | ** **                                                                     | ** **    | ** ** | ** ** | ** **                                                                 | ** ** | **Fiscal Year Ended**   | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|---------------|------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                     | ** ** | **February 14,   2006 to   December 30,   2006** | ** **    | ** ** | ** ** | **January 1, 2006   to February 13,   2006** | ** ** | **December 31,   2005** | ** ** | **January 1,   2005** | ** ** |
| ** **                                                     | ** ** | **(Successor   Entity)**                                                  | ** **    | ** ** | ** ** | **(Predecessor   Entity)**                                            | ** ** | **(Predecessor   Entity)**   | ** ** | **(Predecessor   Entity)** | ** ** |
| **Net sales**                                                  | ** ** | **$**                                                                          | **2,534,365** | ** ** |       |                                                                       | **$**      | **284,971**                       | ** ** | **$** | **2,694,742** | ** ** | **$** | **2,661,469** | ** ** |
| Cost of sales,  including buying and distribution costs        |       | 1,557,011                                                                      |          |       |       | 180,675                                                                    |       | 1,595,394                         |       | 1,589,700 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| **Gross profit**                                               | ** ** | **977,354**                                                                    | ** **    |       |       | **104,296**                                                                | ** ** | **1,099,348**                     | ** ** | **1,071,769** | ** ** |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| **Selling, general and  administrative expenses**              |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| Fixed asset  impairment                                        |       | 27,992                                                                         |          |       |       | —                                                                     |       | 4,059                             |       | 900 |   |
| Identifiable  intangible asset impairment                      |       | 3,119                                                                          |          |       |       | —                                                                     |       | —                            |       | — |   |
| Other selling,  general and administrative expenses            |       | 1,040,023                                                                      |          |       |       | 174,138                                                                    |       | 1,033,462                         |       | 969,579 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
|                                                           |       | 1,071,134                                                                      |          |       |       | 174,138                                                                    |       | 1,037,521                         |       | 970,479 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| **Operating (loss) profit**                                    | ** ** | **(93,780**                                                                    | **)**         |       |       | **(69,842**                                                                | **)**      | **61,827**                        | ** ** | **101,290** | ** ** |
| ** **                                                     | ** ** | ** **                                                                     | ** **    |       |       | ** **                                                                 | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Interest income                                                |       | (190                                                                           | )             |       |       | (668                                                                       | )          | (894                              | )          | (542 | ) |
| Interest expense                                               |       | 79,795                                                                         |          |       |       | —                                                                     |       | 4,860                             |       | 3,903 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| Interest expense  (income), net                                |       | 79,605                                                                         |          |       |       | (668                                                                       | )          | 3,966                             |       | 3,361 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| **(Loss) income before (benefit)  provision for income taxes** | ** ** | **(173,385**                                                                   | **)**         |       |       | **(69,174**                                                                | **)**      | **57,861**                        | ** ** | **97,929** | ** ** |
| (Benefit) provision for  income taxes                          |       | (66,852                                                                        | )             |       |       | (21,270                                                                    | )          | 21,879                            |       | 37,408 |   |
|                                                           |       |                                                                           |          |       |       |                                                                       |       |                              |       |   |   |
| **Net (loss) income**                                          | ** ** | **$**                                                                          | **(106,533**  | **)**      |       |                                                                       | **$**      | **(47,904**                       | **)**      | **$** | **35,982** | ** ** | **$** | **60,521** | ** ** |

 

*See accompanying Notes to Consolidated FinancialStatements.*

54

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except share amounts)**
| ** **                                                                                                                                                            | ** ** | **December 30,   2006** | ** **    | ** ** | ** ** | **December 31,   2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|---------------|------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **Successor Entity**         | ** **    | ** ** | ** ** | **Predecessor Entity**       | ** ** |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Assets**                                                                                                                                                            | ** ** | ** **                        | ** **    | ** ** | ** ** | ** **                        | ** ** |
| **Current assets:**                                                                                                                                                   | ** ** | ** **                        | ** **    | ** ** | ** ** | ** **                        | ** ** |
| Cash and cash equivalents                                                                                                                                             |       | $                                 | 12,526        |       |       |                              | $          | 158,158 |   |
| Accounts receivable                                                                                                                                                   |       | 37,063                            |          |       |       | 43,561                            |       |
| Inventories                                                                                                                                                           |       | 793,002                           |          |       |       | 787,283                           |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 15,308                            |          |       |       | 17,425                            |       |
| Current deferred income taxes                                                                                                                                         |       | 16,815                            |          |       |       | 2,033                             |       |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Total current assets**                                                                                                                                              | ** ** | **874,714**                       | ** **    | ** ** | ** ** | **1,008,460**                     | ** ** |
| Property and equipment, net                                                                                                                                           |       | 530,829                           |          |       |       | 612,247                           |       |
| Identifiable intangible assets, net                                                                                                                                   |       | 150,044                           |          |       |       | 1,301                             |       |
| Goodwill                                                                                                                                                              |       | 267,830                           |          |       |       | 18,126                            |       |
| Deferred financing costs and other noncurrent  assets, net                                                                                                            |       | 34,517                            |          |       |       | 10,700                            |       |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| Total assets                                                                                                                                                          | ** ** | **$**                             | **1,857,934** | ** ** | ** ** | ** **                        | **$**      | **1,650,834** | ** ** |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                        | ** ** | ** **                        | ** **    | ** ** | ** ** | ** **                        | ** ** |
| **Current liabilities:**                                                                                                                                              | ** ** | ** **                        | ** **    | ** ** | ** ** | ** **                        | ** ** |
| Accounts payable                                                                                                                                                      |       | $                                 | 260,089       |       |       |                              | $          | 267,582 |   |
| Accrued expenses and other current liabilities                                                                                                                        |       | 186,582                           |          |       |       | 198,961                           |       |
| Current deferred income taxes                                                                                                                                         |       | —                            |          |       |       | 4,401                             |       |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Total current liabilities**                                                                                                                                         | ** ** | **446,671**                       | ** **    | ** ** | ** ** | **470,944**                       | ** ** |
| Senior secured notes and other long-term debt                                                                                                                         |       | 689,876                           |          |       |       | 2,139                             |       |
| Noncurrent deferred income taxes                                                                                                                                      |       | 125,977                           |          |       |       | 54,416                            |       |
| Other long-term liabilities                                                                                                                                           |       | 50,667                            |          |       |       | 273,472                           |       |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Total liabilities**                                                                                                                                                 | ** ** | **1,313,191**                     | ** **    | ** ** | ** ** | **800,971**                       | ** ** |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Shareholders’ equity:**                                                                                                                                        | ** ** | ** **                        | ** **    | ** ** | ** ** | ** **                        | ** ** |
| Preferred stock of Predecessor Entity, $0.01 par  value; 1,000,000 shares authorized; none issued and outstanding                                                     |       | —                            |          |       |       | —                            |       |
| Common stock of Predecessor Entity, $0.01 par value;  135,000,000 shares authorized; 45,653,954 shares issued and 45,389,975 shares  outstanding at December 31, 2005 |       | —                            |          |       |       | 457                               |       |
| Common stock of Successor Entity; $0.01 par value;  15,000,000 shares authorized; 13,013,000 shares issued and outstanding at  December 30, 2006                      |       | 131                               |          |       |       | —                            |       |
| Additional paid-in capital                                                                                                                                            |       | 652,395                           |          |       |       | 376,730                           |       |
| Retained (deficit) earnings                                                                                                                                           |       | (106,533                          | )             |       |       | 476,896                           |       |
| Accumulated other comprehensive (loss) income                                                                                                                         |       | (1,250                            | )             |       |       | 3,287                             |       |
| Treasury stock of Predecessor Entity, at cost;  263,979 shares at December 31, 2005                                                                                   |       | —                            |          |       |       | (7,507                            | )          |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Total shareholders’ equity**                                                                                                                                   | ** ** | **544,743**                       | ** **    | ** ** | ** ** | **849,863**                       | ** ** |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |
| **Total  liabilities and shareholders’ equity**                                                                                                                  | ** ** | **$**                             | **1,857,934** | ** ** | ** ** | ** **                        | **$**      | **1,650,834** | ** ** |
|                                                                                                                                                                  |       |                              |          |       |       |                              |       |

 

*See accompanying Notes to Consolidated FinancialStatements.*

55

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

** **
| ** **                                                                     | ** ** | **Common Stock**                                                | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                    | ** ** | ** **                                                | ** **   | ** **                | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------|--------------|---------------------------|------------|
| ** **                                                                     | ** ** | **Shares**                                                           | ** ** | **Amount** | ** ** | **Additional   Paid-in   Capital** | ** ** | **Retained   Earnings   (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** **   | **Treasury   Stock** | ** ** | **Total** | ** ** |
| **Predecessor Entity**                                                    | ** ** | **(in thousands, except number of shares)** | ** ** |
| **Balance  at January 3, 2004**                                                | ** ** | **44,793,619**                                                       | ** ** | **$**      | **450**    | ** **                                   | **$**      | **362,483**                                   | ** ** | **$**                                                     | **380,393**  | ** **                | **$**      | **1,391** | ** ** | **$** | **(7,340** | **)** | **$** | **737,377** | ** ** |
| Net income                                                                     |       | —                                                               |       | —     |       | —                                       |       | 60,521                                        |       | —                                                    |         | —                    |       | 60,521 |   |
| Currency  translation adjustment                                               |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | 1,228                                                     |         | —                    |       | 1,228 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| Comprehensive  income                                                          |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       | 61,749 |   |
| Common stock  issued under stock incentive plans and related tax benefits      |       | 408,212                                                              |       | 5          |       | 10,144                                       |       | —                                        |       | —                                                    |         | —                    |       | 10,149 |   |
| Increase in  treasury stock, net                                               |       | (935                                                                 | )          | —     |       | —                                       |       | —                                        |       | —                                                    |         | 78                        |       | 78 |   |
| **Balance  at January 1, 2005**                                                | ** ** | **45,200,896**                                                       | ** ** | **455**    | ** ** | **372,627**                                  | ** ** | **440,914**                                   | ** ** | **2,619**                                                 | ** **   | **(7,262**                | **)**      | **809,353** | ** ** |
| Net income                                                                     |       | —                                                               |       | —     |       | —                                       |       | 35,982                                        |       | —                                                    |         | —                    |       | 35,982 |   |
| Currency  translation adjustment                                               |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | 668                                                       |         | —                    |       | 668 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| Comprehensive  income                                                          |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       | 36,650 |   |
| Common stock  issued under stock incentive plans and related tax benefits      |       | 193,487                                                              |       | 2          |       | 4,103                                        |       | —                                        |       | —                                                    |         | —                    |       | 4,105 |   |
| Increase in  treasury stock, net                                               |       | (4,408                                                               | )          | —     |       | —                                       |       | —                                        |       | —                                                    |         | (245                      | )          | (245 | ) |
| **Balance  at December 31, 2005**                                              | ** ** | **45,389,975**                                                       | ** ** | **457**    | ** ** | **376,730**                                  | ** ** | **476,896**                                   | ** ** | **3,287**                                                 | ** **   | **(7,507**                | **)**      | **849,863** | ** ** |
| Cumulative effect  of adoption of SAB No. 108, net of tax                      |       | —                                                               |       | —     |       | —                                       |       | 11,450                                        |       | —                                                    |         | —                    |       | 11,450 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| **Adjusted  balance at January 1, 2006**                                       | ** ** | **45,389,975**                                                       | ** ** | **457**    | ** ** | **376,730**                                  | ** ** | **488,346**                                   | ** ** | **3,287**                                                 | ** **   | **(7,507**                | **)**      | **861,313** | ** ** |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| Net loss for  period January 1 to February 13, 2006                            |       | —                                                               |       | —     |       | —                                       |       | (47,904                                       | )          | —                                                    |         | —                    |       | (47,904 | ) |
| Currency  translation adjustment                                               |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | 253                                                       |         | —                    |       | 253 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| Comprehensive  loss                                                            |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       | (47,651 | ) |
| Share-based  compensation under stock incentive plans                          |       | —                                                               |       | —     |       | 13,224                                       |       | —                                        |       | —                                                    |         | —                    |       | 13,224 |   |
| Tax benefit from  exercise of stock options in connection with the Acquisition |       | —                                                               |       | —     |       | 4,298                                        |       | —                                        |       | —                                                    |         | —                    |       | 4,298 |   |
| Decrease in  treasury stock, net                                               |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | —                                                    |         | 674                       |       | 674 |   |
| ** **                                                                     | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                    | ** ** | ** **                                                | ** **   | ** **                | ** ** | ** ** | ** ** |
| **Balance  at February 13, 2006 (prior to acquisition transactions)**          | ** ** | **45,389,975**                                                       | ** ** | **457**    | ** ** | **394,252**                                  | ** ** | **440,442**                                   | ** ** | **3,540**                                                 | ** **   | **(6,833**                | **)**      | **831,858** | ** ** |
| Acquisition  transactions                                                      |       | (32,389,975                                                          | )          | (327       | )          | 253,231                                      |       | (440,442                                      | )          | (3,540                                                    | )            | 6,833                     |       | (184,245 | ) |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| **Successor  Entity**                                                          |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| ** **                                                                     |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| **Balance  at February 14, 2006**                                              | ** ** | **13,000,000**                                                       | ** ** | **130**    | ** ** | **647,483**                                  |       | —                                        |       | —                                                    |         | —                    | ** ** | **647,613** | ** ** |
| Net loss for the  period February 14, 2006 to December 30, 2006                |       | —                                                               |       | —     |       | —                                       |       | (106,533                                      | )          | —                                                    |         | —                    |       | (106,533 | ) |
| Currency  translation adjustment                                               |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | (820                                                      | )            | —                    |       | (820 | ) |
| Unrealized loss  on hedge arrangements                                         |       | —                                                               |       | —     |       | —                                       |       | —                                        |       | (708                                                      | )            | —                    |       | (708 | ) |
| Tax effect of  period changes to accumulated other comprehensive loss          |       |                                                                 |       |       |       |                                         |       |                                          |       | 278                                                       |         |                      |       | 278 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| Comprehensive  loss                                                            |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       | (107,783 | ) |
| Share-based  compensation under stock incentive plans                          |       | —                                                               |       | —     |       | 4,263                                        |       | —                                        |       | —                                                    |         | —                    |       | 4,263 |   |
| Common stock  issued                                                           |       | 13,000                                                               |       | 1          |       | 649                                          |       | —                                        |       | —                                                    |         | —                    |       | 650 |   |
|                                                                           |       |                                                                 |       |       |       |                                         |       |                                          |       |                                                      |         |                      |       |   |   |
| **Balance  at December 30, 2006**                                              | ** ** | **13,013,000**                                                       | ** ** | **$**      | **131**    | ** **                                   | **$**      | **652,395**                                   | ** ** | **$**                                                     | **(106,533** | **)**                     | **$**      | **(1,250** | **)** | **$** | **—** | ** ** | **$** | **544,743** | ** ** |

 

*See accompanying Notes to Consolidated FinancialStatements.*

 

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**
| ** **                                                                                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                              | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                           | ** ** | **February 14, 2006**     | ** ** | ** ** | ** ** | **January 1,  2006 to ** | ** ** | ** **                      | ** ** |
| ** **                                                                                           | ** ** | **to December 30,  2006** | ** ** | ** ** | ** ** | **February 13,  2006**             | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** |
| ** **                                                                                           | ** ** | **Successor Entity**           | ** ** | ** ** | ** ** | **Predecessor  Entity**                 | ** ** | **Predecessor  Entity**         | ** ** | **Predecessor  Entity** | ** ** |
| **Cash flows from operating  activities:**                                                           | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net (loss) income                                                                                    |       | $                                   | (106,533   | )          |       |                                    | $          | (47,904                         | )          | $ | 35,982 |   | $ | 60,521 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |                                |       |       |       |                                    |       |                            |       |   |   |
| Depreciation and  amortization                                                                       |       | 114,509                             |       |       |       | 12,642                                  |       | 90,270                          |       | 81,318 |   |
| Deferred income  taxes                                                                               |       | (73,641                             | )          |       |       | (6,725                                  | )          | (11,265                         | )          | (1,112 | ) |
| Share-based  compensation                                                                            |       | 4,263                               |       |       |       | 12,484                                  |       | 1,243                           |       | 510 |   |
| Amortization of  deferred financing charges                                                          |       | 3,930                               |       |       |       | 43                                      |       | 154                             |       | 24 |   |
| Loss on sale and  disposals of property and equipment                                                |       | 671                                 |       |       |       | —                                  |       | 1,433                           |       | 2,209 |   |
| Fixed asset  impairment                                                                              |       | 27,992                              |       |       |       | —                                  |       | 4,059                           |       | 900 |   |
| Identifiable  intangible asset impairment                                                            |       | 3,119                               |       |       |       | —                                  |       | —                          |       | — |   |
| Changes in  assets and liabilities, net of effect of acquisition:                                    |       |                                |       |       |       |                                    |       |                            |       |   |   |
| Decrease  (increase) in accounts receivable                                                          |       | 8,727                               |       |       |       | (2,240                                  | )          | (17,704                         | )          | 3,851 |   |
| Decrease  (increase) in inventories                                                                  |       | 26,133                              |       |       |       | (31,886                                 | )          | (70,657                         | )          | (11,997 | ) |
| Decrease  (increase) in prepaid expenses and other current assets                                    |       | 13,482                              |       |       |       | (12,153                                 | )          | 20,544                          |       | (6,057 | ) |
| Decrease  (increase) in identifiable intangible assets and other noncurrent assets, net              |       | 124                                 |       |       |       | 9,580                                   |       | (1,360                          | )          | (4,899 | ) |
| (Decrease)  increase in accounts payable                                                             |       | (14,493                             | )          |       |       | 7,244                                   |       | 21,411                          |       | (5,431 | ) |
| (Decrease)  increase in accrued expenses and other liabilities, net                                  |       | (6,081                              | )          |       |       | (3,041                                  | )          | 4,987                           |       | 47,422 |   |
| **Net cash provided by (used in)  operating activities**                                             | ** ** | **2,202**                           | ** ** |       |       | **(61,956**                             | **)**      | **79,097**                      | ** ** | **167,259** | ** ** |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |
| **Cash flows from investing activities:**                                                            | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Acquisition of  the Predecessor Entity, net of cash acquired(1)                                      |       | (1,205,502                          | )          |       |       | —                                  |       | —                          |       | — |   |
| Additions to  property and equipment                                                                 |       | (66,280                             | )          |       |       | (10,956                                 | )          | (128,912                        | )          | (110,443 | ) |
| Proceeds from  sale of property and equipment                                                        |       | 3,100                               |       |       |       | —                                  |       | —                          |       | — |   |
| Proceeds from  return of building purchase option deposit                                            |       | 1,817                               |       |       |       | —                                  |       | —                          |       | — |   |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |
| **Net cash used in investing  activities**                                                           | ** ** | **(1,266,865**                      | **)**      |       |       | **(10,956**                             | **)**      | **(128,912**                    | **)**      | **(110,443** | **)** |
| ** **                                                                                           | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Cash flows from financing  activities:**                                                           | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Issuance of common  stock to Linens Investors LLC and others                                         |       | 650,650                             |       |       |       | —                                  |       | —                          |       | — |   |
| Issuance of  floating rate notes                                                                     |       | 650,000                             |       |       |       | —                                  |       | —                          |       | — |   |
| Financing and  direct acquisition costs                                                              |       | (60,447                             | )          |       |       | —                                  |       | —                          |       | — |   |
| Premium paid for  derivative financial instrument                                                    |       | (700                                | )          |       |       | —                                  |       | —                          |       | — |   |
| Issuance of  common stock under stock incentive plans                                                |       | —                              |       |       |       | —                                  |       | 3,614                           |       | 8,649 |   |
| Federal tax  benefit from common stock issued under stock incentive plans                            |       | —                              |       |       |       | 4,298                                   |       | 492                             |       | 1,500 |   |
| Net increase in  borrowings under revolving credit facility                                          |       | 37,800                              |       |       |       | —                                  |       | —                          |       | — |   |
| Decrease  (increase) in treasury stock                                                               |       | —                              |       |       |       | 674                                     |       | (245                            | )          | 78 |   |
| Payments on  mortgage note                                                                           |       | (54                                 | )          |       |       | (10                                     | )          | (58                             | )          | (27 | ) |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |
| **Net cash provided by financing  activities**                                                       | ** ** | **1,277,249**                       | ** ** |       |       | **4,962**                               | ** ** | **3,803**                       | ** ** | **10,200** | ** ** |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                                        |       | (60                                 | )          |       |       | 125                                     |       | 161                             |       | 864 |   |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                |       | 12,526                              |       |       |       | (67,825                                 | )          | (45,851                         | )          | 67,880 |   |
| **Cash and cash equivalents at  beginning of period**                                                |       | —                              | ** ** |       |       | **158,158**                             | ** ** | **204,009**                     | ** ** | **136,129** | ** ** |
| **Cash and cash equivalents at  end of period**                                                      | ** ** | **$**                               | **12,526** | ** ** |       |                                    | **$**      | **90,333**                      | ** ** | **$** | **158,158** | ** ** | **$** | **204,009** | ** ** |
|                                                                                                 |       |                                |       |       |       |                                    |       |                            |       |   |   |

 

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| ** **                                                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** **                              | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **February 13, 2006**     | ** ** | ** ** | ** ** | **January 1,  2006 to ** | ** ** | ** **                      | ** ** |
| ** **                                                          | ** ** | **to December 30,  2006** | ** ** | ** ** | ** ** | **February 13,  2006**             | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** |
| ** **                                                          | ** ** | **Successor Entity**           | ** ** | ** ** | ** ** | **Predecessor  Entity**                 | ** ** | **Predecessor**

**Entity**     | ** ** | **Predecessor  Entity** | ** ** |
| ** **                                                          | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Supplemental  disclosure of cash flow information**               | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Cash  paid during the period for:**                               | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Interest (net of amounts capitalized)(2)                            |       | $                                   | 58,577     |       |       |                                    | $          | 135                             |       | $ | 4,851 |   | $ | 4,018 |   |
| Income taxes                                                        |       |                                |       |       |       |                                    |       |                            |       |   |   |
| Income taxes paid                                                   |       | $                                   | 42,010     |       |       |                                    | $          | 57                              |       | $ | 33,684 |   | $ | 21,105 |   |
| Income tax refunds                                                  |       | $                                   | (22,914    | )          |       |                                    | $          | —                          |       | $ | (875 | ) | $ | 698 |   |
|                                                                |       |                                |       |       |       |                                    |       |                            |       |   |   |
| **Non-cash  transactions:**                                         | ** ** | ** **                          | ** ** |       |       | ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Increase (decrease) in accrued additions to property  and equipment |       | $                                   | (1,940     | )          |       |                                    | $          | (3,180                          | )          | $ | (1,330 | ) | $ | 8,609 |   |
| Increase in goodwill due to purchase accounting  adjustments, net   |       | 1,845                               |       |       |       | —                                  |       | —                          |       | — |   |
| Unrealized loss  on hedge arrangements, net of tax                  |       | $                                   | 430        |       |       |                                    | $          | —                          |       | $ | — |   | $ | — |   |

----

(1)

In connection with the Merger, net cashsettlements of approximately $20.0 million and $4.4 million for stockoptions and restricted stock units, respectively, are included in “Acquisitionof the Company, net of cash acquired.”

(2)

Excludes $37,623 of deferredfinancing costs incurred in connection with the Merger.  Such costs are being charged-off to interestexpense over the life of the related financing commitments.

*See accompanying Notes to Consolidated FinancialStatements.*

 

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**1. Business**

LinensHolding Co., a Delaware corporation, together with its wholly ownedconsolidated subsidiaries, including Linens ‘n Things, Inc. and Linens ‘nThings Center, Inc. (collectively, the “Company”), is an entity that was formedin connection with the February 2006 acquisition of all of the outstandingshares of common stock of Linens ‘n Things, Inc. for $28.00 per share in cash,without interest, for aggregate consideration of approximately$1.3 billion (see Note 3 to the Consolidated Financial Statements foradditional details about the acquisition of Linens ‘n Things, Inc. byLinens Holding Co.).

TheCompany operates in one segment, the retail industry, and had 571 stores in 47states across the United States and in six provinces in Canada as ofDecember 30, 2006. The Company’s stores offer a broad assortment of hometextiles, housewares and home accessories, carrying both national brands andprivate label goods.

**2.Summary of Significant Accounting Policies**

***Basis of Presentation***

Theaccompanying consolidated financial statements present the financial positionof successor entity Linens Holding Co. and its wholly owned subsidiaries (the “Successor”or “Successor Entity”), and predecessor entity Linens ‘n Things, Inc.and its wholly owned subsidiaries (the “Predecessor” or “Predecessor Entity”),as of December 30, 2006 and December 31, 2005 and the results of operations andcash flows for the respective periods then ended as presented in thestatements.  All significant intercompanybalances and transactions have been eliminated.

Theconsolidated financial statements presented as of December 30, 2006 and for theperiod from February 14, 2006 through December 30, 2006 represent the“Successor Entity.”  The consolidatedfinancial statements presented as of December 31, 2005 and for the periodJanuary 1, 2006 to February 13, 2006 and for the fiscal years endedDecember 31, 2005 and January 1, 2005 represent the “predecessor entity.”

TheCompany has not presented separate financial statements for Linens ‘n Things,Inc. and its subsidiaries or Linens ‘n Things Center, Inc. and its subsidiaries(collectively, the issuers as described in Note 18) because management hasdetermined that the differences in such financial statements are minor.

***Reclassifications and Immaterial Adjustments***

Certainprior period amounts have been reclassified to conform to the current periodpresentation.  Additionally, the Companycorrected its reporting of additions to property and equipment on theconsolidated statements of cash flows to exclude accrued additions.  These corrections increased (reduced)additions to property and equipment with an offsetting adjustment to net cashprovided by (used in) operating activities by $3.2 million for the periodJanuary 1, 2006 to February 13, 2006, $1.3 million in fiscal 2005 and $(8.6)million in fiscal 2004.

***Adoption of Staff Accounting Bulletin No. 108***

InSeptember 2006, the SEC staff issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SABNo. 108”).  This SAB providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment.  SAB No. 108 establishesan approach that requires quantification of financial statement errors based onthe effects on each of the Company’s financial statements and related financialstatement disclosures.  The SAB permitsexisting public companies to record the cumulative effect of initially applyingthis approach in the first year ending after November 15, 2006 by recordingthe necessary correcting adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of

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retainedearnings.  Additionally, the use of thecumulative effect transition method requires detailed disclosure of the natureand amount of each individual error being corrected through the cumulativeadjustment and how and when it arose.  AtDecember 31, 2006, the Company recorded an adjustment under SAB No. 108.

Thetransition provisions of SAB No. 108 permit the Company to adjust for thecumulative effect on retained earnings of immaterial errors relating to prioryears.  SAB No. 108 also requiresthe adjustment of any prior quarterly financial statements within the fiscalyear of adoption for the effects of such errors on the quarters when theinformation is next presented.  Suchadjustments do not require previously filed reports with the SEC to be amended.

TheCompany adopted SAB No. 108 effective the beginning of the 52-week periodended December 30, 2006.  Inaccordance with the requirements of SAB No. 108, the Company has adjustedthe opening retained earnings of its Predecessor Entity for 2006 in theaccompanying consolidated financial statements for an adjustment to its netdeferred income tax liability.

At theend of 2006 the Company re-evaluated its deferred income tax asset andliability balances.  This review resultedin a determination that the Company’s noncurrent deferred income tax liabilityfor depreciation was overstated by approximately $10.4 million and other netcurrent deferred tax liabilities were overstated by approximately $1.1 millionfor an aggregate amount of $11.5 million. Consequently the Company recorded an adjustment to decrease its net deferredincome tax liability and increase opening retained earnings of its PredecessorEntity by approximately $11.5 million. The adjustment had no impact on income tax expense.  The adjustment was due to the carryoverimpact of excess deferred income tax liabilities from prior years which hadaccumulated over a period of years prior to 2002.  The Company considers this adjustment to beimmaterial as it did not impact the Consolidated Statements of Operations andthe adjustment to the excess deferred tax liability was not material to theConsolidated Balance Sheets in prior periods.

The cumulative effect ofthe adjustment above on the opening balances of the Predecessor Entity’sbalance sheet is as follows (in thousands):

| Balance Sheet Account Adjusted  Increase (Decrease) | ** ** | **Assets** | ** ** | **Liabilities   and   Shareholders’   Equity** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|
| Retained  earnings                                                      | ** ** | **$**      | **—** |                                                               | $          | 11,450 |   |
| Noncurrent  deferred income taxes                                       | ** ** | **—** |       | (10,371                                                            | )          |
| Current deferred  income taxes                                          |       | 1,079      | ** ** | **—**                                                         | ** ** |
| Total                                                                   |       | $          | 1,079      |                                                               | $          | 1,079 |   |

 

***Fiscal Periods***

The Company utilizes a 52/53-week period ending on theSaturday nearest the last day of December. However, because of the Merger (see note 3 to the consolidated financialstatements), the presentation of fiscal 2006 financial position, results of operationsand cash flow has been segregated between the Successor Entity and PredecessorEntity.  Fiscal years 2006, 2005 and 2004were each 52-week periods.

***Revenue Recognition***

TheCompany recognizes revenue at the time merchandise is purchased by customers atits retail stores and when shipped for merchandise purchased from its websiteor ordered by telephone.  Shipping termsfor merchandise purchased from its website or ordered by telephone are FOBshipping point and title passes to the customer upon delivery of themerchandise to the carrier. Shipping and handling fees billed to customers in asale transaction are included in sales.

Revenuefrom gift cards, gift certificates and merchandise credits are recognized whenredeemed. As part of the Company’s private-label credit card (“PLCC”) program,when customers purchase merchandise 

60

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usingtheir PLCC they earn points that enable them to receive future free ordiscounted merchandise once they reach certain purchase thresholds. The valueof these points is accrued for on each PLCC purchase net of an estimate forpoints never to be redeemed. The resulting net value of these points isreflected as an increase in cost of goods sold in the consolidated statementsof operations.

Provisionsfor estimated future sales returns are recorded in the period that the relatedsales are recorded. The Company determines the amount of provision based onhistorical information. Sales discounts, coupons, cash rebates and othersimilar incentives are recorded as a reduction of sales in the period when therelated sales are recorded. The Company periodically offers rebate programs inwhich customers receive either a check or a gift card upon receipt of anapproved rebate claim form. During the promotion period for each respectiverebate promotion, the Company accrues the total amount eligible to be disbursedat the time each item is sold. During the period when the related qualifyingsales subject to rebate are recorded, the Company records cash rebates earnedas a reduction of sales and gift cards to be awarded as an increase to cost ofsales in the consolidated statements of operations.

***Sales Tax Recognition***

Inaccordance with local laws, the Company collects sales tax on merchandisepurchased by customers.  Sales taxcollections are presented in the accompanying consolidated statements ofoperations on a net basis (excluded from revenues).

***Inventories***

Inventoriesconsist of the cost of finished goods purchased from domestic and foreignvendors, including inbound freight and other importation costs, productdevelopment costs and certain vendor allowances. Inventories are carried at thelower of cost or market; cost is determined by the retail inventory method ofaccounting. Amounts are removed from inventory at their weighted average cost.

***Deferred Rent***

TheCompany accrues for scheduled rent increases contained in its leases on astraight-line basis over the expected lease term, beginning when the Companyfirst obtains possession of the premises, including cancelable option periodsin those instances where exercising such options is reasonably assured at theinception of the lease.

***Store Opening and Closing Costs***

New storeopening costs are charged to expense as incurred. Certain legal andconstruction-related overhead costs are capitalized. Store opening costsprimarily include rent, store payroll and general operating costs incurredprior to the store opening.

Prior tothe adoption of Statement of Financial Accounting Standards No. 146 (“SFASNo. 146”), *“Accounting for Costs Associated with Exitor Disposal Activities,”* in the event a store was closed before itslease expired, the remaining lease obligation, less anticipated sublease rentalincome, and asset impairment charges related to improvements and fixtures,inventory writedowns and other miscellaneous closing costs, were provided forin the period in which management determined to close the store. In fiscal2001, the Company recorded a pre-tax restructuring and asset impairment chargeof $37.8 million related to the closing of certain under-performing stores(see note 4 to the consolidated financial statements). As ofDecember 30, 2006 and December 31, 2005, the Company had $3.6 millionand $5.4 million, respectively, remaining related to this reserve relatedprimarily to lease obligations.

TheCompany has adopted the provisions of SFAS No. 146 for exit or disposalactivities, if any, initiated after December 31, 2002. SFAS No. 146requires the Company to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan.

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***FinancialInstruments***

Cashand cash equivalents, accounts receivable, accounts payable and accruedexpenses are reflected in the consolidated financial statements at carryingvalues which approximate fair value due to the short-term nature of theseinstruments.  The carrying amount forborrowings under the Company’s revolving credit facility approximates fairvalue because of the variable market interest rate charged to the Company forthese borrowings.  The fair value of theCompany’s Notes is determined based on quoted bid prices.  As of December 30, 2006, the fair value ofthe Company’s $650 million senior secured notes is approximately $622.4million.

***Cash and Cash Equivalents***

Cashequivalents are considered to be those securities with maturities of threemonths or less when purchased. The Company’s cash management program utilizeszero balance disbursement accounts. Accordingly, outstanding checks have beenreclassified to accounts payable or accrued expenses and other currentliabilities in the consolidated balance sheets. Such outstanding checksincluded in accounts payable totaled $24.6 million and $67.2 millionat December 30, 2006 and December 31, 2005, respectively, and outstandingchecks included in accrued expenses and other current liabilities totaled$45.7 million and $29.5 million at December 30, 2006 andDecember 31, 2005, respectively.

***BusinessCombination***

OnFebruary 14, 2006, the Company acquired all of the outstanding common stock ofthe Company’s predecessor entity, Linens ‘n Things, Inc., for total cashconsideration of approximately $1.3 billion. The acquisition of Linens ‘n Things, Inc. was accounted for as abusiness combination in accordance with the provisions set forth in SFASNo. 141, *“Business Combinations”* using the purchase method ofaccounting, whereby the purchase price (including liabilities assumed) waspreliminarily allocated to the assets acquired based on their estimated fairmarket values at the date of acquisition. The purchase price paid by Linens Holding Co. to acquire the Company andrelated preliminary purchase accounting adjustments were “pushed down” andrecorded in Linens ‘n Things, Inc. and its subsidiaries’ financial statementsand resulted in a new basis of accounting for the “Successor” period beginningon the day the acquisition was completed. The purchase price and related costs were preliminarily allocated to theestimated fair values of the assets acquired and liabilities assumed at thetime of the acquisition based on management’s best estimates, which were basedin part on the work of third-party appraisers engaged to perform valuations ofcertain of the tangible and intangible assets acquired.  The allocation of the purchase price may be adjustedwithin one year following the date of the business combination.  The Company’s assets and liabilities wereadjusted to fair value as of the closing date of the Transactions (see note 3to the consolidated financial statements), and the excess of the total purchaseprice over the fair value of the Company’s net assets was allocated togoodwill.

***Property and Equipment***

Additionsto property and equipment are stated at cost. Depreciation and amortization is computed on a straight-line basis overthe estimated useful lives of the assets (5 to 10 years for furniture,fixtures and equipment and 3 to 5 years for computer hardware and capitalizedsoftware costs). Leasehold improvements are amortized over the lesser of theexpected useful life and expected lease term, including cancelable optionperiods in those instances where exercising such options is reasonably assuredat the inception of the lease.

Maintenance andrepairs are charged directly to expense as incurred. Major renewals orreplacements are capitalized after making the necessary adjustments to theasset and accumulated depreciation accounts of the items renewed or replaced.

***Impairment of Long-Lived Assets (including Goodwill)***

Inaccordance with SFAS No. 144, *“Accounting for Impairmentor Disposal of Long-Lived Assets,”*long-lived assets, such asproperty and equipment and purchased intangible assets subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be fully recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, an impairment charge is 

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recognizedfor the amount that the carrying value of the asset exceeds the fair value ofthe asset, which is determined by discounting the future cash flows expected tobe generated by the asset.

Inaccordance with SFAS No. 142, *“Goodwill and OtherIntangible Assets,”* goodwill and intangible assets that haveindefinite useful lives are tested annually for impairment. These assets aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value.  For goodwill, the impairment determination ismade at the reporting unit level and consists of two steps. First, the Companydetermines the fair value of a reporting unit and compares it to its carryingamount. Second, if the carrying amount of a reporting unit exceeds its fairvalue, an impairment loss is recognized for any excess of the carrying amountof the reporting unit’s goodwill over the implied fair value of the goodwill.The implied fair value of goodwill is determined by allocating the fair valueof the reporting unit in a manner similar to a purchase price allocation, inaccordance with SFAS No. 141*.*  The residual fair value after this allocationis the implied fair value of the reporting unit goodwill.

***Deferred Charges***

Deferredcharges, principally lease acquisition fees, are amortized on a straight-linebasis, generally over the expected lease term, beginning when the Company firstobtains possession of the premises, including cancelable option periods inthose instances where exercising such options is reasonably assured at theinception of the lease.

***Costs of Sales***

Inaddition to the cost of inventory sold, the Company includes its buying anddistribution expenses in its cost of sales. Buying expenses include all directand indirect costs to procure merchandise. Distribution expenses include thecost of operating the Company’s distribution centers and freight expenserelated to transporting merchandise.

***Selling, General and Administrative Expenses***

Otherselling, general and administrative expenses (“SG&A”) in the consolidatedstatements of operations include store payroll and selling expenses, storeoccupancy costs, advertising and other corporate expenses.

***Vendor Allowances***

TheCompany receives various types of allowances from its merchandise vendors,which are based on negotiated terms, to cover costs such as freight expense,markdowns and advertising. These allowances are recorded as an offset to theexpense as incurred or when the merchandise is sold, as applicable, and isreflected as a reduction of cost of sales in accordance with the provisions ofthe Emerging Issues Task Force Issue No. 02-16, *“Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor”* (“EITF 02-16”).

EITF02-16 states that cash consideration received from a vendor is presumed to be areduction of the prices of the vendor’s products or services and should,therefore, be characterized as a reduction of cost of merchandise sold whenrecognized in the Company’s consolidated statement of operations. Thatpresumption may be overcome when the consideration is either a reimbursement ofspecific, incremental and identifiable costs incurred to sell the vendor’sproducts, or a payment for assets or services delivered to the vendor.  In accordance with EITF 02-16, the Companytreats certain funds received from vendors as a reduction to the cost ofinventory and, as a result, these funds are recognized as a reduction to costof merchandise sold when the inventory is sold. Vendor allowances, which arereflected as a reduction of inventory, and vendor purchase discounts areamortized to reduce cost of sales on an inventory turn basis.

***AdvertisingCosts***

TheCompany expenses the production costs of advertising at the commencement dateof the advertisement. Advertising costs, recorded as a component of SG&A,were $115.0 million for the period February 14, 2006 to December 30, 2006and $12.0 million for the period January 1, 2006 to February 13, 2006.Advertising costs were $114.0 million and $103.5 million for fiscal2005 and fiscal 2004, respectively.

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***Income Taxes***

TheCompany uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to the differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to be applied to taxable income inthe year in which temporary differences are expected to be recovered or settled.  Theeffect of a change in tax rates on deferred tax assets and liabilities isrecognized in the consolidated statement of operations in the period thatincludes the enactment date.

***Stock-Based Compensation***

OnJanuary 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), *“Share-Based Payment”* (“SFAS No. 123 (Revised 2004)”),requiring the recognition of compensation cost for all equity classified awardsgranted, modified or settled after the effective date and for the unvestedportion of awards outstanding as of the effective date using the fair-valuemeasurement method.

Prior toadopting SFAS No. 123 (Revised 2004), the Company accounted for its share-basedcompensation plans using the intrinsic value method prescribed under theprovisions of Accounting Principles Board Opinion No. 25, as permitted underSFAS No. 148, *“Accounting for Stock-Based Compensation -Transition and Disclosure - an amendment of FASB Statement No. 123.”* During fiscal 2005 and fiscal 2004, the Company recognized compensation expensefor restricted stock unit awards over the related service period in theconsolidated statements of operations, but did not recognize compensationexpense for stock options, since the Company’s stock options have been grantedat fair market value on the date of grant.

Inconnection with the adoption of SFAS No. 123 (Revised 2004) the Company electedthe modified prospective method of transition; accordingly, prior periods havenot been restated.  During the periodJanuary 1, 2006 to February 13, 2006, the Company did not grant any stock options.   Upon completion of the Merger (see note 3 tothe consolidated financial statements) and in accordance with the terms of thestock plans, all of the outstanding stock options and restricted stock unitsbecame fully vested and immediately exercisable.  Accordingly, under SFAS No. 123 (Revised2004) the Company recorded share-based compensation expense for the entireportion of previously granted share-based awards that remained unvestedat the date of the adoption.

OnFebruary 14, 2006, the board of directors and stockholders of LinensHolding Co. adopted the Linens Holding Co. Stock Option Plan (the “Plan”).  Under the Plan, the Company grants stockoptions for a fixed number of shares to key employees and directors.  The Company recognizes the cost of all time-basedemployee stock option grants on a straight-line attribution basis and the costof all performance-based employee stock options on an accelerated basisin accordance with Financial Accounting Standards Board Interpretation No. 28, *“Accounting for Stock Appreciation Rights and Other Variable StockOption or Award Plans”* over their respective vesting periods, net ofestimated forfeitures.  There are norestricted stock units under the Plan.

***DerivativeFinancial Instruments***

Inaccordance with SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”* (“SFAS No. 133”), as amended,the Company designated certain derivative instruments entered into on July 7,2006 as cash flow hedges and recognizes the fair value of the instruments onthe consolidated balance sheet.  Gainsand losses related to a hedge and that result from changes in the fair value ofthe hedge are either recognized in income to offset the gain or loss on thehedged item, or deferred and reported as a component of accumulated othercomprehensive (loss) income in stockholders’ equity on the consolidated balancesheet and subsequently recognized in income when the hedged item affects netincome.  The ineffective portion of thechange in fair value of a hedge is recognized in income immediately.  There was no hedge ineffectiveness during theperiod from inception of the derivative arrangement on July 7, 2006 to December30, 2006.

***Use of Estimates in the Preparation of Financial Statements***

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts and 

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timing of revenues and ofexpenses during the reporting periods. The Company bases its estimates on historical experience and on otherassumptions that it believes to be relevant under the circumstances, theresults of which form the basis for making judgments about the carrying valueof assets and liabilities that are not readily apparent from other sources. TheCompany’s management believes the following critical accounting estimatesinvolve significant estimates and judgments inherent in the preparation of theconsolidated financial statements.  TheCompany bases these estimates on historical results and various otherassumptions believed to be reasonable at the time.

*BusinessCombination*

On February 14,2006, the Company acquired all of the outstanding common stock of the Company’spredecessor entity, Linens ‘n Things, Inc., for total cash consideration ofapproximately $1.3 billion.  Theacquisition of Linens ‘n Things, Inc. was accounted for as a businesscombination using the purchase method of accounting, whereby the purchase price(including liabilities assumed) was preliminarily allocated to the assetsacquired based on their estimated fair market values at the date ofacquisition.  The purchase price paid byLinens Holding Co. to acquire the Company and related preliminary purchaseaccounting adjustments were “pushed down” and recorded in Linens ‘n Things,Inc. and its subsidiaries’ financial statements and resulted in a new basis ofaccounting for the “successor” period beginning on the day the acquisition wascompleted.  As a result, the purchaseprice and related costs were preliminarily allocated to the estimated fairvalues of the assets acquired and liabilities assumed at the time of the acquisitionbased on management’s best estimates, which were based in part on the work ofthird-party appraisers engaged to perform valuations of certain of the tangibleand intangible assets acquired.  Inessence, the Company’s assets and liabilities were adjusted to fair value as ofthe closing date of the Transactions, and the excess of the total purchaseprice over the fair value of the Company’s net assets was allocated togoodwill.

*Valuationof Inventory*

Inventories are valued using the lower of cost or market value,determined by the retail inventory method (“RIM”).  Under RIM, the valuation of inventories atcost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio to the retail value of inventories.  RIM is an averaging method that is used inthe retail industry due to its practicality. Inherent in RIM calculations are certain significant managementjudgments and estimates including, among others, merchandise mark-on, mark-up,markdowns and shrinkage based on historical experience between the dates ofphysical inventories, all of which significantly impact the ending inventoryvaluation at cost.  The methodologiesutilized by the Company in its application of RIM are consistent for allperiods presented.  Such methodologiesinclude the development of the cost-to-retail ratios, the development ofshrinkage reserves and the accounting for price changes.  At any one time, inventories include itemsthat have been written down to the Company’s best estimate of their realizablevalue.  Factors considered in estimating realizable value include the ageof merchandise and anticipated demand.  Actual realizable value coulddiffer materially from this estimate based upon future customer demand oreconomic conditions.

*SalesReturns*

The Companyestimates future sales returns and records a provision in the period that therelated sales are recorded based on historical return rates.  Should actual returns differ from the Company’sestimates, the Company may be required to revise estimated sales returns.  Although these estimates have not variedmaterially from historical provisions, estimating sales returns requiresmanagement judgment as to changes in preferences and quality of products beingsold, among other things; therefore, these estimates may vary materially in thefuture.  The sales returns calculationsare regularly compared with actual return experience.  In preparing its consolidated financial statementsas of December 30, 2006 and December 31, 2005, the Company’s sales returnsreserve was approximately $5.9 million and $7.1 million, respectively.

*Impairmentof Long-Lived Assets (including Goodwill)*

Long-livedassets, such as property and equipment and purchased intangible assets subjectto amortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not be fullyrecoverable.  Recoverability of assets tobe held and used is measured by a comparison of the carrying amount of an assetto estimated undiscounted future cash flows expected to be generated by theasset.  If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized for the amount that the carrying value of the asset exceeds the fairvalue of the asset, which is determined by discounting the future cash flowsexpected to be generated by the asset.

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Goodwilland intangible assets that have indefinite useful lives are tested annually forimpairment.  These assets are tested forimpairment more frequently if events and circumstances indicate that the assetmight be impaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.

TheCompany’s judgments regarding the existence of impairment indicators are basedon market conditions and operational performance.  Future events could cause the Company toconclude that impairment indicators exist and that the value of long-livedassets and goodwill is impaired.  As ofDecember 30, 2006 and December 31, 2005, the Company’s net book value forproperty and equipment was approximately $530.8 million and $612.2 million,respectively, goodwill was approximately $267.8 million and $18.1 million,respectively, and identifiable intangible assets, net was $150.0 million and$1.3 million, respectively.  The increasein goodwill and identifiable intangible assets, net was primarily due to theacquisition of the Predecessor in February 2006.

Duringthe periods February 14, 2006 to December 30, 2006, fiscal 2005 and fiscal2004, the Company determined that the carrying value of certain assets exceededtheir related estimated future undiscounted cash flows.  As a result, the Company reduced the carryingvalue of property and equipment to their fair value by approximately $28.0million, $4.1 million and $0.9 million for the periods February 14, 2006 toDecember 30, 2006, fiscal 2005 and fiscal 2004, respectively.  The related impairment loss was recognized inselling, general and administrative expenses on the company’s consolidatedstatement of operations.  In addition,during the period February 14, 2006 to December 30, 2006, the Company reducedthe carrying value of favorable leases included in identifiable intangibleassets, net by approximately $3.1 million with a corresponding charge toselling, general and administrative expenses.

*StoreClosure Cost*

Infiscal 2001, the Company recorded a pre-tax restructuring and asset impairmentcharge of $37.8 million ($23.7 million after-tax) related to the closing ofcertain under-performing stores.  As ofDecember 30, 2006 and December 31, 2005, the Company had $3.6 million and $5.4million, respectively, remaining related to this reserve.  The Company has closed all of the initiallyidentified stores other than one store, which the Company decided to keep openand whose reserve was reversed.  TheCompany continues to negotiate and/or explore lease buyouts or subleaseagreements for certain of these stores as well as evaluates reopening stores previouslyclosed.  Final settlement of thesereserves is predominantly a function of negotiations with unrelated thirdparties, and, as such, these estimates may be subject to change in the future.

*Self-Insurance*

TheCompany purchases third-party insurance for workers’ compensation, medical andgeneral liability costs that exceed certain limits for each type of insuranceprogram.  The Company is responsible forthe payment of claims under these insured excess limits.  The Company establishes accruals for itsinsurance programs based on available claims data and historical trend andexperience, as well as loss development factors for its medical insuranceprepared with the assistance of third party actuaries.  Workers’ compensation is recorded at its netpresent value.  In preparing theestimates, the Company also considers the nature and severity of the claims,analysis provided by third party claims administrators, as well as currentlegal, economic and regulatory factors.

TheCompany evaluates the accrual and the underlying assumptions periodically andmakes adjustments as needed. The ultimate cost of these claims may vary fromthe established accrual.  While theCompany believes that the recorded amounts are adequate, there can be noassurance that changes to management’s estimates will not occur due tolimitations inherent in the estimate process. In the event the Company determines the accruals should be increased orreduced, the Company would record such adjustments in the period in which suchdetermination is made.

Theaccrued obligation for these self-insurance programs was approximately$16.2 million as of December 30, 2006 and $14.7 million for fiscalyear 2005.

*Share-basedCompensation*

OnJanuary 1, 2006, the Company adopted SFAS No. 123 (Revised 2004),requiring the recognition of compensation cost for all equity classified awardsgranted, modified or settled after the effective date and for the unvestedportion of awards outstanding as of the effective date using the fair-valuemeasurement method.

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Prior toadopting SFAS No. 123 (Revised 2004), the Company accounted for its share-basedcompensation plans under the provisions of Accounting Principles Board OpinionNo. 25, as permitted under SFAS No. 148, *“Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123.”*  During fiscal 2005 and fiscal 2004, theCompany recognized compensation expense for restricted stock unit awards overthe related service period in the Consolidated Statements of Operations, butdid not recognize compensation expense for stock options, since the Company hashistorically treated its stock options as having been granted at fair marketvalue on the date of grant.

Inconnection with the adoption of SFAS No. 123 (Revised 2004) the Company electedthe modified prospective method of transition; accordingly, prior periods havenot been restated.  Upon completion ofthe Merger and in accordance with the terms of the stock plans, all of theoutstanding stock options and restricted stock units became fully vested andimmediately exercisable.  Each option wasexercised and the holder was paid for each option an amount equal to the excessof $28.00 over the underlying stock option exercise price, less applicablewithholding taxes.  Each restricted stockunit award was exercised at $28.00 in cash, without interest, less applicablewithholding taxes.  Accordingly, underSFAS No. 123 (Revised 2004) the Company recorded share-based compensationexpense for the entire portion of previously granted share-based awardsthat remained unvested at the date of the adoption.

OnFebruary 14, 2006, the board of directors and stockholders of LinensHolding Co. adopted the Linens Holding Co. Stock Option Plan (the “Plan”).  Under the Plan, the Company grants stockoptions for a fixed number of shares to key employees and directors.  The Company recognizes the cost of all time-basedemployee stock option grants on a straight-line attribution basis and the costof all performance-based employee stock options on an acceleratedbasis.  There are no restricted stockunits under the Plan.

Eachoption was exercised, equal to the excess of $28.00 over the underlying stockoption exercise price, less applicable withholding taxes.  Each restricted stock unit award wasexercised at $28.00 in cash, without interest, less applicable withholdingtaxes.

TheCompany, with the assistance of an independent third party, uses the MonteCarlo simulation option-pricing model for estimating the fair value ofperformance-based options and the Black-Scholes option-pricing modelfor time-based options issued under the Plan. Both models include various assumptions, including the expected life ofstock options, the expected volatility and the expected risk-free interestrate.  These assumptions reflect the Company’s best estimates, but theyinvolve inherent uncertainties based on certain conditions generally outsidethe control of the Company.  As a result,if other assumptions had been used, total share-based compensation cost, asdetermined in accordance with SFAS No. 123 (Revised 2004) could have beenmaterially impacted.  Furthermore, if theCompany uses different assumptions for future grants, share-based compensationcost could be materially impacted in future periods.

UnderSFAS No. 123 (Revised 2004), the Company is also required to record share-basedcompensation expense net of estimated forfeitures.  The Company’s forfeiture rate assumption usedin determining its share-based compensation expense is estimated, primarilybased upon historical data.  The actualforfeiture rate could differ from these estimates.

*DerivativeFinancial Instruments*

TheCompany has designated certain derivative instruments entered into on July 7,2006 as cash flow hedges and recognizes the fair value of the instruments onthe consolidated balance sheet.  Gainsand losses related to a hedge and that result from changes in the fair value ofthe hedge are either recognized in income to offset the gain or loss on thehedged item, or deferred and reported as a component of accumulated othercomprehensive (loss) or income in stockholders’ equity on the consolidatedbalance sheet and subsequently recognized in income when the hedged itemaffects net income.  The ineffectiveportion of the change in fair value of a hedge is recognized in income immediately.  There was no hedge ineffectiveness during theperiod from inception of the derivative arrangement on July 7, 2006 to December30, 2006.

*IncomeTaxes*

TheCompany uses the asset and liability method to account for its incometaxes.  Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to the differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax 

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ratesexpected to be applied to the taxable income in the year in which temporarydifferences are expected to be recovered or settled.  The effect of achange in tax rates on deferred tax assets and liabilities is recognized in thestatement of operations in the period that includes the enactment date.

Determiningthe provision for income taxes and related accruals, deferred tax assets anddeferred tax liabilities requires judgment. There are transactions and calculations arising in the ordinary courseof business where the ultimate tax outcome is uncertain.  Additionally,tax returns filed by the Company are subject to audit by various taxauthorities. Although the Company believes that its estimates are reasonable,actual results could differ from these estimates.

*Litigation*

The Companyrecords an estimated liability related to various claims and legal actionsarising in the ordinary course of business, which is based on available informationand advice from outside counsel where applicable.  As additional information becomes available,the Company assesses the potential liability related to its pending claims andmay adjust its estimates accordingly.

**3.Acquisition of Linens ‘n Things, Inc. by Linens Holding Co.**

OnNovember 8, 2005, Linens Merger Sub Co. and its parent company, LinensHolding Co., entered into an Agreement and Plan of Merger with Linens ‘n Things, Inc.governing a merger (the “Merger”) pursuant to which each share of common stockof Linens ‘n Things, Inc. (other than shares held in treasury orowned by Linens Merger Sub Co., its parent company or any affiliate of LinensMerger Sub Co. and other than shares held by stockholders who properly demandedand perfected appraisal rights) would be converted into the right to receive$28.00 in cash, without interest, for aggregate consideration of approximately$1.3 billion. The Merger was structured as a reverse subsidiary merger,and on February 14, 2006 Linens Merger Sub Co. was merged with and intoLinens ‘n Things, Inc., with Linens ‘n Things, Inc. as thesurviving corporation.  As the survivingcorporation in the Merger, Linens ‘n Things, Inc. assumed byoperation of law all of the rights and obligations of Linens Merger Sub Co.,including $650 million aggregate principal amount of Senior SecuredFloating Rate Notes (the “Notes”) due 2014 of Linens ‘n Things, Inc.and Linens ‘n Things Center, Inc. (collectively, the “Issuers”) andthe related indenture. Linens ‘n Things Center, Inc., a direct whollyowned subsidiary of Linens ‘n Things, Inc., is a co-issuer of theNotes.

Affiliatesof Apollo Management, L.P., National Realty & Development Corp. andSilver Point Capital Fund Investments LLC (the “Sponsors”) collectivelycontributed approximately $648 million as equity to Linens Merger Sub Co.immediately prior to the Merger.

TheSponsors financed the purchase of Linens ‘n Things, Inc. and paidrelated fees and expenses through the offering of the Notes, the equityinvestment described above and excess cash on hand at Linens ‘n Things, Inc.  Linens ‘n Things, Inc. did not drawon its new asset-based revolving credit facility at closing.

Thesetransactions, including the Merger and payment of any costs related to thesetransactions, are collectively referred to herein as the “Transactions.”  In connection with the Transactions, Linens‘n Things, Inc. incurred significant indebtedness and became highlyleveraged.

Immediatelyfollowing the Merger, Linens ‘n Things, Inc. became a wholly ownedsubsidiary of Linens Holding Co.  LinensHolding Co. is an entity that was formed in connection with the Transactionsand has no assets or liabilities other than the shares of Linens Merger Sub Co.and its rights and obligations under and in connection with the mergeragreement with Linens ‘n Things, Inc. and the equity commitmentletters and debt financing commitment letters provided in connection with theTransactions.

Theclosing of the Merger occurred on February 14, 2006 simultaneously with:

·      the closing ofthe Note offering;

·      the closing ofLinens ‘n Things, Inc.’s new $600 million asset-based revolvingcredit facility;

·      thetermination of Linens ‘n Things, Inc.’s existing $250 millionunsecured revolving credit facility and CAD $40 million unsecured creditfacility agreements; and

·      the equityinvestments described above.

 

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The consummation of the Notesoffering was conditioned upon the consummation of the Merger, the closing ofLinens ‘n Things, Inc.’s new asset-based revolving credit facilityand the equity investments described above, all of which were completed onFebruary 14, 2006.

The Notes bear interest at aper annum rate equal to LIBOR plus 5.625%, which is paid every three months onJanuary 15, April 15, July 15 and October 15, commencingApril 15, 2006.  The interest rateon the Notes is reset quarterly.  TheNotes mature on January 15, 2014.

On July 7, 2006 the Issuersentered into a zero cost interest rate collar agreement (the “Collar Agreement”)to hedge the cash flows associated with the LIBOR component of the interestrate on the Notes.  On July 7, 2006 theIssuers also purchased a one-year forward-starting interest rate cap agreement(the “Cap Agreement”) which takes effect on January 15, 2008 (see Note 11 tothe Consolidated Financial Statements for disclosures regarding thesederivatives).

The Notes are fully andunconditionally guaranteed, jointly and severally, on a senior basis by theCompany and by each of the Company’s direct and indirect subsidiaries (otherthan the Issuers) that guarantee Linens ‘n Things, Inc.’s newasset-based revolving credit facility except for its Canadian subsidiaries(collectively, the “Note Guarantors”).

All obligations under theNotes, and the guarantees of those obligations, are secured by first-priorityliens, subject to permitted liens, on all of the Company’s, the Issuers’ andthe Note Guarantors’ equipment, intellectual property rights and relatedgeneral intangibles and the capital stock of the Issuers and certain of thesubsidiaries.

The lien on capital stock maybe released under certain circumstances. As a result of the filing and effectiveness of a registration statementon Form S-4, and amendment thereto, with the SEC with respect to the Notes,the Issuers and the Note Guarantors became subject to applicableSEC rules with respect to information required to be included in the prospectusin the registration statement.  To the extent that the securities ofany Issuer or Guarantor constitute collateral for the Notes and thevalue of the securities equals or exceeds 20% of the principal amount, or$130 million of the Notes, separate financial statements ofthe Issuer or Guarantor would be required under these SECrules to be included in the Company’s SEC filings. The indenture that governs the Notes provides, however, with respect toany direct or indirect subsidiary of Linens ‘n Things, Inc., that thesecurities of the subsidiary are released from the lien on capital stockon the date that the lien triggers this separate financial statementrequirement.  Accordingly, for any subsidiary with securities thatequal or exceed the 20% threshold, the lien on the capital stock securing theNotes has been released with respect to those securities.  The lien on thecapital stock of Linens ‘n Things, Inc. remains in place.

The Notes and guarantees arealso secured by second-priority liens, subject to permitted liens, on all ofthe Issuers’ and the Note Guarantors’ inventory, accounts receivable, cash,securities and other general intangibles.

If the Issuers sell certainassets or experience specific kinds of changes in control, the Issuers mustoffer to repurchase the Notes.  TheIssuers may, at their option, redeem the Notes at any time on or afterJanuary 15, 2008 at pre-determined prices. Prior to January 15, 2008, the Issuers may, at their option, redeemup to 35% of the Notes with the proceeds of certain sales of its equity or ofits subsidiaries.  Prior toJanuary 15, 2008, the Issuers may, at their option, redeem the Notes at aprice equal to 100% of the principal amount of the Notes plus a “make-whole”premium amount which cannot be quantified as it is dependent on factors thatare not yet determinable.

Linens ‘n Things, Inc.’s newasset-based revolving credit facility (the “Credit Facility”) provides seniorsecured financing of up to $600 million, subject to a borrowing base.  The borrowing base is a formula based oncertain eligible inventory and receivables, minus certain reserves.  A portion of the Credit Facility, not toexceed $40 million, is also available to Linens ‘n Things CanadaCorp. subject to the Canadian borrowing base. The Credit Facility requires the Company to comply with financial ratiomaintenance covenants if the excess availability under the Credit Facility, atany time, does not exceed $75 million and also contains certain customaryaffirmative covenants and events of default. The principal amount outstanding of the loans under the Credit Facility,plus interest accrued and unpaid thereon, will be due and payable in full atmaturity, five years from February 14, 2006, the date of closing of theTransactions.

All obligations under theCredit Facility are unconditionally guaranteed by the Company and certain ofits existing and future domestic subsidiaries. All obligations under the Credit Facility, and the guarantees of 

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thoseobligations, are secured, subject to certain exceptions, by substantially allof the assets of the borrowers, consisting of Linens ‘n Things, Inc., Linens ‘nThings Center, Inc. and Linens ‘n Things Canada Corp. (collectively, the “Borrowers”),and the subsidiary guarantors, including: (i) a first-priority securityinterest in inventory, accounts receivable, cash, securities and other generalintangibles; and (ii) a second-priority security interest in equipment,intellectual property rights and related general intangibles and all of thecapital stock of Linens ‘n Things, Inc. and the capital stock of certainsubsidiaries.

Borrowings under the CreditFacility bear interest at a rate equal to, at the Borrowers’ option, either(a) an alternate base rate determined by reference to the higher of(1) the base rate in effect on such day and (2) the federal fundseffective rate plus 0.50% or (b) a LIBOR rate, with respect to anyEurodollar borrowing, determined by reference to the costs of funds for U.S.dollar deposits for the interest period relevant to such borrowing adjusted forcertain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowingsunder the Credit Facility is 0% with respect to alternate base rate borrowingsand 1.50% with respect to LIBOR borrowings. After the delivery of the financial statements for the first full fiscalquarter after the closing date, the applicable margin for borrowings under theCredit Facility will be subject to adjustment based on the excess availabilityunder the Credit Facility.  In additionto paying interest on outstanding principal under the Credit Facility, theBorrowers are required to pay a commitment fee, initially 0.375% per annum, inrespect of the unutilized commitments thereunder.  After the delivery of financial statementsfor the first full fiscal quarter after the closing date, the commitment feewill be subject to adjustment based on the excess availability under the CreditFacility.  The Borrowers must also paycustomary letter of credit fees and agency fees.  The Borrowers initiated borrowings under itsCredit Facility on February 23, 2006 to meet its operational workingcapital needs.  As of December 30, 2006the applicable margin for borrowings under the Credit Facility and thecommitment fee in respect of the unutilized commitments thereunder remained atthe initial levels established.

As a result of the Merger,all of Linens ‘n Things, Inc.’s issued and outstanding capital stockwas acquired by Linens Holding Co.  Atsuch time, investment funds associated with or designated by the Sponsorsacquired approximately 99.7% of the common stock of Linens Holding Co. throughan investment vehicle controlled by Apollo Management V, L.P., or one of itsaffiliates, and Robert J. DiNicola, the new Chairman and Chief ExecutiveOfficer of Linens ‘n Things, Inc., acquired the remaining 0.3% at thesame price paid by the sponsors.

Upon consummation of theTransactions, Linens ‘n Things, Inc. delisted its shares of commonstock from the New York Stock Exchange (the “NYSE”) and deregistered underSection 12 of the Securities Exchange Act of 1934.  The last day of trading on the NYSE wasFebruary 14, 2006.

Total fees and expensesrelated to the Transactions were approximately $110 million, consisting ofapproximately $49 million of pre-merger transaction cost incurred by theCompany’s predecessor entity, Linens ‘n Things, Inc., $23 million ofdirect acquisition costs of the Company and $38 million of deferredfinancing costs.  Such fees includecommitment, placement, financial advisory and other transaction fees as well aslegal, accounting and other professional fees. The direct acquisition costs were included in the purchase price and isa component of goodwill.  Deferredfinancing costs of approximately $12 million relates to the creditfacility, which are amortized over five years on a straight-line basis, and$26 million relates to the Notes, which are amortized over eight yearsusing the effective interest method.

The acquisition of Linens ‘n Things, Inc.is being accounted for as a business combination using the purchase method ofaccounting, whereby the purchase price (including liabilities assumed) wasallocated to the assets acquired based on their estimated fair market values atthe date of acquisition.  Independentthird-party appraisers were engaged to assist management and perform valuationsof certain of the tangible and intangible assets acquired.

The Company has allocated thepurchase price based on the appraisal associated with the valuation of certainassets and liabilities.  The Company doesnot believe that the appraisal or its estimate of certain contingencies willmaterially modify the preliminary purchase price allocation; however, thepurchase price allocation relating to deferred financing costs  is expected to be revised.

As a result of theconsummation of the Transactions, a new entity (“successor entity”) was formedwith an effective date of February 14, 2006, consisting of Linens HoldingCo. and Subsidiaries.  The ConsolidatedFinancial Statements for the successor entity as of December 30, 2006 and forthe period February 14 to December 30, 2006 show the operations and cashflows of the successor entity, Linens Holding Co. and Subsidiaries.  The Consolidated Financial Statementspresented as of December 31, 2005, and for the periods 

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January 1to February 13, 2006 and fiscal years 2005 and 2004 are shown under the “predecessorentity” caption, consisting of Linens ‘n Things, Inc. andSubsidiaries.

As a result of theconsummation of the Transactions, the Consolidated Financial Statements for theperiod after February 13, 2006 are presented on a different basis thanthat for the periods before February 14, 2006 as a result of theapplication of purchase accounting as of February 14, 2006 and thereforeare not comparable.

A reconciliation of thepreliminary purchase price adjustments recorded in connection with theTransactions is presented below (in thousands):

 
| ** **                                                     | ** ** | **Predecessor Entity**       | ** **    | ** **                         | ** ** | **Successor Entity** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|---------------|------------------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | **February 13,   2006** | ** **    | **Transaction   Adjustments** | ** ** | ** **                | ** ** | **February 14,   2006** | ** ** |
| **Assets**                                                     | ** ** | ** **                        | ** **    | ** **                         | ** ** |                      |       | ** ** | ** ** |
| Current assets:                                                |       |                              |          |                               |       |                      |       |   |   |
| Cash and cash equivalents                                      |       | $                                 | 90,333        |                               | $          | (15,701                   | )          |   |   | $ | 74,632 |   |
| Accounts receivable                                            |       | 45,833                            |          | —                             |       |                      |       | 45,833 |   |
| Inventories                                                    |       | 819,600                           |          | —                             |       |                      |       | 819,600 |   |
| Prepaid expenses and other current assets                      |       | 29,499                            |          | —                             |       |                      |       | 29,499 |   |
| Current deferred income taxes                                  |       | 1,211                             | (2)           | —                             |       |                      |       | 1,211 |   |
| **Total current assets**                                       | ** ** | **986,476**                       | ** **    | **(15,701**                        | **)**      |                      |       | **970,775** | ** ** |
| Property and equipment, net                                    |       | 607,787                           |          | (57                                | )          |                      |       | 607,730 |   |
| Identifiable intangible assets, net                            |       | 1,276                             |          | 159,742                            |       |                      |       | 161,018 |   |
| Goodwill                                                       |       | 18,126                            |          | 247,859                            |       |                      |       | 265,985 |   |
| Deferred financing cost and other noncurrent assets,  net      |       | 1,079                             |          | 36,172                             |       |                      |       | 37,251 |   |
| **Total  assets**                                              | ** ** | **$**                             | **1,614,744** | ** **                         | **$**      | **428,015**               | ** ** |   |   | **$** | **2,042,759** | ** ** |
| ** **                                                     | ** ** | ** **                        | ** **    | ** **                         | ** ** |                      |       | ** ** | ** ** |
| **Liabilities  and Shareholders’ Equity**                 | ** ** | ** **                        | ** **    | ** **                         | ** ** |                      |       | ** ** | ** ** |
| Current liabilities:                                           |       |                              |          |                               |       |                      |       |   |   |
| Accounts payable                                               |       | $                                 | 274,997       |                               | $          | —                    |       |   |   | $ | 274,997 |   |
| Accrued expenses and other current liabilities                 |       | 195,404                           |          | 39,388                             | (1)        |                      |       | 234,792 |   |
| Current deferred income taxes                                  |       | 8,176                             |          | —                             |       |                      |       | 8,176 |   |
| **Total current liabilities**                                  | ** ** | **478,577**                       | ** **    | **39,388**                         | ** ** |                      |       | **517,965** | ** ** |
| Senior secured notes and other long-term debt, net  of current |       | 2,131                             |          | 650,000                            |       |                      |       | 652,131 |   |
| Noncurrent deferred income taxes                               |       | 31,723                            | (2)           | 152,892                            |       |                      |       | 184,615 |   |
| Other long-term liabilities                                    |       | 270,455                           |          | (230,020)                          | (3)        |                      |       | 40,435 |   |
| **Total  liabilities**                                         | ** ** | **782,886**                       | ** **    | **612,260**                        | ** ** |                      |       | **1,395,146** | ** ** |
| **Shareholders’  equity**                                 | ** ** | **831,858**                       | ** **    | **(184,245**                       | **)**      |                      |       | **647,613** | ** ** |
| ** **                                                     | ** ** | ** **                        | ** **    | ** **                         | ** ** |                      |       | ** ** | ** ** |
| **Total liabilities and  shareholders’ equity**           | ** ** | **$**                             | **1,614,744** | ** **                         | **$**      | **428,015**               | ** ** |   |   | **$** | **2,042,759** | ** ** |

----

*(1) *Represents an accrual for unpaid transactionexpenses.

(2)   Reflects adjustment of the carrying value ofdeferred tax liabilities of the Predecessor Entity totaling $11.5 million as ofJanuary 1, 2006 to correct the effects of a difference between the book and taxbases of property and equipment and other adjustments.

*(3) *Consists of the following purchase accountingadjustments:

 

| Unfavorable leases |   | $        | 20,000   |   |
|--------------------|--------|----------|----------|--------|
| Deferred rents     |   | (250,020 | )        |
|               |   |     |     |
|               |   | $        | (230,020 | )      |

 

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As presented inthe above table, the Company’s assets and liabilities were adjusted to fairvalue as of the closing date of the Transactions, and the excess of the totalpurchase price over the fair value of the Company’s net assets was allocated togoodwill.  The following table presentsan analysis of the change in goodwill.

 

| (in thousands)                                                        | ** ** | **Amount** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|
|                                                                       |       |       |       |
| Balance at  December 31, 2005 (predecessor entity)                         |       | $     | 18,126     | (1) |
| Purchase  accounting adjustments from preliminary allocation               |       | 259,309    |       |
|                                                                       |       |       |       |
| Initial  preliminary balance at February 14, 2006                          |       | 277,435    |       |
| SAB 108  adjustment (see note 2 to the consolidated financial statements)  |       | (11,450    | )          |
|                                                                       |       |       |       |
| Balance at  February 14, 2006 (successor entity)                           |       | 265,985    |       |
| Pre-existing tax  adjustments                                              |       | 1,885      |       |
| Pre-existing  book adjustments, net                                        |       | (618       | )          |
| Book adjustment  for returned deposit on building purchase option assigned |       | 722        |       |
| Other — foreign  currency translation                                 |       | (144       | )          |
|                                                                       |       |       |       |
| Balance at  December 30, 2006 (successor entity)                           |       | $          | 267,830    |   |
|                                                                       |       |       |       |

----

(1)  The predecessor entity goodwill has beenwritten-off in purchase accounting.

The unaudited proforma results of operations presented below for the fiscal years ended December30, 2006 and December 31, 2005 are presented as though the Transactions hadoccurred at the beginning of the periods presented, after giving effect topurchase accounting adjustments relating to depreciation and amortization ofthe revalued assets, interest expense associated with the Notes and the CreditFacility and other acquisition-related adjustments in connection with theTransactions.  The pro forma results ofoperations are not necessarily indicative of the combined results that wouldhave occurred had the Transactions been consummated at the beginning of theperiods presented, nor are they necessarily indicative of future operatingresults.
| ** **                            | ** ** | **Fiscal Year Ended  December 30, 2006** | ** ** | **Fiscal Year Ended  December 31, 2005** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(In  Thousands)**                   | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** |
|                                  | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** |
| Net sales                             |       | $                                                            | 2,819,336  |                                                         | $          | 2,694,742 |   |
| Loss before  benefit for income taxes |       | $                                                            | (213,896   | )                                                            | $          | (71,626 | ) |
| Net loss                              |       | $                                                            | (130,850   | )                                                            | $          | (43,523 | ) |

 

**4. Restructuring and Asset Impairment Charge**

In fiscal 2001, the Predecessor developed and committed to a strategicinitiative designed to improve store performance and profitability. Thisinitiative called for the closing of certain under-performing stores, which didnot meet the Predecessor’s profit objectives. In connection with thisinitiative, the Predecessor recorded a pre-tax restructuring and assetimpairment charge of $37.8 million ($23.7 million after-tax) in thefourth quarter of fiscal 2001. A pre-tax reserve of $20.5 million wasestablished for estimated lease commitments for stores to be closed. Thereserve considers estimated sublease income. Because all of the stores wereleased, the Predecessor was not responsible for the disposal of property otherthan fixtures. A pre-tax writedown of $9.5 million was recorded as areduction in property and equipment for fixed asset impairments for thesestores. The fixed asset impairments represent fixtures and leaseholdimprovements. A pre-tax reserve of $4.0 million was established for otherestimated miscellaneous store closing costs. Additionally, a pre-tax charge of$3.8 million was recorded in cost of sales for estimated inventorymarkdowns below cost for the stores to be closed. Certain components of therestructuring charge were based on estimates and may be subject to change inthe future. The Predecessor has closed all of the initially identified storesother than one store, which it decided to keep open and whose reserve wasreversed.    In addition, theCompany reopened one of the previously closed stores during the second quarterof 2006 and plans to reopen a second previously closed store during the secondquarter of fiscal 2007.

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The following table displays a roll forward of the activity for fiscalyears 2006 and 2005, and the reserves remaining as of December 30, 2006,which is included in accrued expenses and other current liabilities in theconsolidated balance sheets ($ in millions):

 
| ** **         | ** ** | **Remaining at  January 1,   2005** | ** ** | **2005 Net   Usage** | ** ** | **Remaining at  December 31,  2005** | ** ** | **2006 Net   Usage** | ** ** | **Remaining at  December 30,  2006** | ** ** |
|--------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|
| ** **         | ** ** | **Predecessor**                                    | ** ** | ** **                     | ** ** | **Predecessor**                                | ** ** | ** **                     | ** ** | **Successor**                                  | ** ** |
|               |       |                                               |       |                           |       |                                           |       |                           |       |                                           |       |
| Lease  commitments |       | $                                                  | 9.0        |                           | $          | (3.6                                           | )          | $                              | 5.4        |                                           | $          | (1.8 | ) | $ | 3.6 |   |
|               |       |                                               |       |                           |       |                                           |       |                           |       |                                           |       |
|               | ** ** | **$**                                              | **9.0**    | ** **                     | **$**      | **(3.6**                                       | **)**      | **$**                          | **5.4**    | ** **                                     | **$**      | **(1.8** | **)** | **$** | **3.6** | ** ** |

 

Fiscal2006 and fiscal 2005 usage consists of payments for lease commitments totaling$3.2 million and $5.1 million, respectively. The 2006 activity also includes the reversal of estimated leasecommitment costs of approximately $0.3 million as these reserves were notneeded, offset by an increase to lease commitment costs of approximately$1.7 million due to changes in estimates based on currentnegotiations.  The 2005 activity alsoincludes the reversal of estimated lease commitment costs of approximately$4.3 million as these reserves were not needed, offset by an increase tolease commitment costs by approximately $5.8 million due to changes inestimates based on current negotiations. The net changes in the restructuring reserve have been reflected withinSG&A in the consolidated statements of operations.

**5. Accounts Receivable**
| **Accounts receivable consisted of the   following (in thousands):** | ** ** | **December 30,  2006** | ** ** | ** ** | **December 31,   2005** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|-----------------------------------|------------|
| ** **                                                                                              | ** ** | **Successor**               | ** ** | ** ** | **Predecessor**                   | ** ** |
| Credit card  settlements due                                                                            |       | $                           | 28,730     |       |                              | $          | 27,007 |   |
| Due from  landlords                                                                                     |       | 2,598                       |       |       | 8,778                             |       |
| Other                                                                                                   |       | 5,735                       |       |       | 7,776                             |       |
|                                                                                                    | ** ** | **$**                       | **37,063** | ** ** | ** **                        | **$**      | **43,561** | ** ** |

 

The Company’s bad debtexperience has historically been insignificant and, accordingly, a minimalallowance for doubtful accounts has been established for these receivables.

Amounts due from landlordsare allowances provided by landlords recorded as deferred rent credits includedin Other Long-Term Liabilities on the Consolidated Balance Sheets.  Deferred rent credits are amortized as areduction of rent expense over the expected lease term, including cancelableoption periods in those instances where exercising such options is reasonablyassured at the inception of the lease.

Account receivable — other atDecember 31, 2005 includes approximately $2.2 million resulting from theVISA/MasterCard antitrust litigation settlement which has been included as areduction of SG&A in the consolidated statements of operations for fiscal2005.

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**6.Property and Equipment**
| **Property and equipment consisted of the  following (in thousands):** | ** ** | **December 30,   2006** | ** ** | ** ** | ** ** | **December 31,   2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                                                  | ** ** | **Successor**           | ** ** | ** ** | ** ** | **Predecessor**         | ** ** |
| Land                                                                        |       | $1,480                  |       |       |       | $1,480                  |       |
| Building                                                                    |       | 6,031                   |       |       |       | 6,080                   |       |
| Furniture, fixtures and equipment                                           |       | 334,579                 |       |       |       | 608,307                 |       |
| Leasehold improvements                                                      |       | 266,886                 |       |       |       | 417,005                 |       |
| Computer hardware and software                                              |       | 19,687                  |       |       |       | 34,762                  |       |
| Construction-in-progress                                                    |       | 2,782                   |       |       |       | 9,109                   |       |
|                                                                        | ** ** | **631,445**             | ** ** | ** ** | ** ** | **1,076,743**           | ** ** |
| Less:                                                                       |       |                    |       |       |       |                    |       |
| Accumulated  depreciation and amortization                                  |       | 100,616                 |       |       |       | 464,496                 |       |
|                                                                        | ** ** | **$****530,829**        | ** ** | ** ** | ** ** | **$612,247**            | ** ** |

 

Depreciation expense for the periods February 14, 2006 to December 30,2006, January 1, 2006 to February 13, 2006, fiscal 2005 and 2004 wasapproximately $106.7 million, $12.6 million, $90.1 million and $80.8million, respectively.

During the periodsFebruary 14, 2006 to December 30, 2006, fiscal 2005 and fiscal 2004, theCompany determined that the carrying value of certain assets exceeded theirrelated estimated future undiscounted cash flows.  As a result, the Company reduced the carryingvalue of property and equipment to their fair value by approximately $28.0million, $4.1 million and $0.9 million for the periods February 14, 2006 toDecember 30, 2006, fiscal 2005 and fiscal 2004, respectively.

**7.Identifiable Intangible Assets**

In connection withthe Transactions, the Company’s intangible assets were revalued with theassistance of an independent third party. The carrying amount and accumulated amortization of identifiableintangible assets consisted of the following:
| **Identifiable intangible assets, net consisted of the   following (in thousands):** | ** ** | **December 30, 2006** | ** **  | ** ** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|-------------|------------|------------|---------------------------------|------------|
| ** **                                                                                                                        | ** ** | **Successor**                   | ** **  | ** ** | ** ** | **Predecessor**                 | ** ** |
| Intangible  assets subject to amortization:                                                                                       |       |                            |        |       |       |                            |       |
| Credit card customer relationships                                                                                                |       | $                               | 10,129      |       |       |                            | $          | — |   |
| Customer list                                                                                                                     |       | 406                             |        |       |       | —                          |       |
| Favorable leases                                                                                                                  |       | 23,852                          |        |       |       | 2,900                           |       |
|                                                                                                                              |       |                            |        |       |       |                            |       |
|                                                                                                                              |       | 34,387                          |        |       |       | 2,900                           |       |
| Less: accumulated amortization                                                                                                    |       | (7,031                          | )           |       |       | (1,599                          | )          |
|                                                                                                                              |       |                            |        |       |       |                            |       |
| Total intangible  assets subject to amortization                                                                                  |       | 27,356                          |        |       |       | 1,301                           |       |
| Total  indefinite-lived trademarks                                                                                                |       | 122,688                         |        |       |       | —                          |       |
|                                                                                                                              |       |                            |        |       |       |                            |       |
| Total  identifiable intangible assets                                                                                             | ** ** | **$**                           | **150,044** | ** ** | ** ** | ** **                      | **$**      | **1,301** | ** ** |
|                                                                                                                              |       |                            |        |       |       |                            |       |

 

Customer list hasan estimated life of 5 years, credit card customer relationships have anestimated life of 3 years and favorable leases have an average estimatedlife of 5 years.  For the periodFebruary 14, 2006 to December 30, 2006, January 1, 2006 to February 13,2006, fiscal year 2005 and fiscal year 2004, amortization 

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expense of $7.8 million,$0.02 million, $0.2 million and $0.2 million, respectively, and an impairmentcharge of approximately $3.1 million for the period February 14, 2006 toDecember 30, 2006 was recorded by the Company.

The following is asummary table representing the remaining amortization of identifiableintangible assets, net, with definitive lives, by year (in thousands):
| **Fiscal Year** | ** ** | **Amortization** | ** ** |
|----------------------|------------|------------------|------------|
| 2007                 |       | $                | 7,434      |   |
| 2008                 |       | 6,485            |       |
| 2009                 |       | 3,125            |       |
| 2010                 |       | 2,405            |       |
| 2011                 |       | 2,405            |       |
| 2012 and thereafter  |       | 5,502            |       |
|                 |       |             |       |
| Total                | ** ** | **$**            | **27,356** | ** ** |
|                 |       |             |       |

 

**8. Accounts Payable, Accrued Expenses and Other CurrentLiabilities**

***Accounts Payable***

Accounts payableincludes amounts due customers principally for gift card, customer rebate andsales return liabilities of $55.3 million and $47.7 million as ofDecember 30, 2006 and December 31, 2005, respectively.  Gift cards that are not expected to beredeemed are recorded as a reduction to SG&A in the Consolidated Statementsof Operations.  Such amounts recognizedfor the period February 14, 2006 to December 30, 2006, the period January 1,2006 to February 13, 2006, fiscal 2005 and fiscal 2004 were approximately$4.0 million, $0.5 million, $2.8 million and $5.3 million,respectively.

***Accrued Expenses and Other Current Liabilities***
| **Accrued expenses and other current liabilities   consisted of the following (in thousands):** | ** ** | **December 30,   2006** | ** **  | **December 31,   2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **Successor**                     | ** **  | **Predecessor**                   | ** ** |
| Other taxes  payable                                                                                                                                   |       | $                                 | 41,062      |                              | $          | 35,602 |   |
| Income taxes  payable                                                                                                                                  |       | 7,650                             |        | 29,181                            |       |
| Salaries and  employee benefits                                                                                                                        |       | 20,347                            |        | 24,518                            |       |
| Other                                                                                                                                                  |       | 117,523                           |        | 109,660                           |       |
|                                                                                                                                                   | ** ** | **$**                             | **186,582** | ** **                        | **$**      | **198,961** | ** ** |

 

Included in “other” ismiscellaneous store operating and corporate office accrued expenses.  Additionally, it includes thereclassification of outstanding checks due to the Company’s utilization of zerobalance disbursement accounts under its cash management program (see note 2 tothe consolidated financial statements — *cash and cash equivalents*).

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**9.Senior Secured Notes and Other Long-Term Debt**

Senior securednotes and other long-term debt consists of the following (in thousands):
| **Senior secured notes and other long-term debt consisted of the   following (in thousands):** | ** ** | **December 30,   2006** | ** **  | **December 31,   2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
| ** **                                                                                                                                                 | ** ** | **Successor**                     | ** **  | **Predecessor**                   | ** ** |
| Senior secured  floating rate notes due 2014                                                                                                               |       | $                                 | 650,000     |                              | $          | — |   |
| Asset-based  revolving credit facility                                                                                                                     |       | 37,800                            |        | —                            |       |
| Mortgage note  payable                                                                                                                                     |       | 2,076                             |        | 2,139                             |       |
|                                                                                                                                                       | ** ** | **$**                             | **689,876** | ** **                        | **$**      | **2,139** | ** ** |

 

***Senior Secured Floating Rate Notes Due 2014***

Senior secured floating ratenotes due 2014 consists of $650 million aggregate principal amount ofSenior Secured Floating Rate Notes due 2014 of Linens ‘n Things, Inc. andLinens ‘n Things Center, Inc.

The Notes bear interest at aper annum rate equal to LIBOR plus 5.625%, which is paid every three months onJanuary 15, 2006 , April 15, 2006 , July 15, 2006 andOctober 15,2006  commencingApril 15, 2006.  The interest rateon the Notes is reset quarterly.  The Notesmature on January 15, 2014.  As ofDecember 30, 2006 the interest rate on the Notes was 11.0%, based on a LIBORrate of 5.4%.

On July 7, 2006 the Issuersentered into a zero cost interest rate collar agreement to hedge the cash flowsassociated with the LIBOR component of the interest rate on the Notes.  On July 7, 2006 the Issuers also purchased aone-year forward-starting interest rate cap agreement which takes effect onJanuary 15, 2008 (see note 11 to the consolidated financial statements).

Deferred financing costs ofapproximately $26 million relating to the Notes are being amortized overeight years using the effective interest method.

The Notes are fully andunconditionally guaranteed jointly and severally on a senior basis by theCompany and by certain of the Company’s domestic subsidiaries other than theIssuers (collectively, the “Note Guarantors”), and are secured by first-priorityliens on all of the Company’s and Note Guarantors’ equipment, intellectualproperty rights and related general intangibles and the capital stock of theIssuers and certain subsidiaries and by second-priority liens on the Issuers’and the Note Guarantors’ inventory, accounts receivable, cash, securities andother general intangibles.  The lien oncapital stock may be released under certain circumstances.  As a result of the filing and effectivenessof a registration statement on Form S-4, and amendment thereto, with the SECwith respect to the Notes, the Issuers and the NoteGuarantors became subject to applicable SEC rules with respect toinformation required to be included in the prospectus in the registrationstatement.  To the extent that the securities of any Issueror Guarantor constitute collateral for the Notes and the value of thesecurities equals or exceeds 20% of the principal amount, or $130million of the Notes, separate financial statements of the Issuer or NoteGuarantor would be required under these SEC rules to be included in theCompany’s SEC filings.  The indenture that governs the Notesprovides, however, with respect to any direct or indirect subsidiary of Linens ‘nThings, Inc., that the securities of the subsidiary are released from the lienon capital stock on the date that the lien triggers this separatefinancial statement requirement.  Accordingly, for any subsidiarywith securities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to thosesecurities.  The lien on the capital stock of Linens ‘n Things, Inc.remains in place.

If the Issuers sell certain assets or experience specific kinds ofchanges in control, the Issuers must offer to repurchase the Notes.  The Issuers may, at their option, redeem theNotes at any time on or after January 15, 2008 at pre-determinedprices.  Prior to January 15, 2008,the Issuers may, at their option, redeem up to 35% of the Notes with theproceeds of certain sales of its equity or of its subsidiaries.  Prior to January 15, 2008, the Issuersmay, at their option, redeem the Notes at a price equal to 100% of theprincipal amount of the Notes plus a “make-whole” premium.

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***Senior Secured Asset-based Revolving Credit Facility***

In February 2006, theCompany entered into a new senior secured asset-based revolving credit facilityagreement (the “Credit Facility”) with third party institutional lenders whichexpires February 14, 2011. The Credit Facility provides senior secured financingof up to $600 million, subject to a borrowing base consisting of certaineligible inventory and receivables, minus certain reserves.  A portion of the Credit Facility, not toexceed $40 million, is also available to a Canadian subsidiary of the Companysubject to the Canadian borrowing base. The Credit Facility replaced the $250 million senior revolvingcredit facility amended November 2004, which allowed for up to$50 million in borrowings from additional lines of credit outside theagreement, including CAD $40 million covering the Company’s Canadianoperations (the “2004 Credit Agreement”). The Company incurred deferred financing costs of approximately$12 million related to the Credit Facility, which are being amortized overfive years on a straight-line basis.

All obligations under theCredit Facility, and the guarantees of those obligations, are secured, subjectto certain exceptions, by substantially all of the Company’s, the Issuers’ andthe subsidiary guarantors’ assets, including: (1) a first-priority securityinterest in inventory, accounts receivable, cash, securities and other generalintangibles; and (2) a second-priority security interest in equipment,intellectual property rights and related general intangibles and all of thecapital stock of the Issuers and the capital stock of certain subsidiaries.

Borrowings under the Credit Facility bear interest at a rate equal to,at the Borrowers’ option, either (a) an alternate base rate determined byreference to the higher of (1) the base rate in effect on such day and(2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate,with respect to any Eurodollar borrowing, determined by reference to the costsof funds for U.S. dollar deposits for the interest period relevant to suchborrowing adjusted for certain additional costs, in each case plus anapplicable margin.  In addition to payinginterest on outstanding principal under the Credit Facility, the Company isrequired to pay a variable rate commitment fee in respect of the unutilizedcommitments thereunder.  The CreditFacility requires the Company to comply with financial ratio maintenancecovenants if the excess availability under the Credit Facility, at any time,does not exceed $75 million and also contains certain restrictive covenantsincluding the Company’s ability to pay dividends and certain customaryaffirmative covenants and events of default. During the period February 14, 2006 to December 30, 2006, the Companyalways maintained excess availability above $75 million.  As of December 30, 2006, the Company had$37.8 million in borrowings under the Credit Facility at an averageinterest rate of 8.3%.  The Company alsohad $81.2 million of letters of credit outstanding as of December 30, 2006issued under the Credit Facility, which includes standby letters of credit andimport letters of credit used for merchandise purchases.  At various times during (1) the periodFebruary 14, 2006 to December 30, 2006 and (2) the periods January 1, 2006 toFebruary 13, 2006, fiscal 2005 and fiscal 2004, the Company borrowed againstits Credit Facility and the 2004 Credit Agreement, respectively, for workingcapital needs.  The Company is notobligated under any formal or informal compensating balance requirements.

***Mortgage Note Payable***

Mortgage note payablerepresents an 8.2% fixed-rate mortgage note on the land and building of one ofthe Company’s closed stores.  Under themortgage note terms, the Company is required to make 96 equal payments ofprincipal and interest, with a final principal payment of approximately$1.6 million in August 2012.

 

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**10. Other Long-Term Liabilities**
| ** **                                                                                                         | ** ** | **December 30, 2006** | ** ** | ** ** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|---------------------------------|------------|
| **Other long-term liabilities consisted of the following (in thousands):** | ** ** | **Successor**                   | ** ** | ** ** | ** ** | **Predecessor**                 | ** ** |
| Deferred rent                                                                                                      | ** ** | **$**                           | 11,751     | ** ** |       |                            | **$**      | 74,262 | ** ** |
| Deferred rent credit                                                                                               |       | 11,568                          |       |       |       | 189,020                         |       |
| Intangible liability  for unfavorable retail leases                                                                |       | 18,071                          |       |       |       | —                          |       |
| Other                                                                                                              |       | 9,277                           |       |       |       | 10,190                          |       |
|                                                                                                               | ** ** | **$**                           | **50,667** | ** ** |       |                            | **$**      | **273,472** | ** ** |

Deferred rentrepresents the unamortized accrual for scheduled rent increases contained inthe Company’s leases and deferred rent credits represent the unamortizedportion of landlord allowances. The intangible liability for unfavorable retailleases represents the assignment of a portion of the purchase accountingallocation to reflect leases that were deemed to have below market leasing terms.

**11.****Derivative Financial Instruments**

The Companyaccounts for derivative instruments in accordance with SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*(“SFAS No. 133”), as amended.  Inaccordance with SFAS No. 133, the Company reports all derivative financialinstruments on its balance sheet at fair value and has established criteria fordesignation and evaluation of effectiveness of transactions entered into forhedging purposes.

The Companyemploys derivative financial instruments to manage its exposure to interestrate changes and to limit the volatility and impact of interest rate changes onearnings and cash flows.

The Company doesnot enter into other derivative financial instruments for trading orspeculative purposes.  The Company facescredit risk if the counterparties to these transactions are unable to performtheir obligations.  However, the Companyseeks to minimize this risk by entering into transactions with counterpartiesthat are major financial institutions with high credit ratings.

The Companyrecords unrealized gains and losses on derivative financial instrumentsqualifying as cash flow hedges in other comprehensive income, to the extentthat hedges are effective.  Forderivative financial instruments which do not qualify as cash flow hedges, anychanges in fair value would be recorded in the consolidated statement ofoperations.

The Company may atits discretion terminate or designate any such hedging instrument agreementsprior to maturity.  At that time, anygains or losses previously reported in other comprehensive income ontermination would amortize into interest expense or interest income tocorrespond to the recognition of interest expense or interest income on thehedged debt.  If such debt instrument wasalso terminated, the gain or loss associated with the terminated derivativeincluded in other comprehensive income at the time of termination of the debtwould be recognized in the consolidated statement of operations at that time.

On July 7, 2006the Issuers entered into a zero cost interest rate collar agreement (the “CollarAgreement”) to hedge the cash flows associated with the LIBOR component of theinterest rate on the Notes.  The CollarAgreement provides for payments to be made to or received from the counterpartywhen the LIBOR rate in effect for the Notes is below 4.45% or above 6.51% for agiven reset period.  Such paymentsrepresent the difference between the rates stated above in the Collar Agreementand those in effect on the Notes for the given reset period.  Payment and reset dates under the CollarAgreement are matched exactly to those of the Notes.  The Collar Agreement has an ultimate maturityof January 15, 2008.  To the extent thatthe three-month LIBOR rate is below the Collar Agreement floor, payment is duefrom the Company to the counterparty for the difference.  To the extent the three-month LIBOR rate isabove the Collar Agreement cap, the Company is entitled to receive thedifference from the counterparty.  At theinception of the Collar Agreement, the Company determined that the hedgingrelationship would have no ineffectiveness, and the Company will continue toverify and document that the critical terms of the hedging instrument and thehedged item are exactly matched.  At December30, 2006, the notional amount of debt related to 

78

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the Collar Agreement was$650 million and the fair value of the Collar Agreement was approximately a$0.1 million liability.

On July 7, 2006the Issuers also purchased a one-year forward-starting interest rate capagreement (the “Cap Agreement”) which takes effect on January 15, 2008.  The Cap Agreement provides for payments to bereceived from the counterparty where the rate in effect on a LIBOR-basedborrowing arrangement is above 6.51% for a given reset period.  Such payments represent the differencebetween the LIBOR rate stated above in the Cap Agreement and those in effect ona LIBOR-based borrowing arrangement for the given reset period.  Payment and reset dates under the CapAgreement are matched exactly to those of the LIBOR-based borrowingarrangement.  The Cap Agreement has anultimate maturity of January 15, 2009. The Issuers paid a premium of $700,000 to purchase the CapAgreement.  The Cap Agreement consists oftwo components, a forward contract and an interest rate cap agreement.  The Company’s intent is to hedge the cashflow associated with the LIBOR component of the interest rate on a LIBOR-basedborrowing arrangement beyond 6.51% for the period January 15, 2008 throughJanuary 15, 2009.  The forward contractenables the Company to achieve this objective. The Company will assess the effectiveness of the forward contractquarterly.  Once the forward contractbecomes an interest rate cap agreement, effectiveness will be assessed anddocumented as a new relationship.  Theinterest rate cap agreement is expected to be perfectly effective at such time,and the Company will continue to subsequently verify and document that thecritical terms of the interest rate cap agreement and the hedged item continueto match exactly over the remaining life of the relationship.  At December 30, 2006, the notional amount ofdebt related to the Cap Agreement was $650 million and the fair value of theinstrument was approximately a $0.1 million asset.

The Company hasdetermined that the Collar Agreement and the Cap Agreement have beenappropriately designated and documented as cash flow hedges under SFAS No.133.  As such, changes in the fair valueof the Collar Agreement and the Cap Agreement have been recorded in accumulatedother comprehensive (loss) income on the consolidated balances sheet.  During the period from inception of thederivative arrangement on July 7, 2006 to December 30, 2006, the Company hasrecorded a loss of approximately $0.7 ($0.4 million, net of tax) in accumulatedother comprehensive (loss) income related to these changes in fair value.  The Collar Agreement and the Cap Agreementhad no ineffectiveness and provided no amounts received or paid under thehedges that affected net loss during the period.  Both agreements are expected to have noineffectiveness during their contractual lives.

**12. Leases**

The Company has non-cancelable operating leases, primarily forretail stores, which expire through 2029. The leases generally contain renewal optionsfor periods ranging from five to 20 years in total and require the Companyto pay costs such as real estate taxes and common area maintenance. Contingentrentals are paid based on a percentage of net sales as defined by leaseagreements. Rental expense, net of landlord allowance amortization of$0.9 million, $3.0 million, $21.6 million and $20.0 million forthe period February 14, 2006 to December 30, 2006, the period January 1, 2006to February 13, 2006, fiscal year 2005 and fiscal year 2004, respectively, andsublease rentals, for all operating leases was as follows (in thousands):

|                     | ** ** | ** **                      | ** **  | ** ** | ** ** | ** **                    | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------|------------|---------------------------------|-------------|------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **February 14, 2006** | ** **  | ** ** | ** ** | **January 1, 2006** | ** ** | ** **                      | ** ** | ** ** | ** ** |
| ** **          | ** ** | **to December 30,**   | ** **  | ** ** | ** ** | **to February 13,** | ** ** | **December 31,**           | ** ** | **January 1,** | ** ** |
| ** **          | ** ** | **2006**                        | ** **  | ** ** | ** ** | **2006**                      | ** ** | **2005**                        | ** ** | **2005** | ** ** |
| ** **          | ** ** | **Successor**                   | ** **  | ** ** | ** ** | **Predecessor**               | ** ** | **Predecessor**                 | ** ** | **Predecessor** | ** ** |
|                |       |                            |        |       |       |                          |       |                            |       |   |   |
| Minimum rentals     |       | $                               | 260,195     |       |       |                          | $          | 34,394                          |       | $ | 249,210 |   | $ | 228,575 |   |
| Contingent  rentals |       | —                          |        |       |       | —                        |       | —                          |       | 17 |   |
|                |       |                            |        |       |       |                          |       |                            |       |   |   |
|                |       | 260,195                         |        |       |       | 34,394                        |       | 249,210                         |       | 228,592 |   |
| Less:               |       |                            |        |       |       |                          |       |                            |       |   |   |
| Sublease rentals    |       | 4,099                           |        |       |       | 596                           |       | 4,489                           |       | 3,599 |   |
|                |       |                            |        |       |       |                          |       |                            |       |   |   |
|                | ** ** | **$**                           | **256,096** | ** ** | ** ** | ** **                    | **$**      | **33,798**                      | ** ** | **$** | **244,721** | ** ** | **$** | **224,993** | ** ** |

At December 30, 2006, thefuture minimum rental payments required under operating leases and the futureminimum sublease rentals excluding lease obligations for closed storesresulting from the 2001 restructuring and asset impairment charge were asfollows (in thousands):

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| Fiscal Year                       | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2007                                   |       | $          | 297,311    |   |
| 2008                                   |       | 299,801    |       |
| 2009                                   |       | 298,127    |       |
| 2010                                   |       | 291,401    |       |
| 2011                                   |       | 279,011    |       |
| Thereafter                             |       | 1,105,035  |       |
|                                   |       |       |       |
|                                   |       | $          | 2,570,686  |   |
|                                   |       |       |       |
| Total future  minimum sublease rentals |       | $          | 32,054     |   |

As ofDecember 30, 2006 the Company had fully executed leases for 23 storesplanned to open in fiscal years 2007 and 2008, for which aggregate minimum rentalpayments over the term of the leases is approximately $101.6 million. The tableabove includes payments for stores that had fully executed leases as ofDecember 30, 2006.

The Company also has assigned property at a retail location inwhich the Company guarantees the payment of rent over the specified lease termin the event of non-performance. As of December 30, 2006, the maximumpotential amount of future payments the Company could be required to make undersuch guarantee is approximately $0.5 million.

**13. Stock Incentive Plans**

OnJanuary 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), *“Share-Based Payment”* (“SFAS No. 123 (Revised 2004)”),requiring the recognition of compensation cost for all equity classified awardsgranted, modified or settled after the effective date and for the unvestedportion of awards outstanding as of the effective date using the fair-valuemeasurement method.  SFAS No. 123(Revised 2004) revises SFAS No. 123, *“Accounting for Stock-BasedCompensation,”* and supersedes Accounting Principles Board (“APB”)Opinion No. 25*, “Accounting for StockIssued to Employees.”*

TheCompany recognizes the cost of all time-based employee stock options on astraight-line attribution basis and the cost of all performance-based employeestock options on an accelerated basis in accordance with Financial AccountingStandards Board Interpretation No. 28, “Accounting for Stock AppreciationRights and Other Variable Stock Option or Award Plans” over their respectivevesting periods, net of estimated forfeitures. The Company has selected the modified prospective method of transition;accordingly, prior periods have not been restated.  Prior to adopting SFAS No. 123 (Revised2004), the Company applied the recognition and measurement principles of APBOpinion No. 25 and related interpretations.  All employee stock options were granted at orabove the grant date market price. Accordingly, the Company did not recognize compensation expense forstock option grants.  Restricted stockunits granted at fair market value at the date of grant are amortized overspecified vesting periods in the accompanying Consolidated FinancialStatements.

*Share-basedCompensation Plans—Predecessor Entity*

Prior to the completion of the Merger, the Company grantedstock options and restricted stock units for a fixed number of shares toemployees and directors under share-based compensation plans.  The exercise prices of the stock options wereequal to the fair market value of the underlying shares at the date ofgrant.  Compensation expense forrestricted stock awards was measured at fair value on the date of grant basedon the number of shares granted and the quoted market price of the Company’scommon stock.  Such value was recognizedas expense over the vesting period of the award adjusted for actualforfeitures.

Upon completion of the Merger and in accordance with the termsof the stock plans, all of the outstanding stock options became fully vestedand immediately exercisable.  Each optionwas exercised, and holders were paid amounts equal to the excess of $28.00 overthe underlying stock option exercise price, less applicable withholdingtaxes.  Each restricted stock unit awardwas exercised at $28.00 in cash, without interest, less applicable withholdingtaxes.

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The following is a summary of activity under the stock optionplans that were in effect upon adoption of SFAS No. 123 (Revised 2004)through the effective date of the Merger, when all of the stock options andrestricted stock units were exercised:
| ** **                                                    | ** ** | **Predecessor Entity** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Outstanding**             | ** ** | ** ** | ** ** | **Outstanding** | ** ** |
| ** **                                                    | ** ** | **at January 1,** | ** ** | ** ** | ** ** | **at February 13,** | ** ** |
| **Plan**                                                      | ** ** | **2006**                    | ** ** | **Exercised** | ** ** | **2006** | ** ** |
| **Stock  options**                                            | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1996 Plan                                                     |       | 1,151,673                   |       | 1,151,673 |   | — |   |
| Directors’ Plan                                          |       | 48,800                      |       | 48,800 |   | — |   |
| 2000 Plan                                                     |       | 1,463,796                   |       | 1,463,796 |   | — |   |
| Broad-based Equity Plan                                       |       | 1,470,638                   |       | 1,470,638 |   | — |   |
| 2004 Plan                                                     |       | 1,246,690                   |       | 1,246,690 |   | — |   |
| New Hire Authorization                                        |       | 450,000                     |       | 450,000 |   | — |   |
|                                                          |       |                        |       |   |   |   |   |
| Total options  outstanding                                    |       | 5,831,597                   |       | 5,831,597 |   | — |   |
|                                                          |       |                        |       |   |   |   |   |
| Weighted average  exercise price per option                   |       | $                           | 25.20      |   | $ | 25.20 |   | — |   |
| Weighted average  remaining contractual term per option       |       | 4.6 years                   |       |   |   | — |   |
| ** **                                                    |       |                        |       |   |   |   |   |
| **Options  exercisable at period end:**                       |       |                        |       |   |   |   |   |
| Number of options                                             |       |                        |       |   |   | — |   |
| Weighted average exercise price                               |       |                        |       |   |   | — |   |
| Weighted average remaining contractual term                   |       |                        |       |   |   | — |   |
| ** **                                                    |       |                        |       |   |   |   |   |
| **Restricted  stock units**                                   |       |                        |       |   |   |   |   |
| 2000 Plan                                                     |       | 7,500                       |       | 7,500 |   | — |   |
| Broad-based Equity Plan                                       |       | 9,850                       |       | 9,850 |   | — |   |
| 2004 Plan                                                     |       | 118,066                     |       | 118,066 |   | — |   |
| New Hire Authorization                                        |       | 20,000                      |       | 20,000 |   | — |   |
|                                                          |       |                        |       |   |   |   |   |
| Total units  outstanding                                      |       | 155,416                     |       | 155,416 |   | — |   |
|                                                          |       |                        |       |   |   |   |   |
| Weighted average  fair market value per unit at date of award |       | $                           | 25.71      |   | $ | 25.71 |   | — |   |
| Weighted average  remaining contractual term for restrictions |       | 2.9 years                   |       |   |   | — |   |

The 2004Stock Award and Incentive Plan (the “2004 Plan”) provided for the granting ofoptions, restricted stock unit grants and other stock-based awards(collectively, “awards”) to key employees and non-employee directors.  The 2004 Plan replaced both the Company’s2000 Stock Award and Incentive Plan (the “2000 Plan”) and the Broad-BasedEquity Plan.  The 2000 Plan replaced boththe Company’s 1996 Incentive Compensation Plan (the “1996 Plan”) and the 1996Non-Employee Directors’ Stock Plan (the “Directors’ Plan”).  Therefore, no future awards were made underthe 2000 Plan, the Broad-Based Equity Plan, the 1996 Plan or the Directors’Plan (collectively, the “Prior Plans”), although outstanding awards under thePrior Plans continued to be in effect. The New Hire Authorization provided for the granting of awards as aninducement to a person being retained for employment by the Company.

Under the 2004 Plan, an aggregate of 4,000,000 shares (plusany shares under outstanding awards under the Prior Plans which becomeavailable for further grants) was authorized for issuance of awards.  Under the New Hire Authorization, anaggregate of 500,000 shares was authorized.

Stock options under the 2004 Plan and the New HireAuthorization were granted with exercise prices at the fair market value of theunderlying shares at the date of grant. The right to exercise options generally commenced one to five yearsafter the grant date, and the options expired between five to ten years afterthe grant date. Restrictions on restricted stock unit grants lapsed overvesting periods of up to five years.

There were no share-based grants during the periodJanuary 1, 2006 to February 13, 2006. The weighted-average grant date fair value of options granted duringfiscal year 2005 and fiscal year 2004 was 

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$8.28 and $8.65, respectively.  The weighted-average grant date fair value ofrestricted stock units granted during fiscal year 2005 and fiscal year 2004 was$25.49 and $26.39, respectively.

The total intrinsic value of stock options and restrictedstock units exercised due to the Merger was approximately $20.0 millionand $4.4 million, respectively, for the period January 1, 2006 toFebruary 13, 2006.  The totalintrinsic value of stock options exercised during fiscal year 2005 and fiscalyear 2004 was approximately $1.3 million and $4.1 million, respectively.  The total intrinsic value of restricted stockunits converted into common stock during fiscal year 2005 and fiscal year 2004was approximately $0.8 million and $0.5 million, respectively.

The following is a summary of the activity for nonvested stockoption grants and restricted stock unit awards as of February 13, 2006 andthe changes for the period January 1, 2006 to February 13, 2006:
| ** **                     | ** ** | **Predecessor Entity** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **Stock Options**      | ** ** | **Restricted Stock Units** | ** ** |
| ** **                     | ** ** | ** **             | ** ** | **Fair** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                     | ** ** | **Options**            | ** ** | **Value(1)** | ** ** | **Units** | ** ** | **Value(1)** | ** ** |
| Nonvested at January 1, 2006   |       | 1,064,620              |       | $ | 10.59 |   | 155,416 |   | $ | 25.71 |   |
| Grants                         |       | —                 |       | $ | — |   | — |   | $ | — |   |
| Vested(2)                      |       | (1,060,940             | )          | $ | 10.59 |   | (155,416 | ) | $ | 25.71 |   |
| Cancelled                      |       | (3,680                 | )          | $ | 11.12 |   | — |   | $ | — |   |
|                           |       |                   |       |   |   |   |   |   |   |
| Nonvested at February 13, 2006 |       | —                 |       | $ | — |   | — |   | $ | — |   |

----

*(1)**         *Represents theweighted-average grant date fair value per share-based unit, using theBlack-Scholes option-pricing model for stock options and the average high/lowmarket price of the Linens ‘n Things, Inc. common stock for restricted stockunits.

*(2)**         *All of theshare-based units became immediately vested on the date of the Merger.

The total fair value of stock options and restricted stockunits vested during the period from January 1, 2006 to February 13,2006 was approximately $11.2 million and $4.0 million,respectively.  The total fair value ofstock options vested during fiscal 2005 and fiscal 2004 was approximately$8.0 million and $19.8 million, respectively.  The total fair value of restricted stockunits vested during fiscal 2005 and fiscal 2004 was approximately$0.8 million and $0.5 million, respectively.

As of December 31, 2005, there was approximately$9.3 million and $3.2 million of total unrecognized compensation costrelated to stock option grants and restricted stock unit awards, respectively,under the stock-based compensation plans. The consummation of the Merger accelerated the recognition ofcompensation cost, and, accordingly, all of this cost was included in SG&Ain the consolidated statements of operations in the period from January 1, 2006to February 13, 2006.

The compensation cost that has been charged against income forrestricted stock unit grants was approximately $1.2 million and $0.5million for fiscal year 2005 and fiscal year 2004, respectively.  No compensation cost was recognized for stockoption grants for either fiscal year 2005 or fiscal year 2004.

*Share-basedCompensation Plans—Successor Entity*

On February 14, 2006, the board of directors (the “Board”)and stockholders of Linens Holding Co. adopted the Linens Holding Co. StockOption Plan (the “Plan”). The Plan provides employees or directors of theCompany or its subsidiaries, who are in a position to contribute to thelong-term success of these entities, with options to acquire shares in theCompany to aid in attracting, retaining and motivating persons of outstandingability.  The Plan was amended inMarch 2006 to increase the number of shares of common stock, par value$0.01 per share, of Linens Holding (the “Common Stock”) available for issuanceunder the Plan to 1,157,298 shares.

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As of December 30, 2006, 839,946 stock options wereoutstanding as detailed below:
| ** **                                                                                                    | ** ** | **Number of Stock** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                    | ** ** | **Options Granted**      | ** ** |
| Grants under the  Linens Holding Co. Stock Option Plan                                                        |       | 736,946                       |       |
| Grants approved  by the Board and not included in the Plan                                                    |       | 53,000                        |       |
| Grants not  included in the Plan to members of the Board in accordance with the Director  Compensation Policy |       | 50,000                        |       |
|                                                                                                          |       | 839,946                       |       |

The following is asummary of share-based option activity for the period February 14, 2006 toDecember 30, 2006:

| Successor Entity                  | ** ** |
|----------------------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted Average** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average** | ** ** | **Remaining** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual Term** | ** ** |
| **Options**                            | ** ** | **Shares** | ** ** | **Price** | ** ** | **(years)** | ** ** |
| **Outstanding  at February 14, 2006**  | ** ** | **—** | ** ** | **$** | **—** | ** ** | ** ** | ** ** |
| Options granted                        |       | 737,446 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | — |   | — |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at April 1, 2006**      | ** ** | **737,446** | ** ** | **$** | **50.00** | ** ** | ** ** | ** ** |
| Options granted                        |       | 156,500 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | (88,500 | ) | 50.00 |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at July 1, 2006**       | ** ** | **805,446** | ** ** | **$** | **50.00** |   |   |   |
| Options granted                        |       | 45,000 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | (11,000 | ) | 50.00 |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at September 30, 2006** | ** ** | **839,446** | ** ** | **$** | **50.00** | ** ** | ** ** | ** ** |
| Options granted                        |       | 25,000 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | (24,500 | ) | 50.00 |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at December 30, 2006**  | ** ** | **839,946** | ** ** | **$** | **50.00** | ** ** | **6.29** | ** ** |
|                                   |       |   |   |   |   |   |   |
| **Exercisable at December 30, 2006**   | ** ** | **103,000** | ** ** | **$** | **50.00** | ** ** | **6.32** | ** ** |

There are noprovisions in the Plan for the issuance of restricted stock units.

The weighted-average grant date fair value of options grantedduring the period February 14, 2006 to December 30, 2006 (successor entity) was$17.34.

There were no stock option exercises during the periodFebruary 14, 2006 to December 30, 2006.

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The following is a summary of the activity for nonvested stockoption grants as of December 30, 2006 and the changes for the periodFebruary 14, 2006 to December 30, 2006:
| ** **                           | ** ** | **Successor Entity** | ** ** |
|--------------------------------------|------------|---------------------------|------------|
| ** **                           | ** ** | **Stock Options**    | ** ** |
| ** **                           | ** ** | **Options**               | ** ** | **Fair Value(1)** | ** ** |
| **Nonvested  at February 14, 2006**  | ** ** | **—**                | ** ** | **$** | **—** | ** ** |
| Grants                               |       | 737,446                   |       | 17.43 |   |
| Vested                               |       | (40,000                   | )          | 16.67 |   |
|                                 |       |                      |       |   |   |
| **Nonvested  at April 1, 2006**      | ** ** | **697,446**               | ** ** | **$** | **17.47** | ** ** |
| Grants                               |       | 156,500                   |       | 17.21 |   |
| Vested                               |       | (48,000                   | )          | 16.79 |   |
| Canceled                             |       | (88,500                   | )          | 17.47 |   |
|                                 |       |                      |       |   |   |
| **Nonvested  at July 1, 2006**       | ** ** | **717,446**               | ** ** | **$** | **17.46** | ** ** |
| Grants                               |       | 45,000                    |       | 16.43 |   |
| Vested                               |       | (10,000                   | )          | 15.99 |   |
| Canceled                             |       | (11,000                   | )          | 17.47 |   |
|                                 |       |                      |       |   |   |
| **Nonvested  at September 30, 2006** | ** ** | **741,446**               | ** ** | **$** | **17.42** | ** ** |
| Grants                               |       | 25,000                    |       | 17.08 |   |
| Vested                               |       | (5,000                    | )          | 17.00 |   |
| Canceled                             |       | (24,500                   | )          | 17.41 |   |
|                                 |       |                      |       |   |   |
| **Nonvested at December 30, 2006**   | ** ** | **736,946**               | ** ** | **$** | **17.41** | ** ** |

----

*(1)    *Representsthe weighted-average grant date fair value per option, using the Monte Carlosimulation option-pricing model for Performance Options, and the Black-Scholesoption-pricing model for Time Options.

The total fair value of stock options vested during the periodFebruary 14, 2006 to December 30, 2006 was approximately $1.7 million.

As of December 30, 2006, there was approximately$9.8 million of total unrecognized compensation cost related to stockoption grants both under and outside the Plan. This cost is expected to be recognized over a remaining weighted-averageperiod of 2.9 years.  Thecompensation cost that has been charged against income for stock option grantswas approximately $4.3 million for the period February 14, 2006 toDecember 30, 2006 and was included in Selling, General and AdministrativeExpense in the Consolidated Statements of Operations.

Prior to the adoption of SFAS No. 123 (Revised 2004) theCompany used the Black-Scholes option-pricing model for estimating the fairvalue for all options granted.  Beginningin the first quarter of 2006, the Company, with the assistance of anindependent third party, used the Monte Carlo simulation option-pricing modelfor estimating the fair value of Performance Options and the Black-Scholesoption-pricing model for Time Options. This change was made in order to provide a better estimate of fairvalue.  The Monte Carlo option-pricingmodel is particularly useful in the valuation of options with complicatedfeatures that make them difficult to value through a straight-forwardBlack-Scholes-style computation.

84

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Presented below is a comparative summary of valuationassumptions for the indicated periods:
| ** **                                            | ** ** | **(Successor Entity**)             | ** ** | ** ** | ** ** | **(Predecessor Entity)**         | ** ** | **(Predecessor Entity)**   | ** ** | **(Predecessor Entity)**   | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| ** **                                            | ** ** | **February 14, 2006 to** | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| ** **                                            | ** ** | **December 30, 2006**         | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| ** **                                            | ** ** | **(Monte Carlo**                   | ** ** | ** ** | ** ** | **January 1, 2006 to** | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
| ** **                                            | ** ** | **Simulation and**                 | ** ** | ** ** | ** ** | **February 13, 2006**       | ** ** | **December 31, 2005** | ** ** | **January 1, 2005**   | ** ** |
| **Valuation Assumptions:**                       | ** ** | **Black-Scholes)**                      | ** ** | ** ** | ** ** | **(Black-Scholes)**                   | ** ** | **(Black-Scholes)**             | ** ** | **(Black-Scholes)**             | ** ** |
| Weighted-average  fair value of options granted       |       | N/A                                     |       |       |       | No Grants                             |       | $                               | 8.24       |                            | $          | 8.65 |   |
| Weighted-average  calculated value of options granted |       | $                                       | 17.34      |       |       |                                  | No Grants  |                            | N/A        |                            | N/A        |   |
| Expected  volatility                                  |       | N/A                                     | (1)        |       |       | No Grants                             |       | 28.4% — 41.1               | %          | 28.2% — 55.0               | %          |
| Weighted-average  volatility                          |       | 37.9%                                   | (1)        |       |       | No Grants                             |       | 35.2                            | %          | 38.1                            | %          |
| Weighted-average  expected term (in years)            |       | 3.7                                     |       |       |       | No Grants                             |       | 4.0                             |       | 3.8                             |       |
| Dividend yield                                        | ** ** | **—**                              |       |       |       | No Grants                             | ** ** | **—**                      | ** ** | **—**                      | ** ** |
| Risk-free  interest rate                              |       | 4.6% - 5.2                              | %          |       |       | No Grants                             |       | 3.8% — 4.4                 | %          | 1.5% — 5.1                 | %          |
| Weighted-average  risk-free interest rate             |       | 4.8                                     | %          |       |       | No Grants                             |       | 4.0                             | %          | 3.4                             | %          |
| Weighted average  expected annual forfeiture          |       | 3.8                                     | %          |       |       | No Grants                             |       | 1.0                             | %          | 1.1                             | %          |
|                                                       |            |                                         |            |            |            |                                       |            |                                 |            |                                 |            |  |  |  |

----

*(1)**         *The Company used theaverage of the historical volatility of each of the component companiesincluded in the Standard & Poors Specialty Retail Index as asubstitute for expected volatility.

The Company utilized historical optionee behavioral data toestimate the option exercise and termination rates used in the Black-Scholesoption-pricing model prior to the adoption of SFAS No. 123 (Revised2004).  The expected term of the optionsrepresents the period of time the options were expected to be outstanding basedon historical trends.  Expectedvolatility was based on the historical volatility of the common stock of Linens‘n Things, Inc. for a period approximating the expected life. The Companyhas never paid dividends, and, accordingly, the dividend yield is zero.  The risk-free interest rate within theexpected term was based on the U.S. Treasury yield curve in effect at the timeof grant.

For the period subsequent to the adoption of SFAS No. 123(Revised 2004), it is not possible for the Company, a non-public entity,to use Company-specific volatility in determining a reasonable estimate of fairvalue of options granted.  Accordingly,the Company is required to use an alternative measurement method.  Under the alternative measurement method, anonpublic entity uses a calculated volatility, determined by applying thehistorical volatility of an appropriate index of public entities, as an inputto the valuation models.  The Companyused the Standard & Poors Specialty Retail Index for a periodapproximating the expected term as this index most closely approximates theCompany’s applicable operating industry. Expected term of share options granted represents the period of timethat the option grants are expected to be outstanding.  The Company is not expected to pay dividends,and, accordingly, the dividend yield is zero. The risk-free interest rate within the expected term was based on theU.S. Treasury yield curve in effect at the time of grant.

Prior to the adoption of SFAS No. 123 (Revised 2004) theCompany complied with the disclosure requirements of SFAS No. 148, *“Accounting for Stock-Based Compensation—Transition and Disclosure—anamendment of SFAS No. 123”* (“SFAS No. 148”).  SFAS No. 148 required prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.

Set forth below for the indicated periods is the Company’s net(loss) income presented “as reported” and as if the Company had applied thefair value method to its stock-based compensation under the disclosureprovisions of SFAS No. 123 and amended disclosure provisions of SFASNo. 148:

85

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| ** **                                                                                                                                                      | ** ** | **Successor Entity**       | ** ** | ** ** | ** ** | **Predecessor Entity**           | ** ** | **Predecessor Entity**     | ** ** | **Predecessor Entity**     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **February 14, 2006** | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                      | ** ** | **to**                          | ** ** | ** ** | ** ** | **January 1, 2006 to** | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                                      | ** ** | **December 30,**           | ** ** | ** ** | ** ** | **February 13,**                 | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
| **(In millions)**                                                                                                                                          | ** ** | **2006**                        | ** ** | ** ** | ** ** | **2006**                              | ** ** | **December 31, 2005** | ** ** | **January 1, 2005**   | ** ** |
| **Net  (loss) income:**                                                                                                                                         |       |                            |       |       |       |                                  |       |                            |       |                            |       |
| As reported                                                                                                                                                     |       | $                               | (106.5     | )          |       |                                  | $          | (47.9                           | )          | $                               | 36.0       |   | $ | 60.5 |   |
| Add: stock-based employee compensation expense  included in net (loss) income as reported, net of related tax effects(1)                                        |       | 2.6                             |       |       |       | 8.7                                   |       | 0.8                             |       | 0.3                             |       |
|                                                                                                                                                            |       |                            |       |       |       |                                  |       |                            |       |                            |       |
|                                                                                                                                                            |       | (103.9                          | )          |       |       | (39.2                                 | )          | 36.8                            |       | 60.8                            |       |
| Deduct: total stock-based employee compensation  expense determined under the fair value based method of accounting for all  awards, net of related tax effects |       | 2.6                             |       |       |       | 8.7                                   |       | 7.3                             |       | 8.6                             |       |
|                                                                                                                                                            |       |                            |       |       |       |                                  |       |                            |       |                            |       |
| Pro forma loss                                                                                                                                                  |       | $                               | (106.5     | )          |       |                                  | $          | (47.9                           | )          | $                               | 29.5       |   | $ | 52.2 |   |

----

(1)  Stock-based employee compensation expenseincluded in net (loss) income as reported, net of related tax effects isdetailed as follows:
| ** **                                                             | ** ** | **Successor Entity**                                              | ** ** | ** ** | **Predecessor Entity**                                          | ** ** | **Predecessor Entity**                                  | ** ** | **Predecessor Entity**                                | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(In millions)**                                                 | ** ** | **February 14, 2006 to   December 30,  2006** | ** ** | ** ** | **January 1, 2006 to   February 13,  2006** | ** ** | **Fiscal Year Ended  December 31, 2005** | ** ** | **Fiscal Year Ended  January 1, 2005** | ** ** |
|                                                                   |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
| Compensation  expense:                                                 |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
| Stock option grants                                                    |       | $                                                                      | 4.3        |       |                                                                 | $          | 9.3                                                          | ** ** | **$**                                                      | **—** | ** ** | **$** | **—** |   |
| Restricted stock units                                                 | ** ** | **—**                                                             |       |       | 3.2                                                                  |       | 1.2                                                          |       | 0.5                                                        |       |
|                                                                   |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
|                                                                   |       | 4.3                                                                    |       |       | 12.5                                                                 |       | 1.2                                                          |       | 0.5                                                        |       |
|                                                                   |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
| Benefit for  income taxes:                                             |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
| Stock option grants                                                    |       | (1.7                                                                   | )          |       | (2.8                                                                 | )          | **—**                                                   | ** ** | **—**                                                 |       |
| Restricted stock units                                                 | ** ** | **—**                                                             |       |       | (1.0                                                                 | )          | (0.4                                                         | )          | (0.2                                                       | )          |
|                                                                   |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
|                                                                   |       | (1.7                                                                   | )          |       | (3.8                                                                 | )          | (0.4                                                         | )          | (0.2                                                       | )          |
|                                                                   |       |                                                                   |       |       |                                                                 |       |                                                         |       |                                                       |       |
| Stock-based employee  compensation expense, net of related tax effects |       | $                                                                      | 2.6        |       |                                                                 | $          | 8.7                                                          |       | $                                                          | 0.8        |   | $ | 0.3 |   |

 

**14. Employee Benefit Plans**

The Company has a 401(k) plan for its US employees and anemployee savings plan for its Canadian employees. Company contributions to thetwo plans amounted to approximately $3.4 million, $0.3 million,$1.4 million and $1.4 million for the period February 14, 2006 toDecember 30, 2006, the period January 1, 2006 to February 13, 2006, fiscal year2005 and fiscal year 2004, respectively. The Company elected to make “safe harbor” matching contributions inaccordance with statutory requirements to all eligible participants in its401(k) plan beginning January 1, 2006.

86

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Effective July 1, 1999, the Company established aSupplemental Executive Retirement Program (“SERP”). The SERP, which in part wasfunded with the cash surrender values of certain life insurance policies ownedby the Company, provided eligible executives with supplemental pensionbenefits, in addition to amounts received under the Company’s 401(k) benefitplan. Under the terms of the SERP, upon termination of employment with theCompany, eligible participants were entitled to benefits determined under theSERP beginning at or after age 55. The SERP had three components: (i) adefined benefit component, (ii) a split dollar insurance component, whichwas frozen due to limitations imposed by the Sarbanes-Oxley Act prohibiting theCompany from paying premiums into the policy beginning with the 2003 premiumpayment and (iii) a new defined contribution component, which wasestablished in 2004 because of the restrictions on further premium paymentsunder the split dollar insurance arrangement. This new component was designedto provide, together with the defined benefit component and the frozen splitdollar policy, total projected benefits similar to what would have beenprovided if the split dollar insurance arrangement had not been frozen.

The former Chairman and Chief Executive Officer of Linens ‘nThings, Inc. was the only participant under the SERP, whose employmentterminated on February 16, 2006 following the consummation of the Merger.  In accordance with his employment agreement,the Company was obligated to pay severance and other entitlements. Theseentitlements included a payment equal to approximately $5,567,480 representingthe defined benefit portion of his SERP, $975,184 representing the definedcontribution portion of his SERP, and his then current interest under thefrozen split dollar life insurance arrangement totaling $255,848.

The Company recorded expenses related to the SERP ofapproximately $220,000 and $170,000 for fiscal 2005 and fiscal 2004,respectively.

**15. Income Taxes**

The components of (loss) income before (benefit) provision for incometaxes are comprised of the following:

 
| ** **              | ** ** | **February 14, 2006  to** | ** **   | ** ** | ** ** | **January 1, 2006  to** | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------|------------|-------------------------------------|--------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **December 30,  2006**         | ** **   | ** ** | ** ** | **February 13,  2006**       | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** |
| **(in thousands)** | ** ** | **Successor**                       | ** **   | ** ** | ** ** | **Predecessor**                   | ** ** | **Predecessor**                 | ** ** | **Predecessor** | ** ** |
|                    |       |                                |         |       |       |                              |       |                            |       |   |   |
| Domestic                |       | $                                   | (191,747     | )          |       |                              | $          | (68,014                         | )          | $ | 49,356 |   | $ | 91,989 |   |
| Foreign                 |       | 18,362                              |         |       |       | (1,160                            | )          | 8,505                           |       | 5,940 |   |
|                    |       |                                |         |       |       |                              |       |                            |       |   |   |
| **Total**               | ** ** | **$**                               | **(173,385** | **)**      | ** ** | ** **                        | **$**      | **(69,174**                     | **)**      | **$** | **57,861** | ** ** | **$** | **97,929** | ** ** |

 

 

87

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The (benefit) provision for income taxes is comprised of the following:

 
| ** **              | ** ** | **February 14, 2006  to** | ** **  | ** ** | ** ** | **January 1, 2006  to** | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------|------------|-------------------------------------|-------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **December 30,  2006**         | ** **  | ** ** | ** ** | **February 13,  2006**       | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** |
| **(in thousands)** | ** ** | **Successor**                       | ** **  | ** ** | ** ** | **Predecessor**                   | ** ** | **Predecessor**                 | ** ** | **Predecessor** | ** ** |
|                    |       |                                |        |       |       |                              |       |                            |       |   |   |
| **Current:**            | ** ** | ** **                          | ** **  | ** ** | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
| U.S. Federal            |       | $                                   | (1,990      | )          |       |                              | $          | (14,545                         | )          | $ | 21,516 |   | $ | 28,212 |   |
| U.S. State              |       | 187                                 |        |       |       | 354                               |       | 8,526                           |       | 8,932 |   |
| Non-U.S.                |       | 8,592                               |        |       |       | (354                              | )          | 3,102                           |       | 1,376 |   |
| ** **              | ** ** | ** **                          | ** **  | ** ** | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                    | ** ** | **6,789**                           | ** **  | ** ** | ** ** | **(14,545**                       | **)**      | **33,144**                      | ** ** | **38,520** | ** ** |
|                    |       |                                |        |       |       |                              |       |                            |       |   |   |
| **Deferred:**           |       |                                |        |       |       |                              |       |                            |       |   |   |
| U.S. Federal            |       | $                                   | (62,568     | )          |       |                              | $          | (3,239                          | )          | $ | (6,578 | ) | $ | 2,971 |   |
| U.S. State              |       | (9,458                              | )           |       |       | (3,481                            | )          | (3,654                          | )          | (4,977 | ) |
| Non-U.S.                |       | (1,615                              | )           |       |       | (5                                | )          | (1,033                          | )          | 894 |   |
|                    |       |                                |        |       |       |                              |       |                            |       |   |   |
|                    | ** ** | **(73,641**                         | **)**       | ** ** | ** ** | **(6,725**                        | **)**      | **(11,265**                     | **)**      | **(1,112** | **)** |
|                    |       |                                |        |       |       |                              |       |                            |       |   |   |
| **Total**               | ** ** | **$**                               | **(66,852** | **)**      | ** ** | ** **                        | **$**      | **(21,270**                     | **)**      | **$** | **21,879** | ** ** | **$** | **37,408** | ** ** |

 

Undistributed earnings of the Company’s foreign subsidiariesof approximately $30 million at December 30, 2006 are consideredpermanently reinvested outside the United States, and as a result, the Companyhas not provided federal income taxes on the unremitted earnings.  It is not practicable to determine the taxliability, if any, that would be payable if such earnings were not reinvestedindefinitely.

The following is a reconciliation between the statutoryFederal income tax rate and the Company’s effective tax rate for:

 
| ** **                                  | ** ** | **February 14,  2006 to** | ** ** | ** ** | ** ** | **January 1, 2006  to** | ** ** | ** **                      | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **December 30,**               | ** ** | ** ** | ** ** | **February 13,**             | ** ** | **Fiscal Year Ended** | ** ** |
| ** **                                  | ** ** | **2006**                            | ** ** | ** ** | ** ** | **2006**                          | ** ** | **December 31, 2005** | ** ** | **January 1, 2005** | ** ** |
| ** **                                  | ** ** | **Successor**                       | ** ** | ** ** | ** ** | **Predecessor**                   | ** ** | **Predecessor**                 | ** ** | **Predecessor** | ** ** |
|                                        |       |                                |       |       |       |                              |       |                            |       |   |   |
| Statutory  Federal income tax rate          |       | 35.0                                | %          |       |       | 35.0                              | %          | 35.0                            | %          | 35.0 | % |
| State income  taxes, net of federal benefit |       | 3.7                                 |       |       |       | 4.5                               |       | 5.5                             |       | 2.6 |   |
| Transaction-related  costs                  | ** ** | **—**                          |       |       |       | (7.9                              | )          | **—**                      |       | **—** | ** ** |
| Foreign taxes                               |       | 0.2                                 |       |       |       | (0.1                              | )          | (1.6                            | )          | 0.3 |   |
| Other                                       |       | (0.3                                | )          |       |       | (0.8                              | )          | (1.1                            | )          | 0.3 |   |
|                                        |       |                                |       |       |       |                              |       |                            |       |   |   |
| Effective tax  rate                         |       | 38.6                                | %          |       |       | 30.7                              | %          | 37.8                            | %          | 38.2 | % |

 

For the period January 1, 2006 to February 13, 2006, theeffective tax benefit rate of 30.7% is lower than the statutory federal rate of35.0% primarily due to transaction costs which may not be deducted on taxreturn filings.  The Successor Entityeffective tax benefit rate for the period February 14, 2006 to December 30,2006 was 38.6%.  This exceeds thestatutory federal tax rate of 35.0% primarily due to expected deferred statetax benefits.

88

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Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets and liabilitieswere as follows (in thousands):

 
| ** **                           | ** ** | **December 30,  2006** | ** **  | ** ** | ** ** | **December 31,   2005** | ** ** |
|--------------------------------------|------------|-----------------------------|-------------|------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **Successor**               | ** **  | ** ** | ** ** | **Predecessor**                   | ** ** |
| ** **                           | ** ** | ** **                  | ** **  |       |       | ** **                        | ** ** |
| **Deferred  tax assets:**            | ** ** | ** **                  | ** **  |       |       | ** **                        | ** ** |
| Employee benefits                    |       | $                           | 1,640       |       |       |                              | $          | 6,481 |   |
| Inventories                          |       | 693                         | ** **  |       |       | **—**                        | ** ** |
| Lease termination costs              | ** ** | **—**                  |        |       |       | 2,140                             |       |
| Federal NOL                          |       | 21,560                      | ** **  |       |       | **—**                        | ** ** |
| State NOL                            |       | 17,277                      |        |       |       | 5,911                             |       |
| Accrued expenses and reserves        |       | 31,973                      | ** **  |       |       | **—**                        | ** ** |
| Other                                |       | 6,365                       |        |       |       | 1,618                             |       |
|                                 |       |                        |        |       |       |                              |       |
| **Total  gross deferred tax assets** | ** ** | **79,508**                  | ** **  |       |       | **16,150**                        | ** ** |
| Valuation allowances                 |       | (13,040                     | )           |       |       | —                            |       |
| ** **                           | ** ** | ** **                  | ** **  |       |       | ** **                        | ** ** |
| **Total  net deferred tax asset**    | ** ** | **$**                       | **66,468**  | ** ** |       |                              | **$**      | **16,150** | ** ** |
| ** **                           | ** ** | ** **                  | ** **  |       |       | ** **                        | ** ** |
| ** Deferred tax liabilities:**  | ** ** | ** **                  | ** **  |       |       | ** **                        | ** ** |
| Inventories                          | ** ** | **$**                       | **—**  |       |       |                              | $          | 9,762 |   |
| Property and equipment               |       | 120,922                     |        |       |       | 61,594                            |       |
| Intangible assets                    |       | 51,047                      | ** **  |       |       | **—**                        | ** ** |
| Other                                |       | 3,661                       |        |       |       | 1,578                             |       |
|                                 |       |                        |        |       |       |                              |       |
| **Total  deferred tax liabilities**  | ** ** | **175,630**                 | ** **  |       |       | **72,934**                        | ** ** |
|                                 |       |                        |        |       |       |                              |       |
| **Net deferred tax liability**       | ** ** | **$**                       | **109,162** | ** ** |       |                              | **$**      | **56,784** | ** ** |

 

At December 30, 2006, the Company has approximately $66.7million of federal net operating loss carryforwards after carryback whichexpire in 2026 and approximately $200.0 million of state net operating losscarryforwards (“State NOL”), expiring at various dates between 2007 and 2022.In assessing the realizability of deferred tax assets, management considers whetherit is more likely than not that some portion or all of the deferred tax assetswill not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considers thescheduled reversal of deferred tax liabilities, projected future taxable incomeand tax planning strategies in making this assessment. Based upon the level ofhistorical taxable income and projections for future taxable income over theperiods in which the deferred tax assets are deductible, management believes itis more likely than not that the Company will realize the benefits of thesedeductible differences, net of the existing valuation allowances of$13.0 million at December 30, 2006. The amount of the deferred taxasset considered realizable, however, could be reduced in the near term ifestimates of future taxable income during the carryforward period are reduced.

89

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At December 30, 2006 and December 31, 2005, the netdeferred tax liability was included in the consolidated balance sheets asfollows (in thousands):
| ** **                                 | ** ** | **December 30,  2006** | ** **  | ** ** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|-----------------------------|-------------|------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Successor**               | ** **  | ** ** | ** ** | **Predecessor**             | ** ** |
|                                       |       |                        |        |       |       |                        |       |
| Current deferred  asset                    |       | $                           | 16,815      |       |       |                        | $          | 2,033 |   |
| Current deferred  liability                | ** ** | **—**                  |        |       |       | (4,401                      | )          |
| Non-current  deferred income tax liability |       | (125,977                    | )           |       |       | (54,416                     | )          |
|                                       |       |                        |        |       |       |                        |       |
| **Net deferred tax liability**             | ** ** | **$**                       | **109,162** | ** ** | ** ** | ** **                  | **$**      | **56,784** | ** ** |

 

During October 2006, the Company collected a predecessorcarryback tax receivable of $20.1 million.

**16. Commitments and Contingencies**

TheCompany is involved in various claims and legal actions arising in the ordinarycourse of business. In the opinion of management the ultimate disposition ofthese matters is not expected to have a material adverse effect on the Company’sconsolidated financial position, results of operations or liquidity.

**17. Related Party Transactions**

*Management Services Agreement*

Uponconsummation of the Merger, the Company entered into a management servicesagreement with Apollo Management V, L.P., NRDC Linens B LLC and Silver PointCapital Fund Investments LLC (each of whom is an affiliate of theCompany).  Under this management servicesagreement, the Sponsors agreed to provide to the Company certain investmentbanking, management, consulting, financial planning and real estate advisoryservices on an ongoing basis for a fee of $2 million per year.  Under this management services agreement,Apollo Management V, L.P. also agreed to provide to the Company certainfinancial advisory and investment banking services from time to time inconnection with major financial transactions that may be undertaken by it orits subsidiaries in exchange for fees customary for such services after takinginto account Apollo Management V, L.P.’s expertise and relationships within thebusiness and financial community.  Underthis management services agreement, the Company also agreed to providecustomary indemnification.  In addition,the Company paid a transaction fee of $15 million in the aggregate (plusreimbursement of expenses) to the Sponsors for financial advisory servicesrendered in connection with the Merger. This fee has been included as part of the purchase price.  These services included assisting the Companyin structuring the Merger, taking into account tax considerations and optimalaccess to financing, and assisting in the negotiation of the Company’s materialagreements and financing arrangements in connection with the Merger.

*Stockholders’Agreement*

Theonly stockholders of the Company are Linens Investors, LLC, a limited liabilitycompany owned by the Sponsors, two executives of the Company, Robert J.DiNicola, Chairman and Chief Executive Officer, and F. David Coder, ExecutiveVice President, Store Operations, and one nonemployee director, George G.Golleher.  In connection therewith,Linens Investors, LLC has entered into a stockholders’ agreement with theCompany, and each of the other stockholders have entered into joinderagreements to be bound by the stockholders’ agreement.  The stockholders’ agreement sets forthcertain provisions relating to the management of the Company.  In addition, the stockholders’ agreementcontains customary drag along rights, tag along rights, registration rights,restrictions on the transfer of the Company’s common stock and an indemnity ofthe Sponsors.

**18.Supplemental Consolidating Financial Information**

On February 14, 2006 Linens ‘n Things, Inc. andLinens ‘n Things Center, Inc. (collectively, the “Issuers”), issued$650 million aggregate principal amount of Senior Secured Floating RateNotes due 2014.

90

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The Notes are fully and unconditionally guaranteed,jointly and severally, on a senior basis by the Company, and by each of theCompany’s direct and indirect subsidiaries that guarantee the Company’s newasset-based revolving credit facility except for its Canadiansubsidiaries.  The Company’s Canadiansubsidiaries (the “Non-Guarantors”) are not guarantors of the Notes.

The following tables present the supplemental consolidatingfinancial information for the Company (Parent), the Co-Issuers, the Guarantors(excluding the Company which is also a Guarantor but is separately presented)and the Non-Guarantors, together with eliminations, as of and for theperiods indicated.  The Company has notpresented separate financial statements and other disclosures concerning theCo-Issuers, Guarantors and Non-Guarantors because management has determinedthat such information is not meaningful to investors.  The accounting policies for Parent,Co-Issuers, Guarantors, and Non-Guarantors are as described for the Companyunder “Summary of Significant Accounting Policies” (see Note 2 to theconsolidated financial statements).  Thefinancial information may not necessarily be indicative of the financialposition, results of operations or cash flows had the Parent, Co-Issuers,Guarantors and Non-Guarantors operated as independent entities.

The information as ofDecember 30, 2006, and for the period February 14, 2006 to December 30, 2006,presents the financial position and results of operations and cash flows,respectively, of the Successor Entity. The information as of December 31, 2005 and for the periods January1, 2006 to February 13, 2006, fiscal 2005 and fiscal 2004 presents thefinancial position and results of operations and cash flows, respectively, ofthe Predecessor Entity.

91

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**December 30, 2006**

**(In Thousands)**
| ** **                                                             | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                                             |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Current assets:                                                        |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Cash and cash  equivalents                                             | ** ** | **$**       | **—**  |           | $          | 1,087          |       | $                  | 10,218        |             | $          | 1,221            |       | $ | — |   | $ | 12,526 |   |
| Accounts  receivable                                                   |       | —      |        | 435            |       | 33,083         |       | 3,545              |          | —           |       | 37,063           |       |
| Inventories                                                            |       | —      |        | 14,822         |       | 728,503        |       | 49,677             |          | —           |       | 793,002          |       |
| Prepaid expenses  and other current assets                             |       | —      |        | 141            |       | 14,662         |       | 505                |          | —           |       | 15,308           |       |
| Current deferred  income taxes                                         |       | —      |        | 16,561         |       | —         |       | 254                |          | —           |       | 16,815           |       |
|                                                                   |       |        |        |           |       |           |       |               | ** **    | ** **       |       |             |       |
| **Total  current assets**                                              |       | —      | ** **  | **33,046**     | ** ** | **786,466**    | ** ** | **55,202**         |          | **—**       | ** ** | **874,714**      | ** ** |
| ** **                                                             |       |        | ** **  | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment, net                                           |       | —      |        | 10,154         |       | 477,390        |       | 43,285             |          | —           |       | 530,829          |       |
| Identifiable  intangible assets, net                                   |       | —      |        | 731            |       | 147,650        |       | 1,663              |          | —           |       | 150,044          |       |
| Goodwill                                                               |       | —      |        | 7,357          |       | 244,485        |       | 15,988             |          | —           |       | 267,830          |       |
| Intercompany  receivables                                              |       | —      |        | —         |       | 774,784        |       | 22,986             |          | (797,770         | )          | —           |       |
| Intercompany  notes receivable                                         |       | —      |        | 1,176,998      |       | —         |       | 23,314             |          | (1,200,312       | )          | —           |       |
| Investment in  subsidiaries                                            |       | 544,742     |        | 802,241        |       | —         |       | —             |          | (1,346,983       | )          | —           |       |
| Deferred  financing cost and other noncurrent assets, net              |       | —      |        | 33,813         |       | 687            |       | 17                 |          | —           |       | 34,517           |       |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total  assets**                                                      | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**              | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**                         |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Current  liabilities:                                                  |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Accounts payable                                                       |       | $           | —      |           | $          | 19             |       | $                  | 232,373       |             | $          | 27,697           |       | $ | — |   | $ | 260,089 |   |
| Accrued expenses  and other current liabilities                        |       | —      |        | 38,447         |       | 135,780        |       | 12,355             |          | —           |       | 186,582          |       |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total  current liabilities**                                         | ** ** | **—**  | ** **  | **38,466**     | ** ** | **368,153**    | ** ** | **40,052**         | ** **    | **—**       | ** ** | **446,671**      | ** ** |
| Intercompany  payable                                                  |       | —      |        | 797,770        |       | —         |       | —             |          | (797,770         | )          | —           |       |
| Intercompany  notes payable                                            |       | —      |        | —         |       | 1,153,800      |       | 46,513             |          | (1,200,313       | )          | —           |       |
| Senior secured  notes and other long-term debt, net of current portion |       | —      |        | 687,800        |       | 2,076          |       | —             |          | —           |       | 689,876          |       |
| Noncurrent  deferred income taxes                                      |       | —      |        | (5,343         | )          | 125,894        |       | 5,426              |          | —           |       | 125,977          |       |
| Other long term  liabilities                                           |       | —      |        | 905            |       | 46,953         |       | 2,809              |          | —           |       | 50,667           |       |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total  liabilities**                                                 | ** ** | **—**  | ** **  | **1,519,598**  | ** ** | **1,696,876**  | ** ** | **94,800**         | ** **    | **(1,998,083**   | **)**      | **1,313,191**    | ** ** |
| ** **                                                             |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total  shareholders’ equity**                                   | ** ** | **544,742** | ** **  | **544,742**    | ** ** | **734,586**    | ** ** | **67,655**         | ** **    | **(1,346,982**   | **)**      | **544,743**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total liabilities and  shareholders’ equity**                   | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**              | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |

 

92

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**December 31, 2005**

**(In Thousands)**
| ** **                                           | ** ** | **Co-Issuer** | ** **    | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|------------------------------------------------------|------------|---------------|---------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
| **Assets**                                           | ** ** | ** **    | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Current assets:                                      |       |          |          |           |       |               |       |             |        |             |       |
| Cash and cash  equivalents                           |       | $             | 136,569       |           | $          | 8,718              |       | $                | 12,871      |             | $          | — |   | $ | 158,158 |   |
| Accounts  receivable                                 |       | 361           |          | 39,757         |       | 3,443              |       | —           |        | 43,561           |       |
| Inventories                                          |       | 15,105        |          | 725,856        |       | 46,322             |       | —           |        | 787,283          |       |
| Prepaid expenses  and other current assets           |       | 84            |          | 15,368         |       | 1,973              |       | —           |        | 17,425           |       |
| Current deferred  income taxes                       |       | —        |          | 1,789          |       | 244                |       | —           |        | 2,033            |       |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Total  current assets**                            | ** ** | **152,119**   | ** **    | **791,488**    | ** ** | **64,853**         | ** ** | **—**       | ** **  | **1,008,460**    | ** ** |
| ** **                                           | ** ** | ** **    | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Property and  equipment, net                         |       | 9,974         |          | 561,271        |       | 41,002             |       | —           |        | 612,247          |       |
| Identifiable  intangible assets, net                 |       | 331           |          | 861            |       | 109                |       | —           |        | 1,301            |       |
| Goodwill                                             |       | —        |          | 18,126         |       | —             |       | —           |        | 18,126           |       |
| Intercompany  receivable                             |       | —        |          | 856,999        |       | —             |       | (856,999         | )           | —           |       |
| Intercompany  notes receivable                       |       | 1,096,991     |          | —         |       | 23,306             |       | (1,120,297       | )           | —           |       |
| Investment in  subsidiaries                          |       | 490,933       |          | —         |       | —             |       | (490,933         | )           | —           |       |
| Deferred charges  and other noncurrent assets, net   |       | 1             |          | 10,605         |       | 94                 |       | —           |        | 10,700           |       |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Total  assets**                                    | ** ** | **$**         | **1,750,349** | ** **     | **$**      | **2,239,350**      | ** ** | **$**            | **129,364** | ** **       | **$**      | **(2,468,229** | **)** | **$** | **1,650,834** | ** ** |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Liabilities  and Shareholders’ Equity**       | ** ** | ** **    | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Current  liabilities:                                |       |          |          |           |       |               |       |             |        |             |       |
| Accounts payable                                     |       | $             | (16           | )              | $          | 249,399            |       | $                | 18,199      |             | $          | — |   | $ | 267,582 |   |
| Accrued expenses  and other current liabilities      |       | 43,824        |          | 144,777        |       | 10,360             |       | —           |        | 198,961          |       |
| Current deferred  income taxes                       |       | 222           |          | 4,179          |       | —             |       | —           |        | 4,401            |       |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Total  current liabilities**                       | ** ** | **44,030**    | ** **    | **398,355**    | ** ** | **28,559**         | ** ** | **—**       | ** **  | **470,944**      | ** ** |
| ** **                                           | ** ** | ** **    | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Intercompany  payable                                |       | 848,054       |          | —         |       | 8,945              |       | (856,999         | )           | —           |       |
| Intercompany  notes payable                          |       | —        |          | 1,073,800      |       | 46,497             |       | (1,120,297       | )           | —           |       |
| Other long-term  debt, net of current portion        |       | —        |          | 2,139          |       | —             |       | —           |        | 2,139            |       |
| Noncurrent  deferred income taxes                    |       | 2,732         |          | 51,566         |       | 118                |       | —           |        | 54,416           |       |
| Other long-term  liabilities                         |       | 5,670         |          | 249,071        |       | 18,731             |       | —           |        | 273,472          |       |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Total  liabilities**                               | ** ** | **900,486**   | ** **    | **1,774,931**  | ** ** | **102,850**        | ** ** | **(1,977,296**   | **)**       | **800,971**      | ** ** |
| ** **                                           | ** ** | ** **    | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| **Total  shareholders’ equity**                 | ** ** | **849,863**   | ** **    | **464,419**    | ** ** | **26,514**         | ** ** | **(490,933**     | **)**       | **849,863**      | ** ** |
|                                                 |       |          |          |           |       |               |       |             |        |             |       |
| **Total liabilities and  shareholders’ equity** | ** ** | **$**         | **1,750,349** | ** **     | **$**      | **2,239,350**      | ** ** | **$**            | **129,364** | ** **       | **$**      | **(2,468,229** | **)** | **$** | **1,650,834** | ** ** |

 

93

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**FOR****THE****PERIOD**

**February 14, 2006 to December 30, 2006**

**(In Thousands)**
| ** **                                                     | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| **Net  sales**                                                 | ** ** | **$**      | **—** |           | **$**      | **63,019**     | ** ** | **$**              | **2,283,151** | ** **       | **$**      | **188,195**      | ** ** | **$** | **—** | ** ** | **$** | **2,534,365** | ** ** |
| Cost of sales,  including buying and distribution costs        |       | —     |       | 38,092         |       | 1,422,088      |       | 96,831             |          | —           |       | 1,557,011        |       |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Gross  profit**                                              | ** ** | **—** |       | **24,927**     | ** ** | **861,063**    | ** ** | **91,364**         | ** **    | **—**       | ** ** | **977,354**      | ** ** |
| ** **                                                     | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Selling,  general and administrative expenses:**             |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Fixed asset  impairment                                        |       | —     |       | —         |       | 27,992         |       | —             |          | —           |       | 27,992           |       |
| Identifiable  intangible asset impairment                      |       | —     |       | —         |       | 3,119          |       | —             |          | —           |       | 3,119            |       |
| Other selling,  general and administrative expenses            |       | —     |       | 19,109         |       | 949,007        |       | 71,907             |          | —           |       | 1,040,023        |       |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
|                                                           |       | —     |       | 19,109         |       | 980,118        |       | 71,907             |          | —           |       | 1,071,134        |       |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Operating  profit (loss)**                                   | ** ** | **—** |       | **5,818**      |       | **(119,055**   | **)**      | **19,457**         |          | **—**       |       | **(93,780**      | **)**      |
| Interest (loss)  income                                        |       | —     |       | (91,609        | )          | (142           | )          | (99                | )             | 91,660           |       | (190             | )          |
| Interest expense                                               |       | —     |       | 79,610         |       | 90,652         |       | 1,193              |          | (91,660          | )          | 79,795           |       |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Interest  (income) expense, net                                |       | —     |       | (11,999        | )          | 90,510         |       | 1,094              |          | —           |       | 79,605           |       |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Income  (loss) before provision (benefit) for income taxes** | ** ** | **—** |       | **17,817**     | ** ** | **(209,565**   | **)**      | **18,363**         |          | **—**       | ** ** | **(173,385**     | **)**      |
| Provision  (benefit) for income taxes                          |       | —     |       | 6,774          |       | (79,658        | )          | 6,032              |          | —           |       | (66,852          | )          |
|                                                           |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Net income (loss)**                                          | ** ** | **$**      | **—** |           | **$**      | **11,043**     | ** ** | **$**              | **(129,907**  | **)**            | **$**      | **12,331**       | ** ** | **$** | **—** | ** ** | **$** | **(106,533** | **)** |

 

94

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**FOR THE****PERIOD**

**January 1, 2006 to February 13, 2006**

**(In Thousands)**
| ** **                                                     | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Net  sales**                                                 | ** ** | **$**          | **7,684**  | ** **     | **$**      | **259,826**        | ** ** | **$**            | **17,461** | ** **       | **$**      | **—** | ** ** | **$** | **284,971** | ** ** |
| Cost of sales,  including buying and distribution costs        |       | 4,749          |       | 165,927        |       | 9,999              |       | —           |       | 180,675          |       |
|                                                           |       |           |       |           |       |               |       |             |       |             |       |
| **Gross  profit**                                              | ** ** | **2,935**      | ** ** | **93,899**     | ** ** | **7,462**          |       | —           | ** ** | **104,296**      | ** ** |
| Selling, general  and administrative expenses                  |       | 2,119          |       | 163,511        |       | 8,508              |       | —           |       | 174,138          |       |
|                                                           |       |           |       |           |       |               |       |             |       |             |       |
| **Operating  income (loss)**                                   | ** ** | **816**        | ** ** | **(69,612**    | **)**      | **(1,046**         | **)**      | —           | ** ** | **(69,842**      | **)**      |
| Interest income                                                |       | (2,374         | )          | (139           | )          | (14                | )          | 1,859            |       | (668             | )          |
| Interest expense                                               |       | —         |       | 1,730          |       | 129                |       | (1,859           | )          | **—**       | ** ** |
|                                                           |       |           |       |           |       |               |       |             |       |             |       |
| Interest  (income) expense, net                                |       | (2,374         | )          | 1,591          |       | 115                |       | —           |       | (668             | )          |
|                                                           |       |           |       |           |       |               |       |             |       |             |       |
| **Income  (loss) before provision (benefit) for income taxes** | ** ** | **3,190**      | ** ** | **(71,203**    | **)**      | **(1,161**         | **)**      | —           | ** ** | **(69,174**      | **)**      |
| Provision  (benefit) for income taxes                          |       | 976            |       | (21,822        | )          | (424               | )          | —           |       | (21,270          | )          |
|                                                           |       |           |       |           |       |               |       |             |       |             |       |
| **Net income (loss)**                                          | ** ** | **$**          | **2,214**  | ** **     | **$**      | **(49,381**        | **)**      | **$**            | **(737**   | **)**            | **$**      | **—** | ** ** | **$** | **(47,904** | **)** |

 

95

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**FOR****THE****PERIOD**

**January 2, 2005 to December 31, 2005**

**(In Thousands)**
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
| **Net  sales**                                          | ** ** | **$**          | **73,754** | ** **     | **$**      | **2,461,747**      | ** ** | **$**            | **159,241** | ** **       | **$**      | **—** | ** ** | **$** | **2,694,742** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 42,647         |       | 1,467,510      |       | 85,237             |       | —           |        | 1,595,394        |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Gross  profit**                                       | ** ** | **31,107**     | ** ** | **994,237**    | ** ** | **74,004**         | ** ** | **—**       | ** **  | **1,099,348**    | ** ** |
| ** **                                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| **Selling,  general and administrative expenses:**      |       |           |       |           |       |               |       |             |        |             |       |
| ** **                                              |       |           |       |           |       |               |       |             |        |             |       |
| Fixed asset  impairment                                 |       |           | ** ** | 4,059          | ** ** | **—**         |       | **—**       |        | 4,059            |       |
| Other selling,  general and administrative expenses     |       | 18,963         |       | 950,052        |       | 64,447             |       | —           |        | 1,033,462        |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
|                                                    |       | 18,963         |       | 954,111        |       | 64,447             |       | —           |        | 1,037,521        |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Operating  profit**                                   | ** ** | **12,144**     | ** ** | **40,126**     | ** ** | **9,557**          | ** ** | **—**       | ** **  | **61,827**       | ** ** |
| Interest income                                         |       | (14,301        | )          | (11            | )          | (157               | )          | 13,575           |        | (894             | )          |
| Interest expense                                        |       | 1,944          |       | 15,282         |       | 1,209              |       | (13,575          | )           | 4,860            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| Interest  (income) expense, net                         |       | (12,357        | )          | 15,271         |       | 1,052              |       | —           |        | 3,966            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Income  before income taxes**                         | ** ** | **24,501**     | ** ** | **24,855**     | ** ** | **8,505**          | ** ** | **—**       | ** **  | **57,861**       | ** ** |
| Provision for  income taxes                             |       | 9,834          |       | 9,977          |       | 2,068              |       | —           |        | 21,879           |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Net income**                                          | ** ** | **$**          | **14,667** | ** **     | **$**      | **14,878**         | ** ** | **$**            | **6,437**   | ** **       | **$**      | **—** | ** ** | **$** | **35,982** | ** ** |

 

 

96

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS**

**FOR THEPERIOD**

**January 4, 2004 to January 1, 2005**

**(In Thousands)**
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
| **Net sales**                                           | ** ** | **$**          | **76,451** | ** **     | **$**      | **2,461,026**      | ** ** | **$**            | **123,992** | ** **       | **$**      | **—** | ** ** | **$** | **2,661,469** | ** ** |
| Cost  of sales, including buying and distribution costs |       | 45,150         |       | 1,475,001      |       | 69,549             |       | —           |        | 1,589,700        |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Gross profit**                                        | ** ** | **31,301**     | ** ** | **986,025**    | ** ** | **54,443**         | ** ** | **—**       | ** **  | **1,071,769**    | ** ** |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Selling, general and administrative expenses:**       |       |           |       |           |       |               |       |             |        |             |       |
| Fixed asset impairment                                  |       |           |       | 900            |       | —             |       |             |        | 900              |       |
| Other  selling, general and administrative expenses     |       | 20,092         |       | 902,133        |       | 47,354             |       | —           |        | 969,579          |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
|                                                    |       | 20,092         |       | 903,033        |       | 47,354             |       | —           |        | 970,479          |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Operating profit**                                    | ** ** | **11,209**     | ** ** | **82,992**     | ** ** | **7,089**          | ** ** | **—**       | ** **  | **101,290**      | ** ** |
| Interest income                                         |       | (17,187        | )          | (4,192         | )          | (43                | )          | 20,880           |        | (542             | )          |
| Interest expense                                        |       | —         |       | 23,683         |       | 1,100              |       | (20,880          | )           | 3,903            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| Interest (income)  expense, net                         |       | (17,187        | )          | 19,491         |       | 1,057              |       | —           |        | 3,361            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Income before income taxes**                          | ** ** | **28,396**     | ** ** | **63,501**     | ** ** | **6,032**          | ** ** | **—**       | ** **  | **97,929**       | ** ** |
| Provision for income  taxes                             |       | 10,856         |       | 24,247         |       | 2,305              |       | —           |        | 37,408           |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Net income**                                          | ** ** | **$**          | **17,540** | ** **     | **$**      | **39,254**         | ** ** | **$**            | **3,727**   | ** **       | **$**      | **—** | ** ** | **$** | **60,521** | ** ** |

 

97

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**FOR THEPERIOD**

**February 14, 2006 to December 30, 2006**

**(In Thousands)**
| ** **                                                                                          | ** ** | **Parent**   | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash inflows (outflows) from operating  activities:**                                             | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                                   |       | $            | —     |           | $          | 11,046         |       | $                  | (129,908   | )                | $          | 12,329           |       | $ | — |   | $ | (106,533 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in) provided by operating activities: |       |         |       |           |       |           |       |               |       |             |       |             |       |
| Depreciation and amortization                                                                       |       | —       |       | 1,985          |       | 105,406        |       | 7,118              |       | —           |       | 114,509          |       |
| Deferred income taxes                                                                               |       | —       |       | (28,623        | )          | (43,094        | )          | (1,924             | )          | —           |       | (73,641          | )          |
| Share-based compensation                                                                            |       | —       |       | 4,263          |       | —         |       | —             |       | —           |       | 4,263            |       |
| Amortization of deferred financing charges                                                          |       | —       |       | 3,930          |       | —         |       | —             |       | —           |       | 3,930            |       |
| Loss on sale and disposals of property and equipment                                                |       | —       |       | —         |       | 671            |       | —             |       | —           |       | 671              |       |
| Fixed asset impairment                                                                              |       | —       |       | —         |       | 27,992         |       | —             |       | —           |       | 27,992           |       |
| Identifiable intangible asset impairment                                                            |       | —       |       | —         |       | 3,119          |       | —             |       | —           |       | 3,119            |       |
|                                                                                                |       |         |       |           |       |           |       |               |       |             |       |             |       |
| Changes in assets and liabilities, net of effect of  acquisition:                                   |       |         |       |           |       |           |       |               |       |             |       |             |       |
| Decrease (increase) in accounts receivable                                                          |       | —       |       | 213            |       | 9,257          |       | (743               | )          | —           |       | 8,727            |       |
| (Increase) decrease in inventories                                                                  |       | —       |       | (403           | )          | 27,833         |       | (1,297             | )          | —           |       | 26,133           |       |
| Decrease (increase) in prepaid expenses and other  current assets                                   |       | —       |       | 193            |       | 13,302         |       | (13                | )          | —           |       | 13,482           |       |
| (Increase) decrease in identifiable intangible  assets and other noncurrent assets, net             |       | —       |       | (9             | )          | 150            |       | (17                | )          | —           |       | 124              |       |
| Increase (decrease) in accounts payable                                                             |       | —       |       | 36             |       | (25,489        | )          | 10,960             |       | —           |       | (14,493          | )          |
| (Decrease) increase in accrued expenses and other  liabilities, net                                 |       | —       |       | (57,085        | )          | 43,918         |       | 7,086              |       | —           |       | (6,081           | )          |
|                                                                                                |       | .            |       |           |       |           |       |               |       |             |       |             |       |
| **Net cash (used in) provided by operating  activities**                                            | ** ** | **—**   | ** ** | **(64,454**    | **)**      | **33,157**     | ** ** | **33,499**         | ** ** | **—**       | ** ** | **2,202**        | ** ** |
|                                                                                                |       |         |       |           |       |           |       |               |       |             |       |             |       |
| **Cash inflows (outflows) from investing  activities:**                                             | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Acquisition of the Predecessor, net of cash acquired                                                |       | —       |       | (1,220,465     | )          | 7,632          |       | 7,331              |       | —           |       | (1,205,502       | )          |
| Investment in LNT Inc.                                                                              |       | (764,136     | )          | —         |       | —         |       | —             |       | 764,136          |       | —           |       |
| Additions to property and equipment                                                                 |       | —       |       | (3,138         | )          | (55,342        | )          | (7,800             | )          | —           |       | (66,280          | )          |
| Proceeds from sale of property and equipment                                                        |       | —       |       | —         |       | 3,100          |       | —             |       | —           |       | 3,100            |       |
| Proceeds from return of building purchase option  deposit                                           |       | —       |       | —         |       | 1,817          |       | —             |       | —           |       | 1,817            |       |
| Addition to investment in subsidiary                                                                |       | 113,486      |       | (1,055         | )          | —         |       | —             |       | (112,431         | )          | —           |       |
|                                                                                                |       |         |       |           |       |           |       |               |       |             |       |             |       |
| **Net cash (used in) provided by investing  activities**                                            | ** ** | **(650,650** | **)**      | **(1,224,658** | **)**      | **(42,793**    | **)**      | **(469**           | **)**      | **651,705**      | ** ** | **(1,266,865**   | **)**      |
|                                                                                                     |            |              |            |                |            |                |            |                    |            |                  |            |                  |            |  |  |  |  |  |  |

 

98

----

 
| **Cash inflows (outflows) from financing  activities:**       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **        | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|-------------------|------------|
| Issuance of common stock to Linens Investors LLC and  others  |       | 650,650          |       | —           |       | —            |       | 1,055            |       | (1,055                | )          | 650,650           |       |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| Investment from parent                                        |       | —           |       | 650,650          |       | —            |       | —           |       | (650,650              | )          | —            |       |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| Issuance of floating rate notes                               |       | —           |       | 650,000          |       | —            |       | —           |       | —                |       | 650,000           |       |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| Financing and direct acquisition costs                        |       | —           |       | (60,447          | )          | —            |       | —           |       | —                |       | (60,447           | )          |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| Intercompany movements                                        |       | —           |       | 12,896           |       | 19,908            |       | (32,804          | )          | —                |       | —            |       |
| Premium paid for derivative financial instruments             |       | —           |       | (700             | )          | —            |       | —           |       | —                |       | (700              | )          |
| Net increase in borrowing under revolving credit  facility    |       | —           |       | 37,800           |       | —            |       | —           |       | —                |       | 37,800            |       |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| Payment on mortgage note                                      |       | —           |       | —           |       | (54               | )          | —           |       | —                |       | (54               | )          |
|                                                          |       |             |       |             |       |              |       |             |       |                  |       |              |       |
| **Net cash provided by (used in) financing  activities**      | ** ** | **650,650**      | ** ** | **1,290,199**    | ** ** | **19,854**        | ** ** | **(31,749**      | **)**      | **(651,705**          | **)**      | **1,277,249**     | ** ** |
| ** **                                                    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **        | ** ** |
| Effect of exchange rate  changes on cash and cash equivalents | ** ** |   —    | ** ** |   —    | ** ** | —            | ** ** | (60)             | ** ** | —                | ** ** | (60)         | ** ** |
| ** **                                                    | ** ** |             | ** ** |        | ** ** |         | ** ** |        | ** ** |             | ** ** |         | ** ** |
| Net increase in cash and  cash equivalents                    | ** ** |   —    | ** ** |   1,087     | ** ** | 10,218            | ** ** | 1,221            | ** ** | —                | ** ** | 12,526            | ** ** |
| **Cash and  cash equivalents at beginning of period**         | ** ** |  **—** | ** ** |   —    | ** ** | —            | ** ** | —           | ** ** | **—**            | ** ** | —****   | ** ** |
| ** **                                                    | ** ** |        | ** ** |        | ** ** |         | ** ** |        | ** ** |             | ** ** |         | ** ** |
| **Cash and cash equivalents at end of period**                | ** ** | **$****—**  | ** ** | **$ 1,087** | ** ** | **$ 10,218** | ** ** | **$ 1,221** | ** ** | **$ ****—** | ** ** | **$ 12,526** | ** ** |

 

 

99

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**FOR THEPERIOD**

**January 1, 2006 to February 13, 2006**

**(In Thousands)**
| ** **                                                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash inflows (outflows) from operating  activities:**                                 | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                       |       | $              | 2,214      |           | $          | (49,381            | )          | $                | (737       | )                | $          | — |   | $ | (47,904 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities:   |       |           |       |           |       |               |       |             |       |             |       |
| Depreciation and amortization                                                           |       | 203            |       | 11,662         |       | 777                |       | —           |       | 12,642           |       |
| Deferred income taxes                                                                   |       | (730           | )          | (6,029         | )          | 113                |       | —           |       | (6,646           | )          |
| Share-based compensation                                                                |       | 12,484         |       | —         |       | —             |       | —           |       | 12,484           |       |
| Amortization of deferred financing charges                                              |       | —         |       | 43             |       | —             |       | —           |       | 43               |       |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Changes in assets and liabilities, net of effect of  acquisition:                       |       |           |       |           |       |               |       |             |       |             |       |
| (Increase) decrease in accounts Receivable                                              |       | (288           | )          | (2,582         | )          | 630                |       | —           |       | (2,240           | )          |
| Decrease (increase) in inventories                                                      |       | 687            |       | (30,481        | )          | (2,092             | )          | —           |       | (31,886          | )          |
| (Increase) decrease in prepaid expenses and other  current assets                       |       | (250           | )          | (12,595        | )          | 692                |       | —           |       | (12,153          | )          |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| (Increase) decrease in identifiable intangible  assets and other noncurrent assets, net |       | 11             |       | 9,515          |       | 54                 |       | —           |       | 9,580            |       |
| (Decrease) increase in accounts payable                                                 |       | (1             | )          | 8,465          |       | (1,220             | )          | —           |       | 7,244            |       |
| (Decrease) increase in accrued expenses and other  liabilities                          |       | (27,563        | )          | 28,603         |       | (4,160             | )          | —           |       | (3,120           | )          |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net cash used in operating activities**                                               | ** ** | **(13,233**    | **)**      | **(42,780**    | **)**      | **(5,943**         | **)**      | **—**       | ** ** | **(61,956**      | **)**      |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Cash outflows from investing activities:**                                            |       |           |       |           |       |               |       |             |       |             |       |
| Additions to property and equipment                                                     |       | (107           | )          | (8,533         | )          | (2,316             | )          | —           |       | (10,956          | )          |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net cash used in investing activities**                                               | ** ** | **(107**       | **)**      | **(**8,533     | **)**      | **(2,316**         | **)**      | —           | ** ** | **(10,956**      | **)**      |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Cash inflows (outflows) from financing  activities:**                                 |       |           |       |           |       |               |       |             |       |             |       |
| Inter-company movements                                                                 |       | (52,158        | )          | 49,564         |       | 2,594              |       | —           |       | 0                |       |
| Federal tax benefit from common stock issued under  stock incentive plans               |       | 4,298          |       | —         |       | —             |       | —           |       | 4,298            |       |
| Decrease in treasury stock                                                              |       | 0              |       | 674            |       | —             |       | —           |       | 674              |       |
| Payments on mortgage note                                                               |       |           |       | (10            | )          |               |       |             |       | (10              | )          |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net cash (used in) provided by financing  activities**                                | ** ** | **(47,860**    | **)**      | **50,228**     | ** ** | **2,594**          |       | **—**       | ** ** | **4,962**        | ** ** |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Effect of exchange rate changes on cash and cash  equivalents                           |       | 0              |       | —         |       | 125                |       | —           |       | 125              |       |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Net decrease in cash and cash equivalents                                               |       | (61,200        | )          | (1,085         | )          | (5,540             | )          | —           |       | (67,825          | )          |
| **Cash and cash equivalents at beginning of period**                                    | ** ** | **136,569**    | ** ** | **8,718**      | ** ** | **12,871**         |       | **—**       | ** ** | **158,158**      | ** ** |
|                                                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Cash  and cash equivalents at end of period**                                         | ** ** | **$**          | **75,369** | ** **     | **$**      | **7,633**          | ** ** | **$**            | **7,331**  | ** **       | **$**      | **—** | ** ** | **$** | **90,333** | ** ** |

 

100

----

**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**FOR THEPERIOD**

**January 2, 2005 to December 31, 2005**

**(In Thousands)**
| ** **                                                                              | ** ** | **Co-Issuers** | ** **  | **Guarantors** | ** ** | **Non-   Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|----------------------------|------------|------------------|------------|------------------|------------|
| **Cash inflows (outflows) from operating  activities:**                                 | ** ** | ** **     | ** **  | ** **     | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income                                                                              |       | $              | 14,667      |           | $          | 14,878                     |       | $                | 6,437      |             | $          | — |   | $ | 35,982 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:      |       |           |        |           |       |                       |       |             |       |             |       |
| Depreciation and amortization                                                           |       | 1,453          |        | 83,749         |       | 5,068                      |       | —           |       | 90,270           |       |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| Deferred income taxes                                                                   |       | 2,162          |        | (12,810        | )          | (617                       | )          | —           |       | (11,265          | )          |
| Share-based compensation                                                                |       | 185            |        | 1,058          |       |                       |       |             |       | 1,243            |       |
| Amortization of deferred financing charges                                              |       |           |        | 154            |       |                       |       |             |       | 154              |       |
| Loss on disposals of property and equipment                                             |       | 35             |        | 1,360          |       | 38                         |       | —           |       | 1,433            |       |
| Fixed asset impairment                                                                  |       | —         |        | 4,059          |       | —                     |       | —           |       | 4,059            |       |
| Changes in assets and liabilities, net of effect of  acquisition:                       |       |           |        |           |       |                       |       |             |       |             |       |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| Decrease (increase) in accounts receivable                                              |       | 396            |        | (16,268        | )          | (1,832                     | )          | —           |       | (17,704          | )          |
| Increase in inventories                                                                 |       | (605           | )           | (68,851        | )          | (1,201                     | )          | —           |       | (70,657          | )          |
| Decrease (increase) in prepaid expenses and other  current assets                       |       | 1              |        | 21,461         |       | (918                       | )          | —           |       | 20,544           |       |
| Decrease (increase) in identifiable intangible  assets and other noncurrent assets, net |       | 25             |        | (1, 251)       |       | (134                       | )          | —           |       | (1,360           | )          |
| (Decrease) increase in accounts payable                                                 |       | (2             | )           | 17,561         |       | 3,852                      |       | —           |       | 21,411           |       |
| Increase (decrease) in accrued expenses and other  liabilities                          |       | 11,964         |        | (11,044        | )          | 4,067                      |       | —           |       | 4,987            |       |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Net cash provided by operating activities**                                           | ** ** | **30,281**     | ** **  | **34,056**     | ** ** | **14,760**                 | ** ** | **—**       | ** ** | **79,097**       | ** ** |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Cash outflows from investing activities:**                                            |       |           |        |           |       |                       |       |             |       |             |       |
| Additions to property and equipment                                                     |       | (9,663         | )           | (107,860       | )          | (11,389                    | )          | —           |       | (128,912         | )          |
| Addition to investment in subsidiary                                                    |       | (919           | )           | —         |       | —                     |       | 919              |       | —           |       |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Net cash used in investing activities**                                               | ** ** | **(10,582**    | **)**       | **(107,860**   | **)**      | **(11,389**                | **)**      | **919**          | ** ** | **(128,912**     | **)**      |
| ** **                                                                              | ** ** | ** **     | ** **  | ** **     | ** ** | ** **                 | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash inflows (outflows) from financing activities:**                                  |       |           |        |           |       |                       |       |             |       |             |       |
| Proceeds from common stock under stock incentive  plans                                 |       | 3,614          |        | —         |       | 919                        |       | (919             | )          | 3,614            |       |
| Federal tax benefit from issuance of common stock  under stock incentive plans          |       | 492            |        | —         |       | —                     |       | —           |       | 492              |       |
| Inter-company movements                                                                 |       | (62,042        | )           | 69,536         |       | (7,494                     | )          | —           |       | —           |       |
| Increase in treasury stock                                                              |       | (167           | )           | (78            | )          | —                     |       | —           |       | (245             | )          |
| Payments on mortgage note                                                               |       |           |        | (58            | )          |                       |       |             |       | (58              | )          |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Net cash (used in) provided by financing  activities**                                | ** ** | **(58,103**    | **)**       | **69,400**     | ** ** | **(6,575**                 | **)**      | **(919**         | **)**      | **3,803**        | ** ** |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| Effect of exchange rate changes on cash and cash  equivalents                           |       | —         |        | —         |       | 161                        |       | —           |       | 161              |       |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| Net decrease in cash and cash equivalents                                               |       | (38,404        | )           | (4,404         | )          | (3,043                     | )          | —           |       | (45,851          | )          |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Cash and cash equivalents at beginning of period**                                    | ** ** | **174,973**    | ** **  | **13,122**     | ** ** | **15,914**                 | ** ** | **—**       | ** ** | **204,009**      | ** ** |
|                                                                                    |       |           |        |           |       |                       |       |             |       |             |       |
| **Cash  and cash equivalents at end of Period**                                         | ** ** | **$**          | **136,569** | ** **     | **$**      | **8,718**                  | ** ** | **$**            | **12,871** | ** **       | **$**      | **—** | ** ** | **$** | **158,158** | ** ** |

 

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**FOR THEPERIOD**

**January 4, 2004 to January 1, 2005**

**(In Thousands)**
| ** **                                                                         | ** ** | **Co-Issuers** | ** **  | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash inflows (outflows) from operating  activities:**                            | ** ** | ** **     | ** **  | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income                                                                         |       | $              | 17,540      |           | $          | 39,254             |       | $                | 3,727      |             | $          | — |   | $ | 60,521 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |           |        |           |       |               |       |             |       |             |       |
| Depreciation and amortization                                                      |       | 1,079          |        | 76,342         |       | 3,897              |       | —           |       | 81,318           |       |
| Deferred income taxes                                                              |       | 2,016          |        | (4,023         | )          | 895                |       | —           |       | (1,112           | )          |
| Share-based compensation                                                           |       | 129            |        | 381            |       |               |       |             |       | 510              |       |
| Amortization of deferred financing charges                                         |       |           |        | 24             |       |               |       |             |       | 24               |       |
| Loss on disposals of property and equipment                                        |       | 17             |        | 2,188          |       | 4                  |       | —           |       | 2,209            |       |
| Fixed asset impairment                                                             |       | —         |        | 900            |       | —             |       | —           |       | 900              |       |
| Changes in assets and liabilities, net of effect of  acquisition:                  |       |           |        |           |       |               |       |             |       |             |       |
| (Increase) decrease in accounts receivable                                         |       | (2             | )           | 4,742          |       | (889               | )          | —           |       | 3,851            |       |
| Decrease (increase) in inventories                                                 |       | 322            |        | (3,548         | )          | (8,771             | )          | —           |       | (11,997          | )          |
| Increase in prepaid expenses and other current  assets                             |       | (38            | )           | (4,664         | )          | (1,355             | )          | —           |       | (6,057           | )          |
| Decrease (increase) in identifiable intangible  assets and other noncurrent assets |       | 87             |        | (4,531         | )          | (455               | )          | —           |       | (4,899           | )          |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| (Decrease) increase in accounts payable                                            |       | (7             | )           | (5,647         | )          | 223                |       | —           |       | (5,431           | )          |
| Increase in accrued expenses and other liabilities                                 |       | 15,914         |        | 25,856         |       | 5,652              |       | —           |       | 47,422           |       |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Net cash provided by operating activities**                                      | ** ** | **37,057**     | ** **  | **127,274**    | ** ** | **2,928**          | ** ** | **—**       | ** ** | **167,259**      | ** ** |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Cash outflows from investing activities:**                                       | ** ** | ** **     | ** **  | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to property and equipment                                                |       | (605           | )           | (100,164       | )          | (9,674             | )          | —           |       | (110,443         | )          |
| Addition to investment in subsidiary                                               |       | (28,063        | )           | —         |       | —             |       | 28,063           |       | —           |       |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Net cash used in investing activities**                                          | ** ** | **(28,668**    | **)**       | **(100,164**   | **)**      | **(9,674**         | **)**      | **28,063**       | ** ** | **(110,443**     | **)**      |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Cash inflows (outflows) from financing  activities:**                            | ** ** | ** **     | ** **  | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Proceeds from common stock under stock incentive  plans                            |       | 8,649          |        | 26,020         |       | 2,043              |       | (28,063          | )          | 8,649            |       |
| Federal tax benefit from issuance of common stock  under stock incentive plans     |       | 1,500          |        | —         |       | —             |       | —           |       | 1,500            |       |
| Inter-company movements                                                            |       | 35,189         |        | (48,341        | )          | 13,152             |       | —           |       | —           |       |
| (Increase) decrease in treasury stock                                              |       | (56            | )           | 134            |       | —             |       | —           |       | 78               |       |
| Payments on mortgage note                                                          |       |           |        | (27            | )          |               |       |             |       | (27              | )          |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Net cash provided by (used in) financing  activities**                           |       | 45,282         |        | (22,214        | )          | 15,195             |       | (28,063          | )          | 10,200           |       |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| Effect of exchange rate changes on cash and cash equivalents                       |       | —         |        | —         |       | 864                |       | —           |       | 864              |       |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| Net increase in cash and cash equivalents                                          |       | 53,671         |        | 4,896          |       | 9,313              |       | —           |       | 67,880           |       |
| **Cash and cash equivalents at beginning of period**                               | ** ** | **121,302**    | ** **  | **8,226**      | ** ** | **6,601**          | ** ** | **—**       | ** ** | **136,129**      | ** ** |
|                                                                               |       |           |        |           |       |               |       |             |       |             |       |
| **Cash  and cash equivalents at end of period**                                    | ** ** | **$**          | **174,973** | ** **     | **$**      | **13,122**         | ** ** | **$**            | **15,914** | ** **       | **$**      | **—** | ** ** | **$** | **204,009** | ** ** |

 

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**Item 9.  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

Not applicable.

**Item 9A.  Controls and Procedures**

As of December 30, 2006, the Company’s control procedures didnot include adequate review over the completeness and accuracy of the incometax accounts to ensure compliance with generally accepted accountingprinciples.  The Company out-sources thepreparation of the income tax provision to a third party and did not apply a thoroughreview to detect misstatements.  Thisdeficiency resulted in material errors in the Company’s preliminary income taxprovision in the 2006 consolidated financial statements.  The Company corrected the provision forincome taxes and related balances prior to the issuance of the financial statements.  Accordingly, management determined that thiscondition constitutes a material weakness.

A material weakness in internal control over financialreporting is a control deficiency (within the meaning of the Public CompanyAccounting Oversight Board (“PCAOB”) Auditing Standard No. 2), orcombination of control deficiencies, that adversely affects a company’s abilityto initiate, authorize, record, process or report external financial datareliably in accordance with GAAP that results in there being more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Therefore, the control deficiency that resulted in material errors inthe Company’s preliminary income tax provision in the 2006 consolidatedfinancial statements represented a material weakness in the Company’s internalcontrol over financial reporting as of December 30, 2006.  As described above, the Company corrected theprovision for income taxes and related balances prior to issuance of thefinancial statements.  Management hasimplemented review controls to ensure the propriety of its accounting for thesetransactions.

The Company’s management, including its Chief ExecutiveOfficer and its Chief Financial Officer, performed an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as of December 30, 2006.  Disclosure controls and procedures aredesigned to provide reasonable assurance that the information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act has been appropriately recorded, processed, summarizedand reported on a timely basis and are effective in ensuring that suchinformation is accumulated and communicated to the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.  Based upon that evaluation, the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, concluded that the Company’s disclosure controls and procedures were noteffective as of December 30, 2006, due to the material weakness in the Company’sinternal control over financial reporting as discussed above.  Subsequent to December 30, 2006, the Company’smanagement implemented additional review controls and procedures to ensure thepropriety of its accounting for income tax accounts, which management believesshould render the design and operation of the Company’s disclosure controls andprocedures effective as of March 26, 2007, the date of this Form 10-K.

The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.  The Company’s internal control over financialreporting is designed to provide reasonable assurance regarding the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

There have been no significant changes to the Company’sinternal control over financial reporting during the most recent fiscal quarterthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

**Item 9B.  Other Information**

None

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**PART III**

**Item 10.  Directors, Executive Officers and CorporateGovernance**

**Directors and Executive Officers**

The Company’s executive officersand directors, and their ages and positions, are as follows:

 
| **Name**               | ** ** | **Age** | ** ** | **Position(1)**                                                            |
|------------------------|------------|---------|------------|----------------------------------------------------------------------------|
| Robert J.  DiNicola    |       | 59      |       | Chairman of the Board of Directors, President and  Chief Executive Officer |
| Francis M. Rowan       |       | 44      |       | Senior Vice President and Chief Financial Officer                          |
| F. David Coder         |       | 49      |       | Executive Vice President, Store Operations                                 |
| Robert Homler          |       | 61      |       | Executive Vice President, Merchandising                                    |
| Joyce F. Brown         |       | 60      |       | Director                                                                   |
| Peter P. Copses        |       | 48      |       | Director                                                                   |
| Michael A. Gatto       |       | 39      |       | Director                                                                   |
| George G.  Golleher    |       | 59      |       | Director                                                                   |
| Damian J.  Giangiacomo |       | 30      |       | Director                                                                   |
| Andrew S. Jhawar       |       | 35      |       | Director                                                                   |
| Lee S. Neibart         |       | 56      |       | Director                                                                   |
| Brian H. Pall          |       | 47      |       | Director                                                                   |

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(1)   Eachdirector is a member of the board of directors of each of Linens Holding Co.and Linens ‘n Things, Inc.

***Robert J. DiNicola*** became Chairman of the Company’s Board of Directors and its President andChief Executive Officer in February 2006 upon the consummation of theMerger. Mr. DiNicola has operated in the retail industry for34 years. He is currently the Executive Chairman of GNC Corporation andGeneral Nutrition Centers, Inc. (collectively, “GNC”) and has been in thatcapacity since October 2004. He also served as GNC’s interim ChiefExecutive Officer from December 2004 to May 2005. Mr. DiNicolais the former Chairman of the Board of Directors of Zale Corporation.Mr. DiNicola joined Zale Corporation as its Chairman and Chief ExecutiveOfficer in April 1994. In July 1999, Mr. DiNicola relinquishedhis position as Chief Executive Officer of Zale Corporation and as an officerof the company the following year, but remained a member of the board. At therequest of the board, he rejoined Zale Corporation in February 2001 asChairman and Chief Executive Officer. Mr. DiNicola subsequentlyrelinquished his position as Chief Executive Officer of Zale Corporation inAugust 2002 but retained his position as Chairman of the Board untilMarch 2004. Prior to joining Zale Corporation, Mr. DiNicola served asthe Chairman and Chief Executive Officer of the Bon Marché, a division ofFederated Department Stores, located in Seattle, Washington. Mr. DiNicolaalso serves as the Senior Retail Advisor for Apollo Management, L.P. Beginninghis retail career in 1972, Mr. DiNicola has also worked for Macy’s, MayCompany and Federated Department Stores. He has held numerous executivepositions in buying, merchandising and store operations across the countryduring his retail career. Mr. DiNicola is a graduate of St. Peter’sCollege in New Jersey and a veteran of the U.S. Army.

***Francis M. Rowan*** became the Company’s Senior Vice President and Chief Financial Officer inApril 2006. Mr. Rowan joined Linens ‘n Things, Inc. in 1989 asthe Budget Manager. He was promoted in April 1993 to Director of InventoryControl and promoted to Assistant Controller in November 1995, ExecutiveDirector in August 1999 and Vice President in August 2000. Mostrecently, Mr. Rowan served as Divisional Vice President. Mr. Rowanhas a Bachelor of Science degree in Accounting from St. Peter’s College and aMaster of Business Administration degree from Montclair State University.

***F. David Coder*** became the Company’s Executive Vice President of Stores in 2005.Mr. Coder joined Linens ‘n Things, Inc. in 1989 as Regional Manager—Mid-AtlanticRegion. He was promoted to Vice President in 1994, was promoted to VicePresident of Stores—Eastern Zone in 1995 and was promoted to Senior VicePresident, Store Operations in 2001. Prior to joining Linens ‘nThings, Inc. Mr. Coder held various store management positionsincluding Market Manager at Branden’s, a

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Division of Dayton-Hudson, and Regional MerchandiseManager at Montgomery Wards. Mr. Coder studied Business Management and Psychologyat Anderson College.

***Robert Homler*** became the Executive Vice President, Merchandising in May 2006.Mr. Homler joined Linens ‘n Things, Inc. in April 2006 as SeniorVice President of Marketing. Prior to that, he was Executive Vice President andChief Operating Officer of GNC, after having served as Chief MerchandisingOfficer of GNC from February to December 2005. From March 2001 untilJanuary 2005, Mr. Homler owned a Coffee Beanery (a gourmet coffeeretailer) franchise operation in East Brunswick, New Jersey. FromJuly 1998 to January 2000, Mr. Homler was President ofMerchandising and Marketing of Levitz Furniture Corporation. Prior to joiningLevitz Furniture Corporation, Mr. Homler was, from January 1994 toJune 1998, Executive Vice President of Home Store Operations at Macy’sEast Division of Federated Department Stores. From 1984 through 1994,Mr. Homler was a General Merchandise Manager of Home Store Operations atvarious Federated Department Store divisions: A & S/Jordan Marsh from1992 until 1994; Rich’s Department Stores from 1991 until 1992; and the BonMarché from 1988 until 1992. From 1984 until 1988, Mr. Homler was SeniorVice President—Director of Merchandising for R.H. Macy Corporation where hebegan his retail career in 1968 as a buyer and merchandiser.

***Dr. Joyce F. Brown*** became a member of the board of directors in June 2006.Dr. Brown is president of the Fashion Institute of Technology (“FIT”), aspecialized college of art and design, business, and technology of the StateUniversity of New York. Prior to her appointment at FIT in 1998, Dr. Brownwas Professor of Clinical Psychology at the Graduate School and UniversityCenter of the City University of New York (“CUNY”), where she is currentlyProfessor Emerita. From 1983 to 1992, Dr. Brown served CUNY in a varietyof capacities, including acting President of Bernard Baruch College and ViceChancellor for Urban Affairs and Development. From 1993 to 1994, Dr. Brownserved as Deputy Mayor for Public and Community Affairs in the Office of theMayor of the City of New York. In addition to her position at FIT,Dr. Brown serves as Chief Executive Officer of the Educational Foundationfor the Fashion Industries, an advisory and support body to FIT. She is also adirector of Paxar Corporation, Polo Ralph Lauren Corporation and USEC Inc.Dr. Brown earned her doctorate and master’s degrees in CounselingPsychology from New York University and her bachelor’s degree from MarymountCollege in Tarrytown, New York. She also received a certificate from theInstitute for Educational Management at Harvard University.

***Peter P. Copses*** became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Copses became a founding senior partner atApollo Management, L.P., one of the Sponsors, in 1990. Mr. Copses is alsoa director of Rent-A-Center, Inc. and GNC. Mr. Copses received hisMaster of Business Administration degree from Stanford University’s GraduateSchool of Business and his Bachelor of Commerce degree from the University ofToronto.

***Michael A. Gatto*** became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Gatto is currently a Partner at SilverPoint Capital, an affiliate of one of the Sponsors. He was previously a VicePresident in the Special Situations Investing Group of Goldman SachsGroup, Inc. from 1998 to 2001, a Principal of Stroble &Associates, a financial consulting firm, from 1997 to 1998 and a CorporateFinance Associate in the Retail Industry Group of Citibank, N.A. from 1993 to1997. Mr. Gatto served as a director of Party City Corporation fromFebruary 2001 to August 2003 and as a director of BushIndustries, Inc. from January 2005 to February 2006.  Mr. Gatto received a Bachelor of Artsdegree in Economics from Cornell University and a Master of BusinessAdministration degree from Columbia Business School. He is also a CharteredFinancial Analyst.

***George G. Golleher*** became a member of the board of directors in March 2006.Mr. Golleher has been a business consultant and private equity investorsince June 1999. Mr. Golleher was a director of SimonWorldwide, Inc., a promotional marketing company, from September 1999to April 2006 and was also its Chief Executive Officer fromMarch 2003 to April 2006. From March 1998 to May 1999,Mr. Golleher served as President, Chief Operating Officer and director ofFred Meyer, Inc. a food and drug retailer. Prior to joining FredMeyer, Inc., Mr. Golleher served for 15 years with RalphsGrocery Company until March 1998, ultimately as the

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Chief Executive Officer and Vice Chairman of the Board.Mr. Golleher is also a director of GNC and Rite Aid Corporation.

***Damian J. Giangiacomo*** became a member of the board of directors inMarch 2006. Mr. Giangiacomo is a principal at Apollo Management,L.P., where he has been employed since July 2000. Prior to joining Apollo,Mr. Giangiacomo was an investment banker at Morgan Stanley & Co.Mr. Giangiacomo received a Bachelor of Business degree in Finance from theUniversity of Notre Dame.

***Andrew S. Jhawar*** became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Jhawar is a partner of Apollo Management,L.P., where he has been employed since February 2000. Prior to joiningApollo, Mr. Jhawar was an investment banker at Donaldson,Lufkin & Jenrette Securities Corporation and, prior to that, atJefferies & Company, Inc. where he specialized in leveragedfinance. Mr. Jhawar is also a director of GNC and was a director ofRent-A-Center, Inc. from October 2001 through May 2005.Mr. Jhawar received his Master of Business Administration degree fromHarvard University’s Graduate School of Business and his Bachelor of Sciencedegree in Economics with a concentration in Finance from the Wharton School ofthe University of Pennsylvania.

***Lee S. Neibart*** became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Neibart has been a Partner of Apollo RealEstate Advisors since 1993 and is a Partner of NRDC Advisors. From 1989 to1993, Mr. Neibart was with the Robert Martin Company, most recently asExecutive Vice President and Chief Operating Officer. Robert Martin was a realestate development and management firm with a portfolio of approximately sevenmillion square feet of commercial real estate. Mr. Neibart serves on theAdvisory Boards of both The Enterprise Foundation and The Real Estate Instituteof New York University. He is also a past President of the New York Chapter ofthe National Association of Industrial and Office Parks. Mr. Neibartgraduated with a Bachelor of Arts degree from the University of Wisconsin and aMaster of Business Administration degree from New York University.

***Brian Pall*** became a member of the board of directors on October 20, 2006.  Mr. Pall is Managing Director of NRDC RealEstate Advisors (“NRDC”), where he has been employed since 2004.  Prior tojoining NRDC, Mr. Pall spent 17 years with The Great Atlantic and Pacific TeaCompany, Inc., where he most recently served as Senior Vice President and ChiefDevelopment Officer.

**BoardComposition**

The board of directors is composed of nine directors. Eachdirector serves for annual terms and until his or her successor is elected andqualified. Apollo Management V, L.P. indirectly controls a majority of thecommon stock of the Company. Pursuant to the stockholders’ agreement governingownership of the Company, the Sponsors have the right to appoint all of themembers of the Company’s board of directors.

**BoardCommittees**

The board of directors has the authority to appoint committeesto perform certain management and administration functions. The board ofdirectors has provided for an audit committee and a compensation committee.

**AuditCommittee**

The audit committee is currently comprised of Messrs. Copses(chairman), Gatto and Giangiacomo.  Theaudit committee is responsible for reviewing and monitoring the Company’saccounting controls and internal audit functions and recommending to the boardof directors the engagement of its outside auditors. The audit committee meetsregularly with management, without the Company’s independent auditors present,to discuss management’s evaluations of the

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performance of the independent auditors.  The audit committee also meets regularly withinternal audit personnel to discuss the Company’s internal audit process andthe results of ongoing or recently completed internal audits.

The board of directors has determined that Mr. Copses is an “auditcommittee financial expert” within the meaning of SEC regulations.  None of the audit committee members areindependent directors because of their affiliations with the Sponsors.

**CompensationCommittee**

Themembers of the compensation committee are Messrs. Jhawar (chairman), Pall andGolleher.  The compensation committeereviews and either approves, on behalf of the board of directors, or recommendsto the board of directors for approval the annual salaries and othercompensation of its executive officers and individual stock and stock optiongrants.  The compensation committee alsoprovides assistance and recommendations with respect to the Company’scompensation policies and practices and assists with the administration of itscompensation plans.

**Code of Ethics**

Theboard of directors has adopted a code of ethics that applies to the Company’schief executive officer and senior financial officers. A waiver from anyprovision of the code of ethics may only be granted by the auditcommittee.  In addition, Linens ‘nThings, Inc. has adopted a Code of Business Conduct and Ethics applicable toall employees, officers and directors.

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**Item 11.  ExecutiveCompensation**

**Compensation Discussionand Analysis**

*Overview*

The compensationcommittee of the Company’s board of directors is empowered to review andapprove the annual compensation and compensation structure for the Company’sexecutive officers and management compensation generally.  The Company’s executive officers are theChairman and Chief Executive Officer, the Senior Vice President and ChiefFinancial Officer, the Executive Vice President of Store Operations and theExecutive Vice President, Merchandising. Each of the executive officers is employed by the Company’s wholly ownedsubsidiary, Linens ‘n Things, Inc. (“LNT”). The board of directors and compensation committee of each of the Companyand LNT have the same composition.

The primary objective ofthe Company’s compensation program, including compensation of executives, is toattract and retain qualified, energetic associates who are enthusiastic aboutthe Company’s mission and culture. A further objective of the Company’scompensation program is to provide incentives and to reward each associate fortheir contribution to the Company.  Inaddition, the Company strives to promote an ownership mentality among keyleadership and the Company’s board of directors.  Finally, the Company intends for itscompensation structure to be perceived as fair to associates, stockholders, andnoteholders.

The Company’scompensation program is designed to reward each associate’s individual  contributionto the Company, incentivize each associate’s future performance and recognizethe Company’s growth and financial performance. The Company’s compensation structure, including executive compensation,was reviewed and restructured in 2006 following the Company’s acquisition ofLNT in February 2006.  The compensationcommittee considers numerous factors, including the associates’ experience inconjunction with the level and complexity of the position.  Regarding the compensation program andstructure generally and all aspects of executive compensation, managementprovides recommendations to the compensation committee; however, thecompensation committee does not delegate any of its functions to others insetting compensation. The compensation committee is also responsible forreviewing and making recommendations to the board of directors regardingdirector compensation.  The Company doesnot currently engage any consultant related to executive or directorcompensation matters.

*Elements of the Company’sExecutive Compensation*

Annual executive officercompensation consists of the following components: base salary; annualperformance bonus; stock options; and certain benefits.  The compensation committee intends to setexecutive cash compensation at a level to attract and retain a strong motivatedleadership team, but not so high that it creates a negative perception with ourassociates generally, noteholders or stockholders.  Annual incentive compensation is included toreward executives for the Company’s growth and financial performance based onachievement of criteria established by the Chairman and approved by thecompensation committee.

Each of the Company’sexecutive officers receives stock option grants under the Linens Holding Co.Stock Option Plan.  All of the Company’sassociates are eligible for stock option grants, which recognize andincentivize performance.  The stockoption plan was established in 2006 following the acquisition and grants weremade to associates at the position of buyer and above.  Approximately64% of the stock options granted under the stock option plan has been grantedto associates who are not executive officers.  The Company believes that through itsbroad-based plan, the economic interests of the Company’s associates, includingits executives, are more closely aligned to ownership interests.

The Company provides onlylimited benefits to its executive officers and senior vice presidents,including medical and dental insurance, long-term disability insurance, lifeinsurance, cellular telephone and service needed with the performance of theexecutive’s responsibilities and specified financial planning services.  Under certain circumstances, management mayrecommend and the compensation committee may approve more limited benefits oradditional benefits, such as relocation expenses for new executives.

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*Stock Option Grants*

The compensationcommittee intends for stock option grants generally to be considered on an annual basis, except for new hires,promotions and special performance recognition. Stock option grants are recommended to the compensation committee bymanagement, but all grants must be approved by the compensation committee.  Stock option grants may be approved by thecompensation committee at in-person or telephonic meetings or by unanimouswritten consents.  The date of grant isestablished based on the date of the meeting or, with respect to writtenconsents, the date the last signature of the compensation committee members isobtained.  The compensation committeesets the exercise price per share for stock option grants at an amount greaterthan or equal to the fair market value per share of the Company’s commonstock.  Since the Company’s common stockis not publicly traded, the compensation committee’s determination is based oninformation provided by management and reviewed and approved by thecompensation committee.  In 2006, theexercise price for stock option grants was determined by reference to thepurchase price paid by the Company for the February 2006 acquisition of LNT.  The compensation committee does not delegateany function of the stock option grants, and executives are not treateddifferently from other associates.

*How the Company ChoseAmounts and/or Formulas for Each Element*

Each executive’s currentand prior compensation is considered in setting future compensation. Inaddition, we review the compensation practices of other companies. Base salaryamounts are determined by complexity and level of position as well as marketcomparisons.

The executive officers areentitled to certain annual performance bonuses pursuant to the terms of theiremployment agreements.  See “—SummaryCompensation Table.”  Each executiveofficer has a target bonus amount expressed as a percentage of his annual basesalary.  The respective percentages aredetermined by position and level of responsibility.  The Company’s Chairman of the Board and ChiefExecutive Officer has a target bonus of 100% of his annual base salary if LNTexceeds sales, EBITDA and cash generation goals based on levels to bedetermined by the LNT board of directors or compensation committee for theapplicable year.  The other executiveofficers have target bonuses of 50% of base salary; however, the amount is tobe determined by the LNT board or compensation committee in its solediscretion.  No annual performancebonuses were paid with respect to the year ended December 30, 2006.

Management has developeda proposed plan for 2007 management incentive compensation, which will bepresented to the compensation committee for approval in April 2007.

The compensationcommittee is considering a plan for 2007 management incentive compensation,which includes incentive compensation potential for certain of the namedexecutive officers within the following ranges:

·                  DiNicola— target 100% of annual base salary and maximum 150% of annual base salary.

·                  Rowan,Coder and Homler — target 50% of annual base salary and maximum 75% of annualbase salary.

For each of these namedexecutive officers, the incentive compensation potential for 2007 is proposedto be at the following levels:

·                  Firstthreshold — 25% of target based on achieving 83% of budgeted EBITDA.

·                  Secondthreshold — 50% of target based on achieving 90% of budgeted EBITDA.

·                  Thirdthreshold — 75% of target based on achieving 97% of budgeted EBITDA.

·                  Target— 100% on achieving budgeted EBITDA.

·                  Maximum— maximum for each named executive officer based on achieving 150% of budgetedEBITDA.

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The Company does notdisclose its internal budget for results of operations, including budgetedEBITDA.  Budgeted EBITDA is confidentialfinancial information of the Company, and the Company believes that it disclosurewould cause the Company competitive harm by disclosing to competitors a keyelement of its internal projections. Management believes that achieving 100% of budgeted EBITDA in fiscalyear 2007 while possible for the named executive officers will present asignificant challenge.  Accordingly,there is also a need for appropriate incentive compensation at the lowerthresholds indicated above.

Stock option grant awardsare determined in accordance with performance and level of position.  Each of the stock option grants are grantedunder the Linens Holding Co. Stock Option Plan and are divided equally betweena time option and a performance option. The stock options expire seven years after the date of grant.  The time options become vested andexercisable in four equal installments based on the anniversary of the date ofgrant or the anniversary of a designated date. The performance option provides that if on any “Measurement Date,” the “ValuePer Share” equals or exceeds the “Target Stock Price” (as such terms aredefined in the option grant letter), then the performance option will vest andbecome exercisable in two equal annual installments on each of the first twoanniversaries of the Measurement Date, subject to acceleration in the event ofa change in control or a specified liquidity event, as set forth in the optiongrant letter.  Prior to a qualifiedinitial public offering, with gross proceeds to the Company of not less than$150.0 million, a Measurement Date is the end of a fiscal quarter beginningwith or following December 31, 2007. Prior to a qualified initial public offering, Value Per Share is theCompany’s “Net Equity Value” divided by the number of fully dilutedshares.  Net Equity Value is calculatedas the sum of (1) 7.5 times the Company’s EBITDA for the four fiscal quartersending on the Measurement Date, (2) the sum of all cash and cash equivalentsand the aggregate exercise price of all outstanding options or warrants topurchase shares of the Company’s common stock, less (3) the Company’s debt asof the Measurement Date.  Upon a definedliquidity event, Value Per Share is the price per share realized by the Company’sprincipal stockholder.  The Target StockPrice means $50.00 compounded at an annual rate of 25% from February 14, 2006to the Measurement Date.

*Accounting and TaxConsiderations*

The Company’s stockoption grant policies have been impacted by the implementation of SFAS No. 123(Revised 2004), which it adopted in the first quarter of fiscal year 2006.Under this accounting pronouncement, the Company is required to value unvestedstock options granted prior to our adoption of SFAS No. 123 under the fairvalue method and expense those amounts in the income statement over the stockoption’s remaining vesting period.

The Company hasstructured its compensation program to comply with Internal Revenue CodeSections 162(m) and 409A. Under Section 162(m) of the Internal Revenue Code, alimitation was placed on tax deductions of any publicly-held corporation forindividual compensation to certain executives of such corporation exceeding$1,000,000 in any taxable year, unless the compensation is performance-based.The Company has no individuals with non-performance based compensation paid inexcess of the Internal Revenue Code Section 162(m) tax deduction limit.  If an executive is entitled to nonqualifieddeferred compensation benefits that are subject to Section 409A, and suchbenefits do not comply with Section 409A, then the benefits are taxable in thefirst year they are not subject to a substantial risk of forfeiture. In suchcase, the executive is subject to regular federal income tax, interest and anadditional federal income tax of 20% of the benefit includible in income.

**Summary CompensationTable**

The following table setsforth information with respect to compensation for the fiscal year endedDecember 30, 2006 with respect to the Company’s executive officers, includingthe Company’s principal executive officer and principal financial officer, aswell as the former Chairman and Chief Executive Officer of LNT and formerPresident and Chief Operating Officer. The listed persons are referred to in this Item 11 as the “namedexecutive officers.”

110

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|                                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | ** **                                                                | ** ** | **Change in**                                            | ** ** | ** **                                   | ** ** | ** **           | ** ** |
|----------------------------------|------------|------------|------------|---------------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | ** **                                                                | ** ** | **Pension**                                                   | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | ** **                                                                | ** ** | **Value and**                                            | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | ** **                                                                | ** ** | **Non-**                                                      | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | **Non-Equity**                                                            | ** ** | **qualified**                                                 | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | **Incentive**                                                             | ** ** | **Deferred**                                                  | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | ** **                                  | ** ** | ** **                                                          | ** ** | **Plan**                                                                  | ** ** | **Compen-**                                                   | ** ** | ** **                                   | ** ** | ** **           | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                                        | ** ** | **Stock**                                   | ** ** | **Option**                                                          | ** ** | **Compen-**                                                               | ** ** | **sation**                                                    | ** ** | **All Other**                           | ** ** | ** **           | ** ** |
| **Name and Principal** | ** ** | ** ** | ** ** | **Salary**          | ** ** | **Bonus**                                         | ** ** | **Awards**                                  | ** ** | **Awards**                                                          | ** ** | **sation**                                                                | ** ** | **Earnings**                                                  | ** ** | **Compensation**                             | ** ** | **Total**            | ** ** |
| **Position**                     | ** ** | **Year**   | ** ** | ** **($)       | ** ** | **($) (1)**                                  | ** ** | **($)**                                     | ** ** | **($) (2)**                                                    | ** ** | **($)**                                                                   | ** ** | **($)**                                                       | ** ** | **($) (3)**                             | ** ** | **($)**              | ** ** |
| ** **                       |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| ** **                       |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Robert J. DiNicola               |       | 2006       |       | $ 1,189,885    |       | $       — |       | $      — |       | $ 1,824,777                                                    |       | $           — |       | $         — |       | $      413,587 |       | $ 3,428,249     |       |
| Chairman of the Board            |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| and Chief Executive              |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Officer (4)                      |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
|                             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Francis M. Rowan                 |       | 2006       |       | $ 228,838      |       | $ 35,000                                     |       | $      — |       | $  52,696                                                 |       | $           — |       | $         — |       | $      104,161 |       | $  420,695 |       |
| Senior Vice President            |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| and Chief Financial              |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Officer (5)                      |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
|                             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| F. David Coder                   |       | 2006       |       | $ 382,692      |       | $ 100,000                                    |       | $      — |       | $ 145,757                                                      |       | $           — |       | $         — |       | $      515,314 |       | $ 1,143,763     |       |
| Executive Vice President         |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| of Store Operations              |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
|                             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Robert Homler                    |       | 2006       |       | $ 274,039      |       | $       — |       | $      — |       | $  88,446                                                 |       | $           — |       | $         — |       | $      271,062 |       | $  633,547 |       |
| Executive Vice                   |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| President,                       |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Merchandising (6)                |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
|                             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Norman Axelrod                   |       | 2006       |       | $ 137,250      |       | $       — |       | $      — |       | $          — |       | $           — |       | $         — |       | $ 18,029,699                            |       | $ 18,166,949    |       |
| Former Chairman and              |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Chief Executive Officer (7)      |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
|                             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Jack E. Moore                    |       | 2006       |       | $  61,269 |       | $       — |       | $      — |       | $          — |       | $           — |       | $         — |       | $   4,827,271                 |       | $ 4,888,540     |       |
| Former President and             |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |
| Chief Operating Officer (8)      |       |       |       |                |       |                                              |       |                                        |       |                                                                |       |                                                                      |       |                                                          |       |                                         |       |                 |       |

----

| (1) Bonus amounts reflect transaction  incentive bonuses paid upon consummation of the acquisition of LNT in  February 2006.                                                                                                                                                                                                                                                                                                                                                              |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2) See Note (13) to the Company’s consolidated  financial statements included in this report regarding the valuation assumptions  with respect to the amounts shown.                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3) Includes perquisites, equity distributions and  severance received by the named executive officers and life insurance  premiums paid on behalf of the named executive officers, as follows:                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (a) For Mr. DiNicola, includes perquisites totaling  $243,894, consisting of $33,431 for car allowance and $210,463 for relocation  reimbursement related to sale and purchase of home and moving expenses. Also  includes $163,795 for reimbursement of taxes on such relocation  reimbursementand imputed value for life insurance premium premiums of $5,898.                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (b) For Mr. Rowan, includes perquisite of financial  planning services valued at $4,050, employer 401(k) Plan contribution of  $7,784, equitydistribution in connection with the acquisition of LNT in  February 2006 of $92,225 and imputed value for life insurance premium  premiums of$102.                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (c) For Mr. Coder, includes perquisite of financial  planning services valued at $12,021. Also includes employer 401(k) Plan  contribution of $10,077, equity distribution in connection with the  acquisition of LNT in February 2006 of $492,949 and imputed value for life  insurance premium premiums of $267.                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (d) For Mr. Homler, includes perquisite totaling  $130,881 for relocation reimbursement related to sale and purchase of home  and moving expenses. Also includes $138,277 for reimbursement of taxes on  such relocation reimbursement and imputed value for life insurance premium  premiums of$1,904.                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (e) For Mr. Axelrod, includes perquisite of financial  planning services valued at $15,026. Also includes employer 401(k) Plan  contribution of $5,490, equity distribution in connection with the  acquisition of LNT in February 2006 of $6,362,403, severance compensation of  $5,088,179 a distribution from his supplemental executive retirement program  (“SERP”) of $6,542,664. and imputed income of $15,937 based on the Company-funded  term life insurance benefit. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (f) For Mr. Moore, includes employer 401(k) Plan  contribution of $2,451, equity distribution in connection with the  acquisition of LNT in February 2006 of $1,155,000, severance compensation of  $2,471,948 and tax reimbursement relating to excess parachute payments of  $1,197,872.                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (4) Mr. DiNicola became the Company’s Chairman of the  Board and Chief Executive Officer on February 14, 2006. Salary amount  includes directors fees in 2006 of $32,000. Also, Option Awards amount  includes value of director options granted on June 13, 2006. See “—Director  Compensation” below.                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (5) Mr. Rowan became the Company’s Senior Vice  President and Chief Financial Officer on April 28, 2006.                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (6) Mr. Homler became the Company’s Executive Vice  President, Merchandising on May 5, 2006.                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (7) Mr. Axelrod ceased serving as the Chairman and  Chief Executive Officer of LNT on February 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (8) Mr. Moore ceased serving as the President and  Chief Operating Officer of LNT on January 12, 2006. His final date of  employment was February 14, 2006.                                                                                                                                                                                                                                                                                                                               |

* *

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*Current ExecutiveOfficers*

LNT entered into anemployment agreement with each of the current executive officers in the fiscalyear ended December 30, 2006.  The following summarizes the principal terms ofthese employment agreements.

Theterm of Mr. DiNicola’s employmentcontinues until December 31, 2008.  The employment term for each of Mr. Rowan,Mr. Coder and Mr. Homler continues until December 31, 2007.  Each of the employment terms is subject toautomatic one-year renewals unless LNT or the executive provides one-yearadvance notice of an election not to renew the term.  The employment agreements provide for paymentof an annual base salary that will be reviewed on an annual basis by LNT’scompensation committee.  The currentannual base salaries are $1,350,000 for Mr. DiNicola, $250,000 for Mr. Rowan,$400,000 for Mr. Coder and $400,000 for Mr. Homler.

The executives areentitled to certain annual performance bonuses pursuant to the terms of theiremployment agreements.  Mr. DiNicola hasa target bonus of 100% of his annual base salary if LNT exceeds EBITDA levels tobe determined by the LNT compensation committee for the applicable year.  Mr. Rowan, Mr. Coder and Mr. Homler areeligible for annual performance bonuses in an amount to be determined by theLNT compensation committee in its sole discretion based on EBITDA levels for theapplicable year.  The target bonus is 40%of annual base salary for Mr. Rowan and 50% of annual base salary for each ofMr. Coder and Mr. Homler.

Theemployment agreements generally provide for the executives to participate inand receive benefits under any benefit plans, arrangements or policies madeavailable by LNT to its employees generally and certain specified benefits,including (except for Mr. DiNicola) health insurance, prescription drugcoverage, dental insurance, long-term disability insurance, life insurance,cellular telephone and service and annual financial planning services.  In addition, Mr. DiNicola and Mr. Homler wereeach entitled to relocation expenses, including moving expenses and certain expensesin connection with the sale of an existing home and purchase of a new home, aswell as reimbursement for income taxes incurred as result of suchpayments.  Mr. DiNicola is also entitledto transportation between the Company’s headquarters and his permanent ortemporary residence in the New York City area or a New York City areaairport.  If he does not utilize thisbenefit, he is entitled to equivalent cash compensation.

Eachof the employment agreements also includes customary covenants includingnoncompetition, confidentiality and nondisclosure and nonsolicitation ofemployees.

*Norman Axelrod*

Uponthe consummation of the acquisition of LNT, Norman Axelrod ceased to beChairman of the Company’s board of directors and Chief Executive Officer, andhis employment terminated on February 16, 2006. LNT and Mr. Axelrod entered into a general release agreement pursuant towhich Mr. Axelrod agreed to release LNT and its affiliates from any claims Mr.Axelrod may have had, and LNT agreed to pay Mr. Axelrod’s severance and otherentitlements under his employment agreement. These entitlements include aperquisite of financial planning services valued at $15,026, an employer 401(k)Plan contribution of $5,490, an equity distribution in connection with theacquisition of LNT in February 2006 of $6,362,403, severance compensation of$5,088,179, a distribution from his supplemental executive retirement program (“SERP”)of $6,542,664 and imputed income of $15,937 based on the Company-funded termlife insurance benefit.

**Grantsof Plan-Based Awards**

The following table setsforth certain information with respect to stock options granted during thefiscal year ended December 30, 2006 to each of the named executive officers.

112

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|                        | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **All Other** | ** ** | **All Other** | ** ** | ** **             | ** ** | ** **                   | ** ** |
|------------------------|------------|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|------------------------|------------|------------------------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **Stock**          | ** ** | **Option**         | ** ** | ** **             | ** ** | ** **                   | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **Awards:**        | ** ** | **Awards:**        | ** ** | ** **             | ** ** | ** **                   | ** ** |
| ** **             | ** ** | ** ** | ** ** | **Estimated Future Payouts Under**   | ** ** | **Estimated Future Payouts Under** | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Exercise or** | ** ** | **Grant Date** | ** ** |
| ** **             | ** ** | ** ** | ** ** | **Non-Equity Incentive Plan Awards** | ** ** | **Equity Incentive Plan Awards**   | ** ** | **Shares of** | ** ** | **Securities**     | ** ** | **Base Price**  | ** ** | **Fair**            | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | **Maxi-**          | ** ** | ** **         | ** ** | ** **           | ** ** | **Maxi-**           | ** ** | **Stock or**  | ** ** | **Underlying**     | ** ** | **of Option**     | ** ** | **Value of Stock** | ** ** |
| ** **             | ** ** | **Grant**  | ** ** | **Threshold**                                       | ** ** | **Target**                                        | ** ** | **mum**            | ** ** | **Threshold**      | ** ** | **Target**           | ** ** | **mum**             | ** ** | **Units**          | ** ** | **Options**        | ** ** | **Awards**             | ** ** | **and Option**          | ** ** |
| **Name**               | ** ** | **Date**   | ** ** | **($)**                                             | ** ** | **($)**                                           | ** ** | **($)**            | ** ** | **(#)**            | ** ** | **(#)**              | ** ** | **(#)**             | ** ** | **(#)**            | ** ** | **(#) (1)**   | ** ** | **($ / Sh)** | ** ** | **Awards ($)**          | ** ** |
| Robert J. DiNicola (2) |       | 3/27/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 281,946            |       | $                      | 50.00      |                         | $          | 4,925,597 |   |
|                        |       | 6/13/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 5,000              |       | $                      | 50.00      |                         | $          | 83,900 |   |
|                   |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |                   |       |                         |       |
| Francis M. Rowan       |       | 3/27/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 5,000              |       | $                      | 50.00      |                         | $          | 87,350 |   |
|                        |       | 4/28/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 10,000             |       | $                      | 50.00      |                         | $          | 173,850 |   |
|                   |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |                   |       |                         |       |
| F. David Coder (3)     |       | 3/27/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 25,000             |       | $                      | 50.00      |                         | $          | 436,750 |   |
|                   |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |                   |       |                         |       |
| Robert Homler          |       | 4/17/2006  |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | 25,000             |       | $                      | 50.00      |                         | $          | 439,500 |   |
|                   |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |                   |       |                         |       |
| Norman Axelrod         |       | —     |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | —             |       | —                 |       | —                       |       |
|                   |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |                   |       |                         |       |
| Jack E. Moore          |       | —     |       | —                                              |       | —                                            |       | —             |       | —             |       | —               |       | —              |       | —             |       | —             |       | —                 |       | —                       |       |

----

(1)      Each of the stock options were granted under the LinensHolding Co. Stock Option Plan and are equally divided between a time option anda performance option. The stock options expire seven years after the date ofgrant. The time options become vested and exercisable in four equalinstallments based on the anniversary of the date of grant or the anniversaryof a designated date. Each of the grants reflected in the table above with agrant date of March 27, 2006 vest on the first four anniversaries of theFebruary 14, 2006 closing date of the acquisition of Linens ‘n Things, Inc. Theperformance option provides that if on any Measurement Date, the Value PerShare equals or exceeds the Target Stock Price, then the performance optionwill vest and become exercisable in two equal annual installments on each ofthe first two anniversaries of the Measurement Date, subject to acceleration inthe event of a change in control or a specified liquidity event. Prior to aqualified initial public offering, a Measurement Date is the end of a fiscalquarter beginning with or following December 31, 2007. The Target Stock Pricemeans $50, compounded at an annual rate of 25% from February 14, 2006 to theMeasurement Date.

 

(2)      The June 13, 2006 grant reflects a grant to Mr.DiNicola outside of the Stock Option Plan, but pursuant to Linens Holding Co.and Linens ‘n Things, Inc. Director Compensation Policy price of $50.00 pershare and expire seven years after the date of grant. See “DirectorCompensation” below. On March 27, 2006, Mr. DiNicola also received a grant of40,000 stock options granted outside of the Stock Option Plan, which were fullyvested and exercisable on the date of grant, in connection with his purchase ofshares of common stock of the Company. These non-plan options also have anexercise price of $50.00 per share and expire seven years after the date ofgrant. These non-plan options had a grant date fair market value of $666,800.

 

**(3)**      On May 11, 2006, Mr. Coder also received a grant of 3,000stock options granted outside of the Stock Option Plan, which were fully vestedand exercisable on the date of grant, inconnection with his purchase of sharesof common stock of the Company. The non-plan options have an exercise price of$50.00 per share and expire seven years after the date of grant. These non-planoptions had a grant date fair market value of $50,250.

**Outstanding Equity Awards at Fiscal Year-End**

                Thefollowing table set forth certain information regarding exercisable andunexercisable stock options granted to the named executive officers and held asof December 30, 2006, the end of the fiscal year. No stock options wereexercised in the 2006 fiscal year.

 
|                    | ** ** | **Option Awards** | ** ** | **Stock Awards** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------|------------|
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** | **Incentive** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** | **Equity:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** | **Plan Awards** | ** ** |
| ** **         | ** ** | **Number of**     | ** ** | **Number of**    | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** | **Market or** | ** ** |
| ** **         | ** ** | **Securities**         | ** ** | **Securities**        | ** ** | **Plan Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market** | ** ** | **Number of** | ** ** | **Payout Value** | ** ** |
| ** **         | ** ** | **Underlying**         | ** ** | **Underlying**        | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **of Unearned** | ** ** |
| ** **         | ** ** | **Unexercised**        | ** ** | **Unexercised**       | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **Shares or** | ** ** | **Shares, Units** | ** ** | **Shares, Units** | ** ** |
| ** **         | ** ** | **Options**            | ** ** | **Options**           | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **or Other** | ** ** | **or Other** | ** ** |
| ** **         | ** ** | **(#)**                | ** ** | **(#)**               | ** ** | **Unexercised** | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Rights That** | ** ** | **Rights That** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Option** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **            | ** ** | **Options** | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** |
| **Name**           | ** ** | **Exercisable**        | ** ** | **Unexercisable**     | ** ** | **(#)** | ** ** | **($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
| Robert J. DiNicola |       | —                 |       | 281,946               |       | — |   | $ | 50.00 |   | 3/27/2014 |   | — |   | — |   | — |   | — |   |
|                    |       | 40,000                 |       | —                |       | $ | 50.00 |   |   |   | 3/27/2014 |   |   |   |   |   |   |   |   |   |
|                    |       | 5,000                  |       | —                |       | $ | 50.00 |   |   |   | 6/13/2014 |   |   |   |   |   |   |   |   |   |
|               |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Francis M. Rowan   |       | —                 |       | 5,000                 |       | — |   | $ | 50.00 |   | 3/27/2014 |   | — |   | — |   | — |   | — |   |
|                    |       | —                 |       | 10,000                |       | $ | 50.00 |   |   |   | 4/28/2014 |   |   |   |   |   |   |   |   |   |
|               |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| F. David Coder     |       | —                 |       | 25,000                |       | — |   | $ | 50.00 |   | 3/27/2014 |   | — |   | — |   | — |   | — |   |
|                    |       | 3,000                  |       | —                |       | $ | 50.00 |   |   |   | 5/11/2014 |   |   |   |   |   |   |   |   |   |
|               |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Homler      |       | —                 |       | 25,000                |       | — |   | $ | 50.00 |   | 4/17/2014 |   | — |   | — |   | — |   | — |   |
|               |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Norman Axelrod     |       | —                 |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
|               |       |                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jack E. Moore      |       | —                 |       | —                |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |

 

113

----

**NonqualifiedDeferred Compensation**
| ** **         | ** ** | ** **                             | ** ** | **Registrant**       | ** ** | **Aggregate**        | ** ** | ** **             | ** ** | **Aggregate**        | ** ** |
|--------------------|------------|----------------------------------------|------------|----------------------|------------|----------------------|------------|------------------------|------------|----------------------|------------|
| ** **         | ** ** | **Executive**                          | ** ** | **Contributions**    | ** ** | **Earnings**         | ** ** | **Aggregate**          | ** ** | **Balance at**  | ** ** |
| ** **         | ** ** | **Contributions**                      | ** ** | **in Last**     | ** ** | **in Last**     | ** ** | **Withdrawals /** | ** ** | **Last Fiscal** | ** ** |
| ** **         | ** ** | **in Last Fiscal Year** | ** ** | **Fiscal Year** | ** ** | **Fiscal Year** | ** ** | **Distributions**      | ** ** | **Year-End**         | ** ** |
| **Name**           | ** ** | **($)**                                | ** ** | **($)**              | ** ** | **($)**              | ** ** | **($)**                | ** ** | **($)**              | ** ** |
| Robert J. DiNicola |       | —                                 |       | —               |       | —               |       | —                 |       | —               |       |
|               |       |                                   |       |                 |       |                 |       |                   |       |                 |       |
| Francis M. Rowan   |       | —                                 |       | —               |       | —               |       | —                 |       | —               |       |
|               |       |                                   |       |                 |       |                 |       |                   |       |                 |       |
| F. David Coder (1) |       | —                                 |       | —               |       | $                    | 1,308.84   |                   | $          | 198,646.00           |       | — |   |
|               |       |                                   |       |                 |       |                 |       |                   |       |                 |       |
| Robert Homler      |       | —                                 |       | —               |       | —               |       | —                 |       | —               |       |
|               |       |                                   |       |                 |       |                 |       |                   |       |                 |       |
| Norman Axelrod (2) |       | —                                 |       | —               |       | $                    | 21,231.96  |                   | $          | 802,380.00           |       | — |   |
|               |       |                                   |       |                 |       |                 |       |                   |       |                 |       |
| Jack E. Moore      |       | —                                 |       | —               |       | $                    | 4,476.18   |                   | $          | 140,261.00           |       | — |   |

----

(1)            Mr. Coder received a distributionfrom the Deferred Compensation Plan in February 2006, but is no longer aparticipant in the plan.

 

(2)            Mr. Axelrod received a distribution from the DeferredCompensation Plan in February 2006 in connection with termination of employmentwith LNT.

 

(3)            Mr. Moore received a distribution from the DeferredCompensation Plan in February 2006 in connection with termination of employmentwith LNT.

 

The Linens ‘n Things,Inc. Deferred Compensation Plan (as amended and restated in December 2005 andamended in December 2006), is a nonqualified deferred compensation plan towhich any employee of LNT or any subsidiary, who elect to participate, may makedeferrals of base salary or bonus. Prior to the beginning of a given calendaryear, on a date specified by the deferred compensation committee of LNT, aparticipant may elect to defer up to 75% of base salary and up to 100% ofannual incentive award bonus to be received in the given calendar year.  Although the plan is unfunded as required bythe Internal Revenue Code, amounts credited to participants’ deferredcompensation accounts under the plan are deemed to be invested, at thedirection of the participants, in hypothetical investment vehicles as specifiedfrom time to time with respect to the plan.

None of the currentexecutive officers are participants in the Deferred Compensation Plan.

**DirectorCompensation**

The following table setsforth information with respect to compensation for each of the Company’sdirectors for the fiscal year ended December 30, 2006.

114

----

 
| ** **                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **       | ** ** | ** **              | ** ** | **Change**          | ** ** | ** **         | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------|------------|-----------------------|------------|------------------|------------|-------------------------|------------|---------------------|------------|--------------------|------------|------------|------------|
| ** **                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **       | ** ** | ** **              | ** ** | **in Pension** | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **       | ** ** | ** **              | ** ** | **Value and**  | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **       | ** ** | ** **              | ** ** | **Nonqualified**    | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                   | ** ** | ** **            | ** ** | ** **       | ** ** | **Non-Equity**          | ** ** | **Deferred**        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Fees Earned or** | ** ** | ** **            | ** ** | **Option**       | ** ** | **Incentive Plan** | ** ** | **Compensation**    | ** ** | **All Other** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Paid in Cash**   | ** ** | **Stock Awards** | ** ** | **Awards**       | ** ** | **Compensation**        | ** ** | **Earnings**        | ** ** | **Compensation**   | ** ** | **Total**  | ** ** |
| **Name (1)**          | ** ** | **($)**                      | ** ** | **($)**               | ** ** | **($) (2)** | ** ** | **($)**                 | ** ** | **($)**             | ** ** | **($)**            | ** ** | **($)**    | ** ** |
| Richard Baker  (3)         |       | $                            | 32,000     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 115,900 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Dr. Joyce F.  Brown (4)    |       | $                            | 23,667     |                  | —     |             | $          | 84,150                  |       | —              |       | —             |       | —     |       | $ | 107,817 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Peter P. Copses            |       | $                            | 32,500     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 116,400 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Robert J.  DiNicola (5)    |       | $                            | 32,000     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 115,900 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Michael A. Gatto           |       | $                            | 32,500     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 116,400 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Damian J.  Giangiacomo (6) |       | $                            | 32,500     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 116,400 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| George Golleher  (6)       |       | $                            | 32,000     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 115,900 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Andrew Jhawar              |       | $                            | 32,000     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 115,900 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Lee Neibart                |       | $                            | 32,000     |                  | —     |             | $          | 83,900                  |       | —              |       | —             |       | —     |       | $ | 115,900 |   |
|                       |       |                         |       |                  |       |             |       |                    |       |                |       |               |       |       |       |
| Brian H. Pall (7)          |       | $                            | 7,692      |                  | —     |             | $          | 85,000                  |       | —              |       | —             |       | —     |       | $ | 92,692 |   |

----

 

(1)                               Except as otherwise noted, each of the listeddirector was elected as a director of the Company on February 14, 2006. Eachcurrent and former dirctor listed above received a grant of 5,000 stock optionsgranted outside of the Linens Holding Co. Stock Option Plan, which were fullyvested and exercisable as of the grant date, at an exercise price of $50.00 pershare. The grant date was June 13, 2006 or, if later, the date of thedirector’s appointment to the board of directors of the Company. None of thedirector options were exercised in the fiscal year ended December 30, 2006 andwere held by the respective current or former directors as of December 30,2006.

 

(2)                               The grant date fair value of each option awardis the same as the dollar amount recognized for financial statement reportingpurposes with respect to 2006 in accordance with SFAS 123R and reflected in thetable above.

 

(3)          Resigned as a directorof the Company effective October 20, 2006.

 

(4)          Appointed as adirector of the Company effective June 15, 2006.

 

(5)                               The amounts reflected in the table above forMr. DiNicola are also included in the Summary Compensation Table.See “—SummaryCompensation Table” above.

 

(6)          Elected as a directorof the Company effective March 20, 2006.

 

(7)          Appointed as adirector of the Company effective October 20, 2006.

 

**Post Termination Paymentsand Benefits**

Pursuant to theirrespective employment agreements with LNT, each of the current executiveofficers is entitled to specified severance compensation in the event of a termination of employment by LNTwithout cause or by the executive officer for good reason.  In either case, the executive officeris entitled to continued payments of basesalary and benefits for the remainder of the term, but no less than two yearsif the termination occurs during the six-month period following a change incontrol (as defined in the employment agreement).  In addition, the executive officer will beentitled to payment of a prorated share of the annual performance bonus basedon the period of actual employment during the year.  With respect to Mr. DiNicola, theprorated bonus payment will be made provided that bonus targets are met for theyear of such termination.  With respectto the other current executive officers, the prorated bonus payments aresubject to the discretion of LNT’s board of directors or compensationcommittee. Upon such a termination, all unvested stock options will terminate andthe executive will be entitled to exercise vested options for a specified periodfollowing the termination.  For Mr.DiNicola, the period is 180 days; for the other executive officers, it is 90days.  In addition to any otherseverance, Mr. Homler is entitled to the continuation of the fringe benefitsavailable to him immediately prior to the termination for as long as hecontinues to receive payments of base salary post-termination.

Pursuant to hisemployment agreement, upon the occurrence of a change of control, all of Mr.DiNicola’s outstanding options will become fully exercisable, provided that anyperformance option shall not vest solely because a change of control.  In addition, the option grant letters foreach of the current executive officers provided that their time options will becomefully exercisable immediately prior to a change of control, but that vestingwill not be accelerated for any performance option unless the change ofcontrols occurs after a measurement date (as defined in the grant letter).

115

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The employment agreementsfurther provide that if any payment to the executive would be subject to orresult in the imposition of the excise tax imposed by Section 4999 of theInternal Revenue Code of 1986, then the amount of such payments shall bereduced to the highest amount that may be paid by LNT without subjecting suchpayment to the excise tax.  The executivewill have the right to designate those payments or benefits that will bereduced or eliminated.  Notwithstandingthe foregoing, in the employment agreements for Mr. DiNicola and Mr. Homler,the reduction will not apply if the executive would, on a net after-tax basis,receive less compensation than if the payment were not so reduced. Alldeterminations with regard to such excise tax and any reduction in connectionwith payments to the executive shall be made by a nationally recognizedaccounting firm that acts as LNT’s outside auditors at the time of suchdetermination.

Upon termination ofemployment because of death or disability, the executive (or his estate) willbe entitled to the executive’s current base salary (less any payments madeunder Company-sponsored disability benefit plans) for the remainder of theemployment period, plus payment of a prorated share of the annual performancebonus based on the period of actual employment during the year.  With respectto Mr. DiNicola, the prorated bonus payment will be made provided that bonustargets are met for the year of such termination.  With respect to the other current executiveofficers, the prorated bonus payments are subject to the discretion of LNT’sboard of directors or compensation committee. Stock options that are not exercisable as of the date of terminationbecause of death or disability will expire, and options which are exercisableas of such date will remain exercisable for a 180-day period.  In the event of Mr. DiNicola’s terminationbecause of death or disability, all of his outstanding options will becomefully exercisable.

Upona termination of employment, if any of the executive officers other than Mr.DiNicola own shares of common stock of the Company, the shares are subject torepurchase by LNT or its designee for a period of 180 days (270 days upontermination because of death or disability) following the termination based onfair value as determined by the LNT board of directors.

The following tablessummarize the value of the compensation that the current executive officerswould receive if they had terminated employment on December 30, 2006 underthe circumstances shown. The tables exclude (1) amounts accrued throughDecember 30, 2006 that would be paid in the normal course of continuedemployment, such as accrued but unpaid salary, and (2) vested accountbalances under the LNT 401(k) Plan that is generally available to all of LNT’ssalaried employees.  No annualperformance bonuses were paid with respect to the year ended December 30, 2006.
| ** **          | ** ** | ** **                 | ** ** | **Before Change**        | ** ** | **After Change**         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** |
|---------------------|------------|----------------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------|------------|------------|------------|----------------|------------|--------------------|------------|
| ** **          | ** ** | ** **                 | ** ** | **in Control**           | ** ** | **in Control**           | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** |
| ** **          | ** ** | ** **                 | ** ** | **Termination**               | ** ** | **Termination**               | ** ** | ** **      | ** ** | ** ** | ** ** | ** **     | ** ** | ** **         | ** ** |
| ** **          | ** ** | ** **                 | ** ** | **w/o Cause or**    | ** ** | **w/o Cause or**    | ** ** | **Voluntary**   | ** ** | ** ** | ** ** | ** **     | ** ** | **Change in** | ** ** |
| **Name**            | ** ** | **Benefit**                | ** ** | **for Good Reason** | ** ** | **for Good Reason** | ** ** | **Termination** | ** ** | **Death**  | ** ** | **Disability** | ** ** | **Control**        | ** ** |
| Robert J.  DiNicola |       | Continued  base salary     |       | $                             | 2,700,000  |                          | $          | 2,700,000       |       | $          | —     |           | $          | 2,700,000          |       | $ | 2,700,000 |   | $ | — |   |
|                |       | Continued  fringe benefits |       | $                             | —     |                          | $          | —          |       | $          | —     |           | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | Acceleraton  of vesting of |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | stock  options             |       | $                             | —     |                          | $          | 201,304         |       | $          | —     |           | $          | 201,304            |       | $ | 201,304 |   | $ | 201,304 |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
| Francis M. Rowan    |       | Continued  base salary     |       | $                             | 250,000    |                          | $          | 500,000         |       | $          | —     |           | $          | 250,000            |       | $ | 250,000 |   | $ | — |   |
|                |       | Continued  fringe benefits |       | $                             | —     |                          | $          | —          |       | $          | —     |           | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | Acceleraton  of vesting of |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | stock  options             |       | $                             | —     |                          | $          | 2,483           |       | $          | —     |           | $          | —             |       | $ | — |   | $ | 2,483 |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
| F. David Coder  (1) |       | Continued  base salary     |       | $                             | 400,000    |                          | $          | 800,000         |       | $          | —     |           | $          | 400,000            |       | $ | 400,000 |   | $ | — |   |
|                |       | Continued  fringe benefits |       | $                             | —     |                          | $          | —          |       | $          | —     |           | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | Acceleraton  of vesting of |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | stock  options             |       | $                             | —     |                          | $          | 12,416          |       | $          | —     |           | $          | —             |       | $ | — |   | $ | 12,416 |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
| Robert Homler       |       | Continued  base salary     |       | $                             | 400,000    |                          | $          | 800,000         |       | $          | 2          |           | $          | 400,000            |       | $ | 400,000 |   | $ | — |   |
|                |       | Continued  fringe benefits |       | $                             | 9,796      |                          | $          | 9,796           |       | $          | —     |           | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                       |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | Acceleraton  of vesting of |       |                          |       |                          |       |            |       |       |       |           |       |               |       |
|                |       | stock options              |       | $                             | —     |                          | $          | 12,416          |       | $          | —     |           | $          | —             |       | $ | — |   | $ | 12,416 |   |

 

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**CompensationCommittee Report**

The compensationcommittee of the board of directors of the Company oversees the compensationprogram of the Company on behalf of the board of directors.  In fulfilling its oversight responsibilities,the compensation committee reviewed and discussed with management of theCompany the “Compensation Discussion and Analysis” included in this report.

In reliance on thisreview and discussion, the compensation committee recommended to the board ofdirectors that the “Compensation Discussion and Analysis” be included in thisreport to be filed with the SEC.

Members of the Compensation Committee:

Andrew S. Jhawar, Chairman

George Golleher

Brian H. Pall

*ThisCompensation Committee Report shall not be deemed to be incorporated byreference by any general statement incorporating by reference this annualreport into any filing under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended, and shall not otherwise be deemedfiled under such acts.*

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**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

The following table sets forth, as of March 1, 2007(the “Ownership Date”), the number of shares of the Company’s common stockbeneficially owned by (1) each person or group known by us to ownbeneficially more than 5% of the outstanding shares of common stock,(2) each director, (3) each of the named executive officers and(4) all directors and executive officers as a group.

Unless otherwise indicated in the footnotes to thetable, and subject to community property laws where applicable, the followingpersons have sole voting and investment control with respect to the sharesbeneficially owned by them. In accordance with SEC rules, if a person has aright to acquire beneficial ownership of any shares of Common Stock, on orwithin 60 days of the Ownership Date, upon exercise of outstanding options orotherwise, the shares are deemed beneficially owned by that person and aredeemed to be outstanding solely for the purpose of determining the percentageof our shares that person beneficially owns. These shares are not included inthe computations of percentage ownership for any other person.

 

| Name of Beneficial Owner(1)                   | ** ** | **Number of  Shares** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                                                   | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Linens  Investors, LLC(2)                                    |       | 12,960,000                 |       | 99.6           | %          |
| Robert J.  DiNicola(3) (4)                                   |       | 120,243                    |       | *              |       |
| Francis M.  Rowan(5)                                         |       | 1,875                      |       | *              |       |
| F. David  Coder(3)(6)                                        |       | 9,125                      |       | *              |       |
| Robert Homler(7)                                             |       | 3,125                      |       | —         |       |
| Joyce F.  Brown(8)                                           |       | 5,000                      |       | *              |       |
| Peter P.  Copses(9)                                          |       | 12,965,000                 |       | 99.6           | %          |
| Michael A.  Gatto(8)(10)                                     |       | 5,000                      |       | *              |       |
| George G.  Golleher(3)(11)                                   |       | 25,000                     |       | *              |       |
| Damian J.  Giangiacomo(8)                                    |       | 5,000                      |       | *              |       |
| Andrew S.  Jhawar(9)                                         |       | 12,965,000                 |       | 99.6           | %          |
| Lee S.  Neibart(8)(12)                                       |       | 5,000                      |       | *              |       |
| Brian H.  Pall(8)(12)                                        |       | 5,000                      |       | *              |       |
|                                                         |       |                       |       |           |       |
| All officers and  directors as a group (12 persons)(13) |       | 13,144,368                 |       | 100.0          | %          |

----

***      Less than 1% of the outstanding shares.

(1)*         *The address of Linens Investors, LLC (“LinensInvestors”) is c/o Apollo Management V, L.P., 10250 Constellation Boulevard,Los Angeles, California 90067.  The addressof each named executive officer, Mr. Golleher, and Dr. Brown is c/o Linens ‘nThings, Inc., 6 Brighton Road, Clifton, New Jersey 07015.  The address for each of Messrs. Copses,Jhawar and Giangiacomo is c/o Apollo Management V, L.P., 10250 ConstellationBoulevard, Los Angeles, California 90067. The address for each of Messrs. Neibart and Pall is c/o NRDC RealEstate Advisors I LLC, 3 Manhattanville Road, Purchase, New York 10577.  The address of Mr. Gatto is c/o SilverPoint Capital Fund Investments LLC, 2 Greenwich Plaza, Greenwich, Connecticut06830.

(2)          Linens Investors is the Company’s principalstockholder. Linens Investors is a special purpose entity that was created inconnection with the Merger and is controlled by Apollo Linens Investors, LLCand its affiliates (“Apollo Linens Investors”) which, together with NRDC RealEstate Advisors I LLC and Silver Point Capital Fund Investments LLC, and theirrespective affiliates, own all of the membership interests of LinensInvestors.  Apollo Management V, L.P. (“ApolloManagement V”) is the manager of Linens Investors and has sole voting andinvestment and control with respect to the shares.  Pursuant to a stockholders’ agreement, LinensInvestors has shares dispositive power with respect to all of the outstandingshares of common stock.  Linens Investorsalso has sole voting power over all of the outstanding shares of common stockpursuant to the stockholders’ agreement. Linens Investors expressly disclaims beneficial ownership of such sharesof common stock held by each of the parties to the stockholders’ agreement,except to the extent of its pecuniary interest in the Company.

(3)          On February 14, 2006, the Company entered into a stockholders’ agreementwith each of its stockholders.  Eachstockholder who purchased shares after that time has also agreed to be bound bythe stockholders’ agreement.  Pursuant tothe stockholders’ agreement, each stockholder agreed to give Linens Investors avoting proxy to vote with respect to certain matters as set forth in thestockholders’ agreement.  As a result,Linens Investors may be deemed to be the beneficial owner of the shares ofcommon stock held by the parties to the stockholders’ agreement.  Linens Investors expressly disclaimsbeneficial ownership of such shares of common stock held by each of the partiesto the stockholders’ agreement, except to the extent of its pecuniary interest.

118

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(4)          Includes 40,000 shares of common stockpurchased on February 14, 2006 and options to purchase 80,243 shares of commonstock that are currently exercisable or exercisable within 60 days of theOwnership Date.

(5)          Includes options to purchase 1,875 shares ofcommon stock that are exercisable within 60 days of the Ownership Date.

(6)          Includes 3,000 shares of common stock purchasedin May 2006 and options to purchase 6,125 shares of common stock that areexercisable within 60 days of the Ownership Date.

(7)          Includes options to purchase 3,125 shares ofcommon stock that are exercisable within 60 days of the Ownership Date.

(8)          Includes options to purchase 5,000 shares of common stock that arecurrently exercisable.

(9)          Includes options to purchase 5,000 shares of common stock that arecurrently exercisable and 12,960,000 shares of common beneficially owned byLinens Investors.  Linens Investors iscontrolled by its manager, Apollo Management V. Peter P. Copses and Andrew S.Jhawar, two of the Company’s directors, are affiliates of Apollo Management Vand, therefore, may be deemed to be beneficial owners of the membershipinterests of Linens Investors and the shares of the Company’s common stockowned by Linens Investors. Each of Messrs. Copses and Jhawar disclaimbeneficial ownership of any such interests in which he does not have apecuniary interest.

(10)    Michael A. Gatto is an affiliate of Silver Point Capital FundInvestments LLC, and therefore, may be deemed to be the beneficial owner of themembership interests of Silver Point Capital Fund Investments LLC.Mr. Gatto disclaims beneficial ownership of any such interests in which hedoes not have a pecuniary interest.

(11)    Includes 10,000 shares of common stockpurchased in August 2006 and options to purchase 15,000 shares of common stockthat are currently exercisable.

(12)    Lee S. Neibart and Brian Pall, two of the Company’s directors, areaffiliates of NRDC Real Estate Advisors I LLC, and therefore, may be deemed tobe beneficial owners of the membership interests of NRDC Real Estate Advisors ILLC. Each of Messrs. Neibart and Pall disclaim beneficial ownership of anysuch interests in which he does not have a pecuniary interest.

(13)    Includes (a) options to purchase an aggregate of 131,368 shares ofcommon stock that are currently exercisable or exercisable within 60 days ofthe Ownership Date and (b) 12,960,000 shares owned by Linens Investors.

**Item 13.  Certain Relationshipsand Related Transactions, and Director Independence**

**Management Services Agreement**

Uponconsummation of the Merger, the Company entered into a management servicesagreement with Apollo Management V, L.P., NRDC Linens B LLC and Silver PointCapital Fund Investments LLC (each of whom is an affiliate of theCompany).  Under this management servicesagreement, the Sponsors agreed to provide to the Company certain investment banking,management, consulting, financial planning and real estate advisory services onan ongoing basis for a fee of $2 million per year.  Under this management services agreement,Apollo Management V, L.P. also agreed to provide to the Company certainfinancial advisory and investment banking services from time to time inconnection with major financial transactions that may be undertaken by it orits subsidiaries in exchange for fees customary for such services after takinginto account Apollo Management V, L.P.’s expertise and relationships within thebusiness and financial community.  Underthis management services agreement, the Company also agreed to providecustomary indemnification.  In addition,the Company paid a transaction fee of $15 million in the aggregate (plusreimbursement of expenses) to the Sponsors for financial advisory servicesrendered in connection with the Merger. This fee has been included as part of the purchase price.  These services included assisting the Companyin structuring the Merger, taking into account tax considerations and optimalaccess to financing, and assisting in the negotiation of the Company’s materialagreements and financing arrangements in connection with the Merger.

**Stockholders’Agreement**

Theonly stockholders of the Company are Linens Investors, LLC, a limited liabilitycompany owned by the Sponsors, two executives of the Company, Robert J.DiNicola, Chairman and Chief Executive Officer, and F. David Coder, ExecutiveVice President, Store Operations, and one nonemployee director, George G.Golleher.  In connection therewith,Linens Investors, LLC has entered into a stockholders’ agreement with theCompany, and each of the other stockholders have entered into joinderagreements to be bound by the stockholders’ agreement.  The stockholders’ agreement sets forthcertain provisions relating to the management of the Company.  In addition, the stockholders’ agreementcontains 

119

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customary dragalong rights, tag along rights, registration rights, restrictions on thetransfer of the Company’s common stock and an indemnity of the Sponsors.

**DirectorIndependence**

Pursuantto the stockholders’ agreement, the Sponsors have the right to appoint all ofthe members of the Company’s board of directors.  Only two of the nine members of the board ofdirectors, George Golleher and Dr. Joyce F. Brown, are not affiliates of theSponsors.  Mr. Golleher purchased 10,000shares of the Company in August 2006. Dr. Brown does not currently own any common stock of the Company.

Theboard of directors has provided for an audit committee and a compensationcommittee. The members of the Compensation Committee are Messrs. Jhawar(chair), Pall and Golleher.  The auditcommittee is currently comprised of Messrs. Copses (chairman), Gatto andGiangiacomo.  All of the named persons areaffiliates of the Sponsors.

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**Item 14. Principal Accountant Fees and Services**

The information regarding principal accountant fees andservices and the Company’s pre-approval policies and procedures for audit andnon-audit services provided by the Company’s independent accountants issummarized as follows:

The audit committee of the board of directors appointed KPMGLLP as the Company’s independent registered public accounting firm to examinethe Company’s consolidated financial statements for fiscal 2006 and to renderother professional services as required. The audit committee has not yet formally adopted a resolution appointingthe Company’s independent registered public accounting firm for fiscal 2007.

Aggregate feespaid and payable to KPMG LLP for audit services related to the most recent twofiscal years, and for otherprofessional services billed in the most recent two fiscal years, were asfollows:

 

| Type of Service                      | ** ** | **Fiscal 2006** | ** ** | **Fiscal 2005** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Audit Fees(1):                                 |       |                 |       |                 |       |
| Annual Audit and Quarterly Reviews             |       | $                    | 1,450,000  |                 | $          | 2,170,000 |   |
| Registration Statement and Purchase Accounting |       | 995,000              |       | 700,000              |       |
|                                           |       | 2,445,000            |       | 2,870,000            |       |
| Tax Fees                                       |       | 273,000              |       | —               |       |
|                                           |       |                 |       |                 |       |
| Total                                          |       | $                    | 2,718,000  |                 | $          | 2,870,000 |   |

----

(1)          Audit fees consisted of the audit of the Company’sannual financial statements and reviews of the Company’s quarterly financialstatements, as well as consents to SEC filings.

Registration statement and purchase accounting feesconsisted of services related to the Merger and related purchase accounting andthe preparation of the comfort letter.

During fiscal 2006, the audit committee conformed with aformal policy it adopted concerning the pre-approval of audit and non-auditservices to be provided by the independent registered public accounting firm tothe Company.  The policy required thatall services to be performed by KPMG LLP, the Company’s independent registeredpublic accounting firm, including audit services, audit-related services andpermitted non-audit services, be pre-approved by the audit committee.  The policy permitted the audit committee todelegate pre-approval authority to one or more members, provided that anypre-approval decisions are reported to the audit committee at its nextmeeting.  Specific services beingprovided by the independent registered public accounting firm were regularlyreviewed in accordance with the pre-approval policy.  At subsequent audit committee meetings, theaudit committee received updates on services being provided by the independentregistered public accounting firm, and management presented additional servicesfor approval.  For 2006, all audit andnon-audit services provided by KPMG LLP were approved in advance by the auditcommittee.

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**PART IV**

**Item 15.  Exhibits, FinancialStatement Schedules**

(a)  The following documents are filed as part ofthis report.

**1.             Financial Statements**

Thefollowing Consolidated Financial Statements for the 52 weeks ended December 30,2006 are included in this report as follows:
|                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Report of  Independent Registered Public Accounting Firm on the Consolidated Financial  Statements                                                                                                                                                                                                                                                             |       |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Consolidated  Statements of Operations for the period February 14, 2006 to December 30,  2006 (Successor Entity), the period January 1, 2006 to February 13, 2006  (Predecessor Entity), the fiscal year ended December 31, 2005 (Predecessor  Entity) and the fiscal year ended January 1, 2005 (Predecessor Entity)                                          |       |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Consolidated Balance  Sheets as of December 30, 2006 (Successor Entity) and December 31, 2005  (Predecessor Entity)                                                                                                                                                                                                                                            |       |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income for the period  February 14, 2006 to December 30, 2006 (Successor Entity), the period January  1, 2006 to February 13, 2006 (Predecessor Entity), the fiscal year ended  December 31, 2005 (Predecessor Entity) and the fiscal year ended January 1,  2005 (Predecessor Entity) |       |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Consolidated Statements  of Cash Flows for the period February 14, 2006 to December 30, 2006  (Successor Entity), the period January 1, 2006 to February 13, 2006  (Predecessor Entity), the fiscal year ended December 31, 2005 (Predecessor  Entity) and the fiscal year ended January 1, 2005 (Predecessor Entity)                                          |       |       |
|                                                                                                                                                                                                                                                                                                                                                           |       |       |
| Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                    |       |       |

 

**2.             Schedules**

None

**3.             Exhibits**

Theexhibits on the accompanying exhibit index are filed as part of, andincorporated by reference into, this report.

 

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**Exhibits**

 
| Exhibit  Number | ** ** | **Description  of Exhibits**                                                                                                                                                                                                                                  |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1**                |       | Certificate  of Merger merging Linens Merger Sub Co. with and into Linens ‘n Things, Inc.                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.2**                |       | Amended  and Restated Certificate of Incorporation of Linens ‘n Things, Inc.                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.3**                |       | Amended  and Restated By-laws of Linens ‘n Things, Inc.                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.4**                |       | Articles  of Incorporation of Linens ‘n Things Center, Inc.                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.5**                |       | By-laws  of Linens ‘n Things Center, Inc.                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.6**                |       | Amended  and Restated Certificate of Incorporation of Linens Holding Co.                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.7**                |       | Amended  and Restated By-laws of Linens Holding Co.                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.8**                |       | Articles  of Incorporation of Bloomington, MN., L.T., Inc.                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.9**                |       | By-laws  of Bloomington, MN., L.T., Inc.                                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.10**               |       | Certificate  of Formation of Vendor Finance, LLC                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.11**               |       | Amended  and Restated Operating Agreement of Vendor Finance, LLC                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.12**               |       | Certificate  of Incorporation of E W Kalkin, Inc. (n/k/a) LNT, Inc.                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.13**               |       | Certificate  of Amendment to the Certificate of Incorporation of E W Kalkin, Inc.  (changing name to Linens ‘n Things, Inc.)                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.14**               |       | Certificate  of Amendment to the Certificate of Incorporation of Linens ‘n Things, Inc.  (changing name to LNT, Inc.)                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.15**               |       | By-laws  of LNT, Inc.                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.16**               |       | Certificate  of Incorporation of LNT Services, Inc.                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.17**               |       | By-laws  of LNT Services, Inc.                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.18**               |       | Certificate  of Formation of LNT Leasing II, LLC                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.19**               |       | Amended  and Restated Operating Agreement of LNT Leasing II, LLC                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.20**               |       | Certificate  of Incorporation of LNT West, Inc.                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.21**               |       | By-laws  of LNT West, Inc.                                                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.22**               |       | Certificate  of Organization of LNT Virginia LLC                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.23**               |       | Amended  and Restated Operating Agreement of LNT Virginia LLC                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.24**               |       | Certificate  of Formation of LNT Merchandising Company LLC                                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.25**               |       | Amended  and Restated Operating Agreement of LNT Merchandising Company LLC                                                                                                                                                                                    |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.26**               |       | Certificate  of Formation of LNT Leasing III, LLC                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.27**               |       | Amended  and Restated Operating Agreement of LNT Leasing III, LLC                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.28**               |       | Certificate  of Formation of Citadel LNT, LLC                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                          |
| 3.29**               |       | Amended  and Restated Operating Agreement of Citadel LNT, LLC                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                          |
| 4.1*                 |       | Indenture,  dated as of February 14, 2006, among Linens ‘n Things, Inc., Linens ‘n Things  Center, Inc., the Guarantors (as defined therein) and The Bank of New York,  as Trustee, with respect to the Senior Secured Floating Rate Notes due 2014 |
|                 |       |                                                                                                                                                                                                                                                          |
| 4.2*                 |       | Form  of Senior Secured Floating Rate Notes due 2014 (included as “Exhibit A” to  Exhibit 4.1)                                                                                                                                                 |

 

123

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| 4.3*    |   | Registration  Rights Agreement, dated February 14, 2006, by and among Linens ‘n  Things, Inc., Linens ‘n Things Center, Inc., the Guarantors listed  on Schedule I thereto and Bear, Stearns & Co. Inc. and UBS  Securities LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1*   |   | Credit  Agreement, (the “Credit Agreement”) dated as of February 14, 2006, among  Linens ‘n Things, Inc., Linens ‘n Things Center, Inc., the Subsidiary  Guarantors (as defined therein), the parties named therein from time to time  as lenders, whether by execution of the Credit Agreement or an Assignment and  Acceptance, UBS Securities LLC, as Arranger and Bookmanager, UBS AG, Stamford  Branch, as Issuing Bank, US Administrative Agent and US Co-Collateral Agent,  UBS AG, Canada Branch, as Canadian Co-Collateral Agent, Wachovia Bank,  National Association, as US Co-Collateral Agent, Co-Documentation Agent and  an Issuing Bank, Wachovia Capital Finance Corporation (Canada), as Canadian  Administrative Agent, Canadian Co-Collateral Agent and Canadian Swingline  Lender, UBS Loan Finance LLC, as US Swingline Lender, UBS Securities LLC and  Bear, Stearns & Co. Inc., as Joint Book Runners, Bear, Stearns &  Co. Inc., as Co-Syndication Agent, Wells Fargo, as Co-Documentation  Agent and The CIT Group/Business Credit, Inc., as Co-Syndication Agent |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2**  |   | Stockholders’Agreement,  dated as of February 14, 2006, between Linens Holding Co. and its  stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3**  |   | Security  Agreement, dated as of February 14, 2006, by Linens ‘n Things, Inc., Linens  ‘n Things Center, Inc., the Guarantors party thereto and The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4**  |   | Security  Agreement, dated as of February 14, 2006, by Linens ‘n Things, Inc., Linens  ‘n Things Center, Inc., the Guarantors party thereto, UBS AG, Stamford Branch  and Wachovia Bank, National Association                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5**  |   | Management  Services Agreement, dated as of February 14, 2006, among Linens ‘n  Things, Inc., Linens Holding Co., Apollo Management V, L.P., NRDC Linens  B LLC and Silver Point Capital Fund Investments LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6**  |   | Intercreditor  Agreement, dated as of February 14, 2006, by and among Linens ‘n Things,  Inc., Linens Holding Co., Linens ‘n Things Center, Inc., Linens ‘n Things  Canada Corp., the Subsidiary Guarantors (as defined therein), UBS AG,  Stamford Branch, Wachovia Bank, National Association, UBS AG Canada Branch,  Wachovia Capital Finance Corporation and The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7*   |   | Employment  Agreement with Robert J. DiNicola                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8*   |   | Option  Grant Letter with Robert J. DiNicola                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9*** |   | Employment  Agreement with Francis M. Rowan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10*  |   | Employment  Agreement with F. David Coder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11*  |   | Amended  and Restated Employment Agreement with F. David Coder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12*  |   | Option  Grant Letter with F. David Coder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13*  |   | Employment  Agreement with Robert Homler                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14*  |   | Amended  and Restated Employment Agreement with Robert Homler                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.15** |   | Separation  Agreement and General Release, by and between Jack E. Moore and Linens ‘n  Things, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.16*  |   | Linens  Holding Co. Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.17*  |   | Standard  Form of Option Grant Letter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.18*  |   | Director  Compensation Policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.19*  |   | Standard  Form of Director Option Grant Letter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20** |   | Trademark  Security Agreement, dated as of February 14, 2006, by Bloomington, MN.,  L.T., Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.21** |   | Trademark  Security Agreement, dated as of February 14, 2006, by LNT Merchandising  Company LLC in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22** |   | Trademark  Security Agreement, dated as of February 14, 2006, by LNT Services, Inc. in  favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23** |   | Copyright  Security Agreement, dated as of February 14, 2006, by Linens ‘n Things, Inc.  in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24** |   | Copyright  Security Agreement, dated as of February 14, 2006, by Linens ‘n Things  Center, Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 14.1**  |   | Code  of Ethics for the Chief Executive Officer and Senior Financial Officers of  Linens ‘n Things, Inc. and Linens Holding Co.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 21.1*   |   | Subsidiaries  of Linens Holding Co.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1*** |   | Certification  of the Chief Executive Officer of Linens Holding Co. pursuant to Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2*** |   | Certification  of the Chief Financial Officer of Linens Holding Co. pursuant to Rule 15d-14(a)  of the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.3*** |   | Certification  of the Chief Executive Officer of Linens ‘n Things, Inc. pursuant to Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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| 31.4*** |   | Certification  of the Chief Financial Officer of Linens ‘n Things, Inc. pursuant to Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended        |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                               |
| 31.5*** |   | Certification  of the Chief Executive Officer of Linens ‘n Things Center, Inc. pursuant to Rule  15d-14(a) of the Securities Exchange Act of 1934, as amended |
|    |   |                                                                                                                                                               |
| 31.6*** |   | Certification  of the Chief Financial Officer of Linens ‘n Things Center, Inc. pursuant to  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
|    |   |                                                                                                                                                               |
| 32.1*** |   | Certification  of the Chief Executive Officer and Chief Financial Officer of Linens Holding  Co. pursuant to 18 U.S.C. Section 1350                                |
|    |   |                                                                                                                                                               |
| 32.2*** |   | Certification  of the Chief Executive Officer and Chief Financial Officer of Linens ‘n  Things, Inc. pursuant to 18 U.S.C. Section 1350                       |
|    |   |                                                                                                                                                               |
| 32.3*** |   | Certification  of the Chief Executive Officer and Chief Financial Officer of Linens ‘n  Things Center, Inc. pursuant to 18 U.S.C. Section 1350                |

----

**     *Filed previously as an exhibit to the Registration Statement onForm S-4 (File No. 333-135646) filed by the Registrants onJuly 7, 2006.

**   Filed previously as an exhibit to the Registration Statement onForm S-4/A (File No. 333-135646) filed by the Registrants on August 11, 2006.

***      Includedherein.

 

125

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrants’ have duly caused thisReport to be signed on their behalf by the undersigned, thereunto dulyauthorized.
|                      |   |   | **LINENS HOLDING CO.**                 |
|----------------------|--------|--------|----------------------------------------|
| ** **           |   |   | **LINENS ‘N THINGS, INC.**        |
| ** **           |   |   | **LINENS ‘N THINGS CENTER, INC.** |
| Date: March 26, 2007 |   | By:    |                                   | /s/ Robert J. DiNicola |
|                 |   |   |                                   | Robert J. DiNicola |
|                 |   |   |                                   | Chairman and Chief Executive Officer |
|                 |   |   |                                   | (principal executive officer) |
|                      |        |        |                                        |  |  |

 

Pursuant to the requirements of the Securities Exchange Act of1934, this Report has been signed below by the following persons on behalf ofthe Registrants and in the capacities indicated on the 26th day of March, 2007.

| Signature                  | ** ** | **Title**                                          | ** ** | **Date**       |
|----------------------------|------------|----------------------------------------------------|------------|----------------|
| /s/ Robert J. DiNicola     |       | Chairman and Chief  Executive Officer              |       | March 26, 2007 |
| **Robert J. DiNicola**     |       | (principal executive officer)                      |       |           |
| /s/ Francis M. Rowan       |       | Senior Vice President  and Chief Financial Officer |       | March 26, 2007 |
| **Francis M. Rowan**       |       | (principal financial and accounting officer)       |       |           |
| /s/ Joyce F. Brown         |       | Director                                           |       | March 26, 2007 |
| **Joyce F. Brown**         |       |                                               |       |           |
| /s/ Peter P. Copses        |       | Director                                           |       | March 26, 2007 |
| **Peter P. Copses**        |       |                                               |       |           |
| /s/ Michael A. Gatto       |       | Director                                           |       | March 26, 2007 |
| **Michael A. Gatto**       |       |                                               |       |           |
| /s/ George G. Golleher     |       | Director                                           |       | March 26, 2007 |
| **George G. Golleher**     |       |                                               |       |           |
| /s/ Damian J.  Giangiacomo |       | Director                                           |       | March 26, 2007 |
| **Damian J. Giangiacomo**  |       |                                               |       |           |
| /s/ Andrew S. Jhawar       |       | Director                                           |       | March 26, 2007 |
| **Andrew S. Jhawar**       |       |                                               |       |           |
| /s/ Lee S. Neibart         |       | Director                                           |       | March 26, 2007 |
| **Lee S. Neibart**         |       |                                               |       |           |
| /s/ Brian H. Pall          |       | Director                                           |       | March 26, 2007 |
| **Brian H. Pall**          |       |                                               |       |           |

 

 

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