**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| **(Mark)**                                       | ** ** | ** **                                                                                         |
|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
| **þ**                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                       | ** ** | ** **                                                                                         |
| **For the  Quarterly Period Ended July 1, 2006** |
|                                             |       | ** **                                                                                         |
| **or**                                           |
| ** **                                       | ** ** | ** **                                                                                         |
| **o**                                            | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

| **Commission file numbers:** |   |   |
|------------------------------|--------|--------|
|                         |   |   |
|                         |   |   |

** **

**LINENSHOLDING CO.****LINENS ‘N THINGS, INC.****LINENS ‘N THINGS CENTER, INC.***(Exactnames of registrants as specified in their charters)*

| **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 ofprincipal executive offices) (Zip Code)*

**(973) 778-1300***(Registrants’telephone number, including area code)*

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 theregistrant was required to file such reports), and (2) have been subjectto such filing requirements for the past 90 days:

Yes  o   No  þ

Indicateby check mark whether the registrants are large accelerated filers, acceleratedfilers, or non-accelerated filers. See definition of “accelerated filerand large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large AcceleratedFiler o     AcceleratedFiler o     Non-acceleratedfiler þ

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

Yes  o   No  þ

Asof July 31, 2006, there were 13,043,000 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.

 

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**INDEX**
|                                                     | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | **Page No.** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **Explanatory Note and Forward-Looking Statements** | ** ** | 3                                                                                                                                                                                                                                                                   |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Part  I.**                                        |       | **Financial  Information**                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item  1.**                                        | ** ** | **Financial  Statements**                                                                                                                                                                                                                                           |       | ** **   |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          |       | Condensed Consolidated Statements of Operations  (Unaudited) for the Thirteen Weeks Ended July 1, 2006 (Successor Entity) and  July 2, 2005 (Predecessor Entity)                                                                                                    | ** ** | 4            |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          |       | Condensed Consolidated Statements of Operations  (Unaudited) for the period February 14 to July 1, 2006 (Successor  Entity); the period January 1 to February 13, 2006 (Predecessor Entity); and  the Twenty-Six Weeks Ended July 2, 2005 (Predecessor Entity) | ** ** | 5            |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          |       | Condensed Consolidated Balance Sheets (Unaudited) as  of July 1, 2006 (Successor Entity); December 31, 2005 (Predecessor Entity);  and July 2, 2005 (Predecessor Entity)                                                                                            | ** ** | 6            |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          |       | Condensed Consolidated Statements of Cash Flows  (Unaudited) for the period February 14 to July 1, 2006 (Successor  Entity); the period January 1 to February 13, 2006 (Predecessor Entity); and  the Twenty-Six Weeks Ended July 2, 2005 (Predecessor Entity) | ** ** | 7            |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          |       | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                                                                                                                                                                   | ** ** | 8            |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item 2.**                                         | ** ** | **Management’s Discussion and Analysis of Financial  Condition and Results of Operation**                                                                                                                                                                      | ** ** | 35           |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item 3.**                                         | ** ** | **Quantitative and Qualitative Disclosures about Market  Risk**                                                                                                                                                                                                     | ** ** | 45           |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item 4.**                                         | ** ** | **Controls and Procedures**                                                                                                                                                                                                                                         |       | 45           |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Part  II.**                                       |       | **Other  Information**                                                                                                                                                                                                                                              | ** ** | ** **   |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item  1.**                                        | ** ** | **Legal  Proceedings**                                                                                                                                                                                                                                              |       | 47           |
| ** **                                          |       | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item  1A.**                                       | ** ** | **Risk  Factors**                                                                                                                                                                                                                                                   |       | 47           |
| ** **                                          |       | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item 2.**                                         | ** ** | **Unregistered Sales of Equity Securities and Use of  Proceeds**                                                                                                                                                                                                    |       | 56           |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| **Item 6.**                                         | ** ** | **Exhibits**                                                                                                                                                                                                                                                        |       | 56           |
| ** **                                          | ** ** | ** **                                                                                                                                                                                                                                                          | ** ** | ** **   |
| ** **                                          | ** ** | **Signatures**                                                                                                                                                                                                                                                      | ** ** | 57           |

 

2

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**EXPLANATORY NOTE**

On November 7, 2005,Linens Merger Sub Co. was formed by affiliates of Apollo Management, L.P., andNational Realty & Development Corp. and Silver Point Capital FundInvestments LLC (collectively, 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 1to the Condensed Consolidated Financial Statements included in this report (the“Merger”), 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 of Linens ‘n Things, Inc. and Linens ‘nThings Center, Inc., a wholly owned subsidiary of Linens ‘n Things, Inc.  The Notes are guaranteed by the Company andeach of its domestic subsidiaries (other than Linens ‘n Things, Inc. and Linens‘n Things Center, Inc.).  This reportalso contains the condensed consolidated financial statements of the Company’spredecessor entity, Linens ‘n Things, Inc. and Subsidiaries, as of July 2, 2005and December 31, 2005, and for the thirteen and twenty-six weeks ended July 2,2005 and the period January 1 to February 13, 2006.  The accompanying Condensed ConsolidatedFinancial Statements are those of Linens Holding Co. and its subsidiaries.  The Company has not presented separatefinancial statements for Linens ‘n Things, Inc. and its subsidiaries or Linens ‘nThings Center, Inc. and its subsidiaries (collectively, the issuers asdescribed in Note 14) because management has determined that the differences insuch financial statements 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, our predecessor and itssubsidiaries.

**FORWARD-LOOKINGSTATEMENTS**

This report may contain forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 1995(Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934) with respect to our financial condition,results of operations and business that is not historical information.  All statements, other than statements ofhistorical 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,”areintended to identify forward-looking statements.

These statements arebased on assumptions and assessments made by the Company’s management in lightof its experience and its perception of historical trends, current conditions,expected future developments and other factors it believes to beappropriate.  The Company believes thereis a reasonable basis for our expectations and beliefs, but they are inherentlyuncertain, we may not realize our expectations and our beliefs may not provecorrect.  Any forward-lookingstatements are not guarantees of the Company’s future performance and aresubject to risks and uncertainties that could cause actual results,developments and business decisions to differ materially from those describedor 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 our substantial indebtedness on our operating income and our abilityto grow; the cost of labor; labor disputes; increased healthcare benefit costs;other costs and expenses; and other important factors that could cause actualresults to differ materially from those described or implied by theforward-looking statements contained in this report.  See Item 1A, “Risk Factors,” included in PartII of this report.

3

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**PART I — FINANCIAL INFORMATION**

**Item 1.**                          FinancialStatements

**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****(In thousands) (Unaudited)**
| ** **                                              | ** ** | **Thirteen Weeks Ended** | ** **  |
|---------------------------------------------------------|------------|------------------------------------|-------------|
| ** **                                              | ** ** | **July 1, 2006**         | ** **  | **July 2, 2005** | ** ** |
| ** **                                              | ** ** | **(Successor Entity)**        | ** **  | **(Predecessor Entity)** | ** ** |
| ** **                                              | ** ** | ** **                         | ** **  | ** ** | ** ** |
| **Net  sales**                                          | ** ** | **$**                              | **611,583** | ** ** | **$** | **573,317** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 373,265                            |        | 336,374 |   |
|                                                    |       |                               |        |   |   |
| **Gross  profit**                                       | ** ** | **238,318**                        | ** **  | **236,943** | ** ** |
| Selling, general  and administrative expenses           |       | 280,287                            |        | 245,702 |   |
|                                                    |       |                               |        |   |   |
| **Operating  loss**                                     | ** ** | **(41,969**                        | **)**       | **(8,759** | **)** |
| Interest income                                         |       | (33                                | )           | (129 | ) |
| Interest expense                                        |       | 21,845                             |        | 867 |   |
|                                                    |       |                               |        |   |   |
| Interest  expense, net                                  |       | 21,812                             |        | 738 |   |
|                                                    |       |                               |        |   |   |
| **Loss  before benefit for income taxes**               | ** ** | **(63,781**                        | **)**       | **(9,497** | **)** |
| Benefit for  income taxes                               |       | (24,654                            | )           | (3,565 | ) |
|                                                    |       |                               |        |   |   |
| **Net  loss**                                           | ** ** | **$**                              | **(39,127** | **)** | **$** | **(5,932** | **)** |

 

*See accompanying Notes to Condensed ConsolidatedFinancial Statements*

4

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**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)****CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS****(In thousands) (Unaudited)**
| ** **                                              | ** ** | **February 14 to  July 1,  2006** | ** **  | **January 1 to  February 13,  2006** | ** ** | **Twenty-Six Weeks  Ended July 2, 2005** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|-------------|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Successor  Entity)**                          | ** **  | **(Predecessor  Entity)**                           | ** ** | **(Predecessor  Entity)**                                    | ** ** |
| ** **                                              | ** ** | ** **                                       | ** **  | ** **                                          | ** ** | ** **                                                   | ** ** |
| **Net  sales**                                          | ** ** | **$**                                            | **919,428** | ** **                                          | **$**      | **284,971**                                                  | ** ** | **$** | **1,144,263** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 562,333                                          |        | 180,675                                             |       | 670,927                                                      |       |
|                                                    |       |                                             |        |                                                |       |                                                         |       |
| **Gross  profit**                                       | ** ** | **357,095**                                      | ** **  | **104,296**                                         | ** ** | **473,336**                                                  | ** ** |
| Selling, general  and administrative expenses           |       | 418,048                                          |        | 174,138                                             |       | 487,856                                                      |       |
|                                                    |       |                                             |        |                                                |       |                                                         |       |
| **Operating  loss**                                     | ** ** | **(60,953**                                      | **)**       | **(69,842**                                         | **)**      | **(14,520**                                                  | **)**      |
| Interest income                                         |       | (119                                             | )           | (668                                                | )          | (624                                                         | )          |
| Interest expense                                        |       | 31,832                                           |        | —                                              |       | 2,085                                                        |       |
|                                                    |       |                                             |        |                                                |       |                                                         |       |
| Interest expense  (income), net                         |       | 31,713                                           |        | (668                                                | )          | 1,461                                                        |       |
|                                                    |       |                                             |        |                                                |       |                                                         |       |
| **Loss  before benefit for income taxes**               | ** ** | **(92,666**                                      | **)**       | **(69,174**                                         | **)**      | **(15,981**                                                  | **)**      |
| Benefit for  income taxes                               |       | (35,967                                          | )           | (21,270                                             | )          | (5,975                                                       | )          |
|                                                    |       |                                             |        |                                                |       |                                                         |       |
| **Net loss**                                            | ** ** | **$**                                            | **(56,699** | **)**                                               | **$**      | **(47,904**                                                  | **)**      | **$** | **(10,006** | **)** |

 

*See accompanying Notes to Condensed ConsolidatedFinancial Statements*

5

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share amounts)(Unaudited)**

** **
| ** **                                                                                                                                                                                                                                              | ** ** | **Successor Entity** | ** **    | **Predecessor Entity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                              | ** ** | **July 1,  2006**    | ** **    | **December 31,  2005** | ** ** | **July 2,  2005** | ** ** |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Assets**                                                                                                                                                                                                                                              | ** ** | ** **                | ** **    | ** **                  | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                         |       |                      |          |                        |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                              |       | $                         | 13,494        |                        | $          | 158,158 |   | $ | 22,193 |   |
| Accounts receivable                                                                                                                                                                                                                                     |       | 39,695                    |          | 43,561                      |       | 34,250 |   |
| Inventories                                                                                                                                                                                                                                             |       | 854,823                   |          | 787,283                     |       | 799,077 |   |
| Prepaid expenses and  other current assets                                                                                                                                                                                                              |       | 74,658                    |          | 17,425                      |       | 38,890 |   |
| Current deferred taxes                                                                                                                                                                                                                                  |       | 5,599                     |          | 2,033                       |       | 1,620 |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total current assets**                                                                                                                                                                                                                                | ** ** | **988,269**               | ** **    | **1,008,460**               | ** ** | **896,030** | ** ** |
| Property and equipment,  net of accumulated depreciation of $44,147, $464,496 and $424,928 at  July 1, 2006, December 31, 2005 and July 2, 2005, respectively                                                                                      |       | 590,781                   |          | 612,247                     |       | 586,743 |   |
| Identifiable intangible  assets, net                                                                                                                                                                                                                    |       | 157,887                   |          | 1,301                       |       | 1,391 |   |
| Goodwill                                                                                                                                                                                                                                                |       | 277,315                   |          | 18,126                      |       | 18,126 |   |
| Deferred financing cost  and other noncurrent assets, net                                                                                                                                                                                               |       | 35,364                    |          | 10,700                      |       | 11,621 |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total assets**                                                                                                                                                                                                                                        | ** ** | **$**                     | **2,049,616** | ** **                  | **$**      | **1,650,834** | ** ** | **$** | **1,513,911** | ** ** |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                                                                                                          | ** ** | ** **                | ** **    | ** **                  | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| Accounts payable                                                                                                                                                                                                                                        |       | $                         | 235,805       |                        | $          | 267,582 |   | $ | 244,842 |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                                         |       | 179,492                   |          | 199,024                     |       | 137,566 |   |
| Current deferred taxes                                                                                                                                                                                                                                  |       | —                    |          | 4,401                       |       | — |   |
| Short-term borrowings                                                                                                                                                                                                                                   |       | 155,070                   |          | —                      |       | — |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total current liabilities**                                                                                                                                                                                                                           | ** ** | **570,367**               | ** **    | **471,007**                 | ** ** | **382,408** | ** ** |
| Senior secured notes  and other long-term debt, net of current portion                                                                                                                                                                                  |       | 652,044                   |          | 2,076                       |       | 2,108 |   |
| Deferred income taxes  and other long-term liabilities                                                                                                                                                                                                  |       | 231,854                   |          | 327,888                     |       | 328,806 |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total liabilities**                                                                                                                                                                                                                                   | ** ** | **1,454,265**             | ** **    | **800,971**                 | ** ** | **713,322** | ** ** |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **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; and 45,540,958 shares issued and 45,283,393 shares outstanding at July  2, 2005 |       | —                    |          | 457                         |       | 455 |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| Common stock of  Successor Entity, $0.01 par value; 15,000,000 shares authorized; 13,043,000  shares issued and outstanding at July 1, 2006                                                                                                             |       | 130                       |          | —                      |       | — |   |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                             |       | 649,966                   |          | 376,730                     |       | 374,538 |   |
| Retained (deficit)  earnings                                                                                                                                                                                                                            |       | (56,699                   | )             | 476,896                     |       | 430,908 |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                 |       | 1,954                     |          | 3,287                       |       | 2,047 |   |
| Treasury stock of  Predecessor Entity, at cost; 263,979 shares at December 31, 2005; and 257,565  shares at July 2, 2005                                                                                                                                |       | —                    |          | (7,507                      | )          | (7,359 | ) |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total shareholders’ equity**                                                                                                                                                                                                                     | ** ** | **595,351**               | ** **    | **849,863**                 | ** ** | **800,589** | ** ** |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |
| **Total liabilities and  shareholders’ equity**                                                                                                                                                                                                    | ** ** | **$**                     | **2,049,616** | ** **                  | **$**      | **1,650,834** | ** ** | **$** | **1,513,911** | ** ** |
|                                                                                                                                                                                                                                                    |       |                      |          |                        |       |   |   |

 

*Seeaccompanying Notes to Condensed Consolidated Financial Statements*

6

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands) (Unaudited)**

** **
| ** **                                                                                                                       | ** ** | **Successor Entity**                        | ** ** | **Predecessor Entity**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                       | ** ** | **February 14 to  July 1,  2006** | ** ** | **January 1 to  February 13,  2006** | ** ** | **Twenty-Six  Weeks Ended  July 2,  2005** | ** ** |
| **Cash  flows from operating activities:**                                                                                       | ** ** | ** **                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net loss                                                                                                                         |       | $                                                | (56,699    | )                                                   | $          | (47,904 | ) | $ | (10,006 | ) |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                                     |       |                                             |       |                                                |       |   |   |
| Depreciation and  amortization                                                                                                   |       | 46,816                                           |       | 12,642                                              |       | 43,675 |   |
| Deferred income  taxes                                                                                                           |       | (22,424                                          | )          | (6,646                                              | )          | (3,105 | ) |
| Share-based  compensation                                                                                                        |       | 2,328                                            |       | 12,484                                              |       | 489 |   |
| Loss on disposal  of assets                                                                                                      |       | 73                                               |       | —                                              |       | 339 |   |
| Changes in  assets and liabilities, net of effect of acquisition:                                                                |       |                                             |       |                                                |       |   |   |
| Decrease  (increase) in accounts receivable                                                                                      |       | 6,231                                            |       | (2,240                                              | )          | (8,533 | ) |
| Increase in  inventories                                                                                                         |       | (33,433                                          | )          | (31,886                                             | )          | (85,260 | ) |
| Increase in  prepaid expenses and other current assets                                                                           |       | (45,410                                          | )          | (12,153                                             | )          | (46 | ) |
| Decrease  (increase) in identifiable intangible assets, net, goodwill, deferred  financing cost and other noncurrent assets, net |       | 2,586                                            |       | 9,623                                               |       | (2,152 | ) |
| (Decrease)  increase in accounts payable                                                                                         |       | (39,817                                          | )          | 7,244                                               |       | (345 | ) |
| Decrease in  accrued expenses and other liabilities, net                                                                         |       | (12,205                                          | )          | (6,310                                              | )          | (65,306 | ) |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Net  cash used in operating activities**                                                                                       | ** ** | **(151,954**                                     | **)**      | **(65,146**                                         | **)**      | **(130,250** | **)** |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                                                                       | ** ** | ** **                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Acquisition of  the Company, net of cash acquired(1)                                                                             |       | (1,205,502                                       | )          | —                                              |       | — |   |
| Additions to  property and equipment                                                                                             |       | (25,222                                          | )          | (7,776                                              | )          | (52,841 | ) |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Net  cash used in investing activities**                                                                                       | ** ** | **(1,230,724**                                   | **)**      | **(7,776**                                          | **)**      | **(52,841** | **)** |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                                                                       | ** ** | ** **                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Issuance of  common stock to Linens Investors LLC and others                                                                     |       | 650,150                                          |       | —                                              |       | — |   |
| Issuance of  floating rate notes                                                                                                 |       | 650,000                                          |       | —                                              |       | — |   |
| Financing and  direct acquisition costs                                                                                          |       | (59,254                                          | )          | —                                              |       | — |   |
| Issuance of  common stock under stock incentive plans                                                                            |       | —                                           |       | —                                              |       | 1,769 |   |
| Federal tax  benefit from common stock issued under stock incentive plans                                                        |       | —                                           |       | 4,298                                               |       | 144 |   |
| Increase in  short-term borrowings                                                                                               |       | 155,070                                          |       | —                                              |       | — |   |
| Decrease  (increase) in treasury stock                                                                                           |       | —                                           |       | 674                                                 |       | (97 | ) |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Net  cash provided by financing activities**                                                                                   | ** ** | **1,395,966**                                    | ** ** | **4,972**                                           | ** ** | **1,816** | ** ** |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                    |       | 206                                              |       | 125                                                 |       | (541 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                                            |       | 13,494                                           |       | (67,825                                             | )          | (181,816 | ) |
| **Cash  and cash equivalents at beginning of period**                                                                            | ** ** | **—**                                       | ** ** | **158,158**                                         | ** ** | **204,009** | ** ** |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Cash  and cash equivalents at end of period**                                                                                  | ** ** | **$**                                            | **13,494** | ** **                                          | **$**      | **90,333** | ** ** | **$** | **22,193** | ** ** |
|                                                                                                                             |       |                                             |       |                                                |       |   |   |
| **Cash  paid during the year for:**                                                                                              | ** ** | ** **                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Interest (net of  amounts capitalized)(2)                                                                                        |       | $                                                | 14,031     |                                                | $          | 135 |   | $ | 2,000 |   |
| Income taxes                                                                                                                     |       | $                                                | 25,500     |                                                | $          | 57 |   | $ | 30,476 |   |

----

*(1)**         *In connection withthe Merger, net cash settlements of approximately $20.0 million and$4.4 million for stock options and restricted stock units, respectively,are included in “Acquisition of the Company, net of cash acquired.”

*(2)**         *Excludes $36,653 ofdeferred financing costs incurred in connection with the Merger.  Such costs are being charged-off to interestexpense over the life of the related financing commitments.

*Seeaccompanying Notes to Condensed Consolidated Financial Statements*

7

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.Acquisition of Linens ’n Things, Inc. by Linens Holding Co.**

On November 8, 2005, Linens Merger Sub Co. and itsparent company, Linens Holding Co. (the “Company”), entered into an Agreementand Plan of Merger with Linens ’n Things, Inc. governing amerger (the “Merger”) pursuant to which each share of common stock ofLinens ’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 the surviving corporation.  As thesurviving corporation in the Merger, Linens ’n Things, Inc.assumed by operation of law all of the rights and obligations of Linens MergerSub Co., including $650 million aggregate principal amount of SeniorSecured Floating Rate Notes (the “Notes”) due 2014 of Linens ’n Things, Inc.and Linens ’n Things Center, Inc. (collectively, the “Issuers”)and the related indenture. Linens ’n Things Center, Inc., adirect wholly owned subsidiary of Linens ’n Things, Inc., is aco-issuer of the Notes.

Affiliates ofApollo 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.

The Sponsorsfinanced the purchase of Linens ’n Things, Inc. and paid relatedfees and expenses through the offering of the Notes, the equity investmentdescribed above and excess cash on hand at Linens ’n Things, Inc.  Linens ’n Things, Inc. did notdraw on 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 andbecame highly leveraged.

Immediatelyfollowing the Merger, Linens ’n Things, Inc. became a whollyowned subsidiary of Linens Holding Co. Linens Holding Co. is an entity that was formed in connection with theTransactions and has no assets or liabilities other than the shares of LinensMerger Sub Co. and its rights and obligations under and in connection with themerger agreement with Linens ’n Things, Inc. and the equitycommitment letters and debt financing commitment letters provided in connectionwith 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-basedrevolving credit facility;

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

·      the equityinvestments described above.

The consummationof the Notes offering was conditioned upon the consummation of the Merger, theclosing of Linens ’n Things, Inc.’s new asset-based revolvingcredit facility and the equity investments described above, all of which werecompleted on February 14, 2006.

The Notes bearinterest at a per annum rate equal to LIBOR plus 5.625%, which is paid everythree months on January 15, April 15, July 15 andOctober 15, commencing April 15, 2006.  The interest rate on the Notes is resetquarterly.  The Notes mature onJanuary 15, 2014.

On July 7, 2006 theIssuers entered into a Zero Cost Interest Rate Collar Hedge to mitigate theinterest risk associated with the LIBOR component of the interest rate on theNotes.  The hedge is based on the averageLIBOR rate with an upper strike rate at 6.51% and a lower strike rate at 4.45%,payable and reset on the quarterly dates

8

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

stipulated in the Noteswith a termination date of January 15, 2008. Simultaneously, the Issuers purchased a one-year Forward-Starting Cap,with the first reset date to begin on January 11, 2008, based on the averageLIBOR rate with a strike rate of 6.51%, payable quarterly on the datesstipulated in the Notes.  The Issuerspaid a premium of $700,000 to purchase the Forward-Starting Cap.

The Notes arefully and unconditionally guaranteed, jointly and severally, on a senior basisby the Company and by each of the Company’s direct and indirect subsidiaries(other than the Issuers) that guarantee Linens ’n Things, Inc.’snew asset-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 stockmay be released under certain circumstances. As a result of the filing of a registration statement on Form S-4 withthe SEC with respect to the Notes, the Issuers and the Note Guarantors becamesubject to applicable SEC rules with respect to information required to beincluded in the prospectus in the registration statement.  To the extentthat the securities of any Issuer or Guarantor constitute collateralfor the Notes and the value of the securities equals or exceeds 20% of theprincipal amount, or $130.0 million of the Notes, separate financialstatements of the Issuer or Guarantor would be required under theseSEC rules 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 andguarantees are also secured by second-priority liens, subject to permittedliens, on all of the Issuers’ and the Note Guarantors’ inventory, accountsreceivable, cash, securities and other general intangibles.

If the Issuerssell certain assets or experiences specific kinds of changes in control, theIssuers must offer to repurchase the Notes. The Issuers may, at their option, redeem the Notes at any time on orafter 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 amount which cannotbe quantified as it is dependent on factors that are not yet determinable.

Linens ‘n Things,Inc.’s new asset-based revolving credit facility (the “Credit Facility”)provides senior secured financing of up to $600 million, subject to aborrowing base.  The borrowing base is aformula based on certain eligible inventory and receivables, minus certainreserves.  A portion of the CreditFacility, not to exceed $40 million, is also available to Linens ’n ThingsCanada Corp. subject to the Canadian borrowing base.  The Credit Facility requires the Company tocomply with financial ratio maintenance covenants if the excess availabilityunder the Credit Facility, at any time, does not exceed $75 million andalso contains certain customary affirmative covenants and events ofdefault.  The principal amountoutstanding of the loans under the Credit Facility, plus interest accrued andunpaid thereon, will be due and payable in full at maturity, five years fromFebruary 14, 2006, the date of closing of the Transactions.

All obligationsunder the Credit Facility are unconditionally guaranteed by the Company andcertain of its existing and future domestic subsidiaries.  All obligations under the Credit Facility,and the guarantees of those obligations, are secured, subject to certainexceptions, by substantially all of the assets of the borrowers, consisting ofLinens ‘n Things, Inc., Linens ‘n Things Center, Inc. and Linens ‘n ThingsCanada Corp. (collectively, the “Borrowers”), and the subsidiary guarantors,including: (i) a first-priority security interest in inventory, accountsreceivable, cash, securities and other general intangibles; and (ii) asecond-priority security interest in equipment, intellectual property rightsand related general intangibles and all of the capital stock of Linens ‘nThings, Inc. and the capital stock of certain subsidiaries.

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

9

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

the costs of fundsfor U.S. dollar deposits for the interest period relevant to such borrowingadjusted for certain additional costs, in each case plus an applicablemargin.  The initial applicable marginfor borrowings under the Credit Facility is 0% with respect to alternate baserate borrowings and 1.50% with respect to LIBOR borrowings.  After the delivery of the financialstatements for the first full fiscal quarter after the closing date, theapplicable margin for borrowings under the Credit Facility will be subject toadjustment based on the excess availability under the Credit Facility.  In addition to paying interest on outstandingprincipal under the Credit Facility, the Borrowers are required to pay acommitment fee, initially 0.375% per annum, in respect of the unutilizedcommitments thereunder.  After thedelivery of financial statements for the first full fiscal quarter after theclosing date, the commitment fee will be subject to adjustment based on theexcess availability under the Credit Facility. The Borrowers must also pay customary letter of credit fees and agencyfees.  The Borrowers initiated borrowingsunder its Credit Facility on February 23, 2006 to meet its operationalworking capital needs.

As a result of theMerger, all of Linens ’n Things, Inc.’s issued and outstandingcapital 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, the newChairman and Chief Executive Officer of Linens ’n Things, Inc.,acquired the remaining 0.3% at the same price paid by the sponsors.

Upon consummationof the Transactions, Linens ’n Things, Inc. delisted its sharesof common stock from the New York Stock Exchange (the “NYSE”) and deregisteredunder Section 12 of the Securities Exchange Act of 1934.  The last day of trading on the NYSE wasFebruary 14, 2006.

Total fees andexpenses related to the Transactions were approximately $107 million,consisting of approximately $48 million of pre-merger transaction cost incurredby the Company’s predecessor entity, Linens ‘n Things, Inc., $23 millionof direct acquisition costs of the Company and $36 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.  Deferred financingcosts of approximately $11 million relates to the asset-based revolving creditfacility, which are amortized over five years on a straight-line basis, and$25 million relates to the Notes, which are amortized over eight yearsusing the effective interest method.

The acquisition ofLinens ’n Things, Inc. is being accounted for as a businesscombination using the purchase method of accounting, whereby the purchase price(including liabilities assumed) was allocated to the assets acquired based ontheir estimated fair market values at the date of acquisition.  Independent third-party appraisers wereengaged to assist management and perform valuations of certain of the tangibleand intangible assets acquired.

The Company hasallocated the purchase price based on the appraisal associated with thevaluation of certain assets and liabilities. The Company does not believe that the appraisal or its estimate ofcertain contingencies will materially modify the preliminary purchase priceallocation.

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 condensedconsolidated financial statements for the successor entity as of July 1,2006, and for the 13-week period ended July 1, 2006 and for the periodFebruary 14 to July 1, 2006 show the operations of the successor entity,Linens Holding Co. and Subsidiaries.  Thecondensed consolidated financial statements presented as of July 2, 2005and December 31, 2005, and for the thirteen-week and twenty-six-weekperiods ended July 2, 2005 and for the period January 1 toFebruary 13, 2006 are shown under the “predecessor entity” caption,consisting of Linens ’n Things, Inc. and Subsidiaries.

As a result of theconsummation of the Transactions, the condensed consolidated financialstatements for the period after February 13, 2006 are presented on adifferent basis than that for the periods before February 14, 2006 as aresult of the application of purchase accounting as of February 14, 2006and therefore are not comparable.

10

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

A reconciliationof the preliminary 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  taxes                                                |       | 132                             |          | —                       |       | 132 |   |
| **Total  current assets**                                              | ** ** | **985,397**                     | ** **    | **(15,701**                  | **)**      | **969,696** | ** ** |
| Property and  equipment, net                                           |       | 607,787                         |          | (57                          | )          | 607,730 |   |
| Identifiable  intangible assets, net                                   |       | 1,276                           |          | 159,742                      |       | 161,018 |   |
| Goodwill                                                               |       | 18,126                          |          | 259,309                      |       | 277,435 |   |
| Deferred  financing cost and other noncurrent assets, net              |       | 1,079                           |          | 36,172                       |       | 37,251 |   |
| **Total  assets**                                                      | ** ** | **$**                           | **1,613,665** | ** **                   | **$**      | **439,465** | ** ** | **$** | **2,053,130** | ** ** |
| ** **                                                             | ** ** | ** **                      | ** **    | ** **                   | ** ** | ** ** | ** ** |
| **Liabilities  and Shareholders’ Equity**                         | ** ** | ** **                      | ** **    | ** **                   | ** ** | ** ** | ** ** |
| Current  liabilities:                                                  |       |                            |          |                         |       |   |   |
| Accounts payable                                                       |       | $                               | 274,997       |                         | $          | — |   | $ | 274,997 |   |
| Accrued expenses  and other current liabilities                        |       | 195,467                         |          | 39,388                       | (1)        | 234,855 |   |
| Current deferred  taxes                                                |       | 8,176                           |          | —                       |       | 8,176 |   |
| **Total  current liabilities**                                         | ** ** | **478,640**                     | ** **    | **39,388**                   | ** ** | **518,028** | ** ** |
| Senior secured  notes and other long-term debt, net of current portion |       | 2,068                           |          | 650,000                      |       | 652,068 |   |
| Deferred income  taxes and other long-term liabilities                 |       | 312,549                         |          | (77,128                      | )(2)       | 235,421 |   |
| **Total  liabilities**                                                 | ** ** | **793,257**                     | ** **    | **612,260**                  | ** ** | **1,405,517** | ** ** |
| **Shareholders’  equity**                                         | ** ** | **820,408**                     | ** **    | **(172,795**                 | **)**      | **647,613** | ** ** |
| **Total liabilities and  shareholders’ equity**                   | ** ** | **$**                           | **1,613,665** | ** **                   | **$**      | **439,465** | ** ** | **$** | **2,053,130** | ** ** |

----

*(1)**         *Represents anaccrual for unpaid transaction expenses.

*(2)**         *Consists of thefollowing purchase accounting adjustments:
| Unfavorable  leases    |   | $        |    20,000  |   |
|------------------------|--------|----------|---------------------------|--------|
| Deferred rents         |   | (250,020 | )                         |
| Deferred income  taxes |   | 152,892  |                      |
|                   |   |     |                      |
|                   |   | $        |    (77,128 | )      |
|                   |   |     |                      |

 

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 table presents an analysis ofthe change in goodwill.

| (in thousands)                                                 | ** ** | ** ** | ** **                | **Amount** | ** ** |
|---------------------------------------------------------------------|------------|------------|---------------------------|------------|------------|
|                                                                |       |       |                      |
| Balance at July  2, 2005 and December 31, 2005 (predecessor entity) |       | $          |    18,126  | (1)        |
| Purchase  accounting adjustments from preliminary allocation        |       | 259,309    |                      |
| Balance at  February 14, 2006 (successor entity)                    |       | 277,435    |                      |
| Pre-existing tax  adjustments                                       |       | (706       | )                         |
| Other—foreign  currency translation                            |       | 586        |                      |
| Balance at July 1, 2006  (successor entity)                         |       | $          |    277,315 |       |

----

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

11

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

The unaudited proforma results of operations provided below for the twenty-six weeks endedJuly 1, 2006 and July 2, 2005 are presented as though theTransactions had occurred at the beginning of the periods presented, aftergiving effect to purchase accounting adjustments relating to depreciation andamortization of the revalued assets, interest expense associated with the Notesand the Credit Facility and other acquisition-related adjustments in connectionwith the Transactions.  The pro formaresults of operations are not necessarily indicative of the combined resultsthat would have occurred had the Transactions been consummated at the beginningof the periods presented, nor are they necessarily indicative of futureoperating results.
| ** **                            | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-Six Weeks Ended** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **July 1, 2006**         | ** ** | **July 2, 2005**           | ** ** | **July 1, 2006** | ** ** | **July 2, 2005** | ** ** |
| **(In Thousands)**               | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                             |       | $                                  | 611,583    |                                 | $          | 573,317 |   | $ | 1,204,399 |   | $ | 1,144,263 |   |
| Loss before benefit for  income taxes |       | $                                  | (63,781    | )                                    | $          | (41,660 | ) | $ | (133,177 | ) | $ | (79,225 | ) |
| Net loss                              |       | $                                  | (39,127    | )                                    | $          | (25,648 | ) | $ | (81,029 | ) | $ | (48,775 | ) |

 

**2. Basisof Presentation**

The accompanyingCondensed Consolidated Financial Statements are unaudited.  In the opinion of management, theaccompanying Condensed Consolidated Financial Statements contain alladjustments to present fairly the financial position of successor entity LinensHolding Co. and Subsidiaries and predecessor entity Linens ’n Things, Inc.and Subsidiaries, as of July 1, 2006 and July 2, 2005 and the resultsof operations for the respective periods then ended and cash flows for therespective periods then ended as presented in the unaudited statements.  The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  Because of the seasonality ofthe specialty retailing business, operating results of the Company on aquarterly or interim basis may not be indicative of operating results for thefull year.

These CondensedConsolidated Financial Statements should be read in conjunction with theaudited Consolidated Financial Statements for the fiscal year endedDecember 31, 2005 included in the Company’s predecessor entity’s AnnualReport on Form 10-K Equivalent for Linens ’n Things, Inc.posted on the Linens ’n Things, Inc. website on March 21,2006 under “Noteholder Information.”  Allsignificant intercompany accounts and transactions have been eliminated.

Certain priorperiod amounts have been reclassified to conform with the current period’spresentation.

The accompanyingCondensed Consolidated Financial Statements are those of Linens Holding Co. andits subsidiaries.  The Company has notpresented separate financial statements for Linens ‘n Things, Inc. and itssubsidiaries or Linens ‘n Things Center, Inc. and its subsidiaries(collectively, the issuers as described in Note 14) because management hasdetermined that the differences in such financial statements are minor.

**3.Stock-based Compensation**

On January 1,2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (Revised2004)”), requiring the recognition of compensation cost for all equityclassified awards granted, modified or settled after the effective date and forthe unvested portion of awards outstanding as of the effective date using thefair-value measurement method.  SFASNo. 123 (Revised 2004) revises SFAS No. 123, “Accounting forStock-Based Compensation,” and supersedes Accounting Principles Board (“APB”)Opinion No. 25, “Accounting for Stock Issued to Employees.”

The Companyrecognizes the cost of all time-based employee stock options on a straight-lineattribution basis and the cost of all performance-based employee stock optionson an accelerated basis in accordance with Financial Accounting Standards BoardInterpretation No. 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans” over their respective vesting periods,net of estimated forfeitures.  TheCompany has selected the modified prospective method of transition;accordingly, prior periods have not been restated.  Prior to

12

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

adopting SFASNo. 123 (Revised 2004), the Company applied the recognition andmeasurement principles of APB Opinion No. 25 and relatedinterpretations.  All employee stockoptions were granted at or above the grant date market price.  Accordingly, the Company did not recognizecompensation expense for stock option grants. Restricted stock units granted at fair market value at the date of grantare amortized over specified vesting periods in the accompanying CondensedConsolidated Financial Statements.

**Share-basedCompensation Plans—Predecessor Entity**

Prior to thecompletion of the Merger, the Company granted stock options and restrictedstock units for a fixed number of shares to employees and directors undershare-based compensation plans.  Theexercise prices of the stock options were equal to the fair market value of theunderlying shares at the date of grant. Compensation expense for restricted stock awards was measured at fairvalue on the date of grant based on the number of shares granted and the quotedmarket price of the Company’s common stock. Such value was recognized as expense over the vesting period of theaward adjusted for actual forfeitures.

Upon completion ofthe Merger and in accordance with the terms of the stock plans, all of theoutstanding stock options became fully vested and immediately exercisable.  Each option was exercised, equal to theexcess of $28.00 over the underlying stock option exercise price, lessapplicable withholding taxes.  Eachrestricted stock unit award was exercised at $28.00 in cash, without interest,less applicable withholding taxes.

The following is asummary of activity under the stock option plans that were in effect uponadoption of SFAS 123 (Revised 2004) through the effective date of theMerger, when all of the stock options and restricted stock units wereexercised:
| ** **                                                    | ** ** | **Predecessor Entity**                    | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|
| **Plan**                                                      | ** ** | **Outstanding at  January 1,  2006** | ** ** | **Exercised** | ** ** | **Outstanding at  February 14,  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                                      |       |   |   |   |   |

 

13

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

The 2004 StockAward 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 2004Plan, an aggregate of 4,000,000 shares (plus any shares under outstandingawards under the Prior Plans which become available for further grants) wasauthorized for issuance of awards.  Underthe New Hire Authorization, an aggregate of 500,000 shares was authorized.

Stock optionsunder the 2004 Plan and the New Hire Authorization were granted with exerciseprices at the fair market value of the underlying shares at the date ofgrant.  The right to exercise optionsgenerally commenced one to five years after the grant date, and the optionsexpired between five to ten years after the grant date. Restrictions onrestricted stock unit grants lapsed over vesting periods of up to five years.

There were no share-based grants during the periodJanuary 1, 2006 to February 14, 2006 (predecessor entity).  The weighted-average grant date fair value ofoptions and restricted stock units granted during the thirteen weeks ended July2, 2005 was $9.77 and $24.25, respectively. The weighted-average grant date fair value of options and restrictedstock units granted during the twenty-six weeks ended July 2, 2005 was $9.98and $24.05, respectively.

The totalintrinsic value of each stock option and restricted stock unit exercised due tothe Merger was approximately $20.0 million and $4.4 million,respectively, for the period January 1, 2006 to February 14, 2006(predecessor entity).  The totalintrinsic value of stock options exercised during the thirteen and twenty-sixweeks ended July 2, 2005 was approximately $73,000 and $422,000, respectively.  The total intrinsic value of restricted stockunits converted into common stock was approximately $352,000 during both thethirteen and twenty-six weeks ended July 2, 2005.

The following is asummary of the activity for nonvested stock option grants and restricted stockunit awards as of February 14, 2006 and the changes for the periodJanuary 1, 2006 to February 14, 2006:

 
| ** **                      | ** ** | **Predecessor Entity** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Stock Options**      | ** ** | **Restricted Stock Units** | ** ** |
| ** **                      | ** ** | **Options**                 | ** ** | **Fair  Value(1)** | ** ** | **Units** | ** ** | **Fair  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 14, 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 Company’s common stock for restricted stock units.

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

The total fairvalue of stock options and restricted stock units vested during the period fromJanuary 1, 2006 to February 14, 2006 (predecessor entity) wasapproximately $11.2 million and $4.0 million, respectively.  The total fair value of stock options vestedduring the thirteen-week and twenty-six week periods ended July 2, 2005was

14

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

 approximately $0.7 million and $1.1million, respectively.  The total fairvalue of restricted stock units vested was approximately $0.4 million duringboth the thirteen and twenty-six weeks ended July 2, 2005.

As ofDecember 31, 2005, there was approximately $9.3 million and$3.2 million of total unrecognized compensation cost related to stockoption grants and restricted stock unit awards, respectively, under thestock-based compensation plans.  Theconsummation of the Merger accelerated the recognition of compensation cost,and, accordingly, all of this cost was included in selling, general andadministrative expense in the Condensed Consolidated Statements of Operationsin the period from January 1, 2006 to February 13, 2006 (predecessorentity).

The compensationcost that has been charged against income for restricted stock unit grants wasapproximately $0.3 million and $0.5 million for the thirteen weeks andtwenty-six weeks ended July 2, 2005. No compensation cost was recognized for stock option grants for thethirteen weeks and twenty-six weeks ended July 2, 2005.

**Share-basedCompensation Plans—Successor Entity**

OnFebruary 14, 2006, the board of directors (the “Board”) and stockholdersof Linens Holding Co. adopted the Linens Holding Co. Stock Option Plan (the “Plan”).The Plan provides employees or directors of the Company or its subsidiaries whoare in a position to contribute to the long-term success of these entities,with options to acquire shares in the Company to aid in attracting, retainingand motivating persons of outstanding ability. The Plan was amended in March 2006 to increase the number of sharesof common stock, par value $0.01 per share, of Linens Holding (the “CommonStock”) available for issuance under the Plan to 1,157,298 shares.

As of July 1, 2006,805,446 stock options were outstanding as detailed below:

 
| ** **                                                                                                          | ** ** | **Number of Stock  Options Granted** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Grants under the  Linens Holding Co. Stock Option Plan *(1)*                                                        |       | 717,446                                             |       |
| Grants approved  by the Board and not included in the Plan *(2)(3)*                                                 |       | 43,000                                              |       |
| Grants not  included in the Plan to members of the Board in accordance with the Director  Compensation Policy *(4)* |       | 45,000                                              |       |
|                                                                                                                |       | 805,446                                             |       |

----

*(1)**         *The stock optionsgranted under the Plan to each optionee are equally divided between a “TimeOption” and a “Performance Option,” as those terms are defined in the standardform of option grant letter.  The stockoptions have an exercise price of $50.00 per share, the estimated fair marketvalue of the underlying shares at the date of grant, and expire seven yearsafter the date of grant.  Time Optionsbecome vested and exercisable in four equal installments on either (1) each ofFebruary 14, 2007, February 14, 2008, February 14, 2009, andFebruary 14, 2010 with respect to 697,446 options initially granted March27, 2006 or (2) on each of the first four anniversaries of the date ofgrant.  With respect to PerformanceOptions and as provided for and defined in the standard form of grant letter,the stock options become vested and exercisable in two equal installments froma measurement date if, on such measurement date, the value per share equals orexceeds a target stock price.

*(2)**         *On March 23,2006, the Board approved a grant to Robert J. DiNicola, the Chairman and ChiefExecutive Officer of Linens ‘n Things, Inc., of a non-qualified stockoption to purchase 40,000 shares of Common Stock outside of the Plan.  These stock options also have an exerciseprice of $50.00 per share and are fully vested and immediately exercisable onthe date of grant.

*(3)**         *On May 11, 2006, theBoard approved a grant to F. David Coder, the Executive Vice President StoreOperations of Linens ‘n Things, Inc., of a non-qualified stock option topurchase 3,000 shares of Common Stock outside of the Plan.  These stock options also have an exerciseprice of $50.00 per share and are fully vested and immediately exercisable onthe date of grant.

*(4)**         *On June 13, 2006,the Board adopted a policy for director compensation (the “DirectorCompensation Policy”) with retroactive effect to April 1, 2006.  Pursuant to the Director Compensation Policy,the Board Chairman and each non-employee director, upon first election orappointment to the Board, will receive a grant of non-qualified stock optionsto purchase a minimum of 5,000 shares of Common Stock outside of the Plan.  In accordance with the Director CompensationPolicy, the Board also approved a grant of a non-qualified stock option topurchase 5,000 shares of Common Stock to each of eight Board members appointedto the Board in March 2006.  These stockoptions have an exercise price of $50.00 per share and are fully vested andimmediately exercisable on the date of grant. On June 15, 2006 an additional grant of a non-qualified stock option topurchase 5,000 shares of Common Stock was approved upon the appointment of theCompany’s ninth and final Board member. These stock options have an exercise price of $50.00 per share and arefully vested and immediately exercisable on the date of grant.

15

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

The following is asummary of share-based option activity for the period February 14, 2006 toJuly 1, 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** | ** ** | **$** | **50.00** | ** ** | **6.75** | ** ** |
|                                  |       |   |   |   |   |   |   |
| **Exercisable at July 1, 2006**       |       | **88,000** |   | **$** | **50.00** |   | **6.75** | ** ** |

 

Thereare no provisions in the Plan for the issuance of restricted stock units.

Theweighted-average grant date fair value of options granted during the thirteenweek period ended July 1, 2006 was $17.21. The weighted-average grant date fair value of options granted during theperiod February 14, 2006 to July 1, 2006 (successor entity) was $17.39.

There were nostock option exercises during the period February 14, 2006 to July 1,2006 (successor entity).

The following is asummary of the activity for nonvested stock option grants as of July 1, 2006and the changes for the period February 14, 2006 to July 1, 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** | ** ** |

----

*(1)**         *Represents theweighted-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 fairvalue of stock options vested during the thirteen-week period endedJuly 1, 2006 was approximately $0.8 million.  The total fair value of stock options vestedduring the period February 14, 2006 to July 1, 2006 (successor entity) wasapproximately $1.5 million.

As of July 1,2006, there was approximately $11.2 million of total unrecognizedcompensation cost related to stock option grants both under and outside thePlan.  This cost is expected to berecognized over a remaining weighted-

16

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

average period of3.3 years.  The compensation costthat has been charged against income for stock option grants was approximately$1.6 million and $2.3 million for the thirteen weeks ended July 1, 2006and for the period February 14, 2006 to July 1, 2006 (successor entity),respectively, and was included in selling, general and administrative expensein the Condensed Consolidated Statements of Operations.

Prior to theadoption of SFAS 123 (Revised 2004) the Company used the Black-Scholesoption-pricing model for estimating the fair value for all optionsgranted.  Beginning in the first quarterof 2006, the Company, with the assistance of an independent third party, usedthe Monte Carlo simulation option-pricing model for estimating the fair valueof Performance Options and the Black-Scholes option-pricing model for TimeOptions.  This change was made in orderto provide a better estimate of fair value. The Monte Carlo option-pricing model is particularly useful in thevaluation of options with complicated features that make them difficult tovalue through a straight-forward Black-Scholes-style computation.

Presented below isa comparative summary of valuation assumptions for the indicated periods:

 
| ** **                                            | ** ** | **Thirteen Weeks**          | ** ** | **Thirteen **               | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                       | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **Ended**                        | ** ** | **Weeks**                        | ** ** | **February 14 to ** | ** ** | ** **                            | ** ** | **Twenty-**                      | ** ** |
| ** **                                            | ** ** | **July 1, 2006 ** | ** ** | **Ended**                        | ** ** | **July 1, 2006 **   | ** ** | ** **                            | ** ** | **Six Weeks  **   | ** ** |
| ** **                                            | ** ** | **(Monte Carlo **      | ** ** | **July 2, 2005 ** | ** ** | **(Monte Carlo **        | ** ** | **January 1 to**            | ** ** | **Ended**                        | ** ** |
| ** **                                            | ** ** | **Simulation and **    | ** ** | **(Black-Scholes) **        | ** ** | **Simulation and **      | ** ** | **February 13, 2006 ** | ** ** | **July 2, 2005 ** | ** ** |
| ** **                                            | ** ** | **Black-Scholes) **         | ** ** | **(Predecessor **           | ** ** | **Black-Scholes) **           | ** ** | **(Black-Scholes) **             | ** ** | **(Black-Scholes) **        | ** ** |
| **Valuation Assumptions:**                       | ** ** | **(Successor Entity)**      | ** ** | **Entity)**                      | ** ** | **(Successor Entity)**        | ** ** | **(Predecessor Entity)**         | ** ** | **(Predecessor Entity)**    | ** ** |
| ** **                                            | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                         | ** ** | ** **                            | ** ** | ** **                       |       |
| Weighted-average  fair value of options granted       |       | N/A                              |       | $                                | 9.77       |                               | N/A        |                                  | No Grants  |                             | $          | 9.98 |   |
| Weighted-average  calculated value of options granted |       | $                                | 17.21      |                             | N/A        |                               | $          | 17.39                                 |       | No Grants                        |       | N/A |   |
| Expected  volatility                                  |       | N/A                              | (1)        | 39.7                             | %          | N/A                                | (1)        | No Grants                             |       | 40.0                             | %          |
| Weighted-average  volatility                          |       | 36.8%                            | (1)        | 39.7                             | %          | 38.0%                              | (1)        | No Grants                             |       | 40.0                             | %          |
| Weighted-average  expected term (in years)            |       | 3.7                              |       | 5.0                              |       | 3.7                                |       | No Grants                             |       | 5.0                              |       |
| Dividend yield                                        |       | —                           |       | —                           |       | —                             |       | No Grants                             |       | —                           |       |
| Weighted-average  risk-free interest rate             |       | 4.9                              | %          | 3.8                              | %          | 4.8                                | %          | No Grants                             |       | 3.9                              | %          |
| Weighted average  expected annual forfeiture          |       | 1.4                              | %          | 2.6                              | %          | 3.9                                | %          | No Grants                             |       | 2.5                              | %          |
|                                                       |            |                                  |            |                                  |            |                                    |            |                                       |            |                                  |            |  |  |  |  |

----

*(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 behavioraldata to estimate the option exercise and termination rates used in theBlack-Scholes option-pricing model prior to the adoption of SFAS 123(Revised 2004).  The expected term of theoptions represents the period of time the options were expected to be outstandingbased on historical trends.  Expected volatilitywas based on the historical volatility of the common stock of Linens ‘nThings, Inc. for a period approximating the expected life. The Company hasnever 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 ofSFAS 123 (Revised 2004), it is not possible for the Company, a non-publicentity, to use Company-specific volatility in determining a reasonable estimateof fair value of options granted. Accordingly, the Company is required to use an alternative measurementmethod.  Under the alternative measurementmethod, a nonpublic entity uses a calculated volatility, determined by applyingthe historical volatility of an appropriate index of public entities, as aninput to the valuation models.  TheCompany used 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.

17

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

Prior to theadoption of SFAS No. 123 (Revised 2004) the Company complied with thedisclosure requirements of SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS No. 123” (“SFASNo. 148”).  SFAS No. 148required prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results.

Set forth belowfor the indicated periods are the Company’s net loss presented “as reported”and as if the Company had applied the fair value method to its stock-basedcompensation under the disclosure provisions of SFAS No. 123 and amendeddisclosure provisions of SFAS No. 148:

 
| ** **                                                                                                                                                      | ** ** | **Successor Entity**                              | ** ** | **Predecessor Entity**                            | ** ** | **Successor Entity**                                | ** ** | **Predecessor Entity**                         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                                                                                                                         | ** ** | **Thirteen Weeks  Ended July 1,  2006** | ** ** | **Thirteen Weeks  Ended July 2,  2005** | ** ** | **February 14 to July 1, 2006** | ** ** | **January 1 to  February 13,  2006** | ** ** | **Twenty-Six  Weeks  Ended July 2,  2005** | ** ** |
| **Net loss:**                                                                                                                                                   | ** ** | ** **                                             | ** ** | ** **                                             | ** ** | ** **                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| As reported                                                                                                                                                     |       | $                                                      | (39,127    | )                                                      | $          | (5,932                                                   | )          | $                                                   | (56,699    | ) | $ | (47,904 | ) | $ | (10,006 | ) |
| Add: stock-based  employee compensation expense included in net loss as reported, net of  related tax effects(1)                                                |       | 992                                                    |       | 160                                                    |       | 1,425                                                    |       | 8,651                                               |       | 306 |   |
|                                                                                                                                                            |       | (38,135                                                | )          | (5,772                                                 | )          | (55,274                                                  | )          | (39,253                                             | )          | (9,700 | ) |
| Deduct: total stock-based  employee compensation expense determined under the fair value based method of  accounting for all awards, net of related tax effects |       | 992                                                    |       | 1,637                                                  |       | 1,425                                                    |       | 8,651                                               |       | 3,248 |   |
|                                                                                                                                                            |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
| Pro forma loss                                                                                                                                                  |       | $                                                      | (39,127    | )                                                      | $          | (7,409                                                   | )          | $                                                   | (56,699    | ) | $ | (47,904 | ) | $ | (12,948 | ) |

----

*(1)**         *Stock-based employeecompensation expense included in net loss as reported, net of related tax effects,is detailed as follows:
| ** **                                                            | ** ** | **Successor Entity**                              | ** ** | **Predecessor Entity**                            | ** ** | **Successor Entity**                                | ** ** | **Predecessor Entity**                         | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**                                               | ** ** | **Thirteen Weeks  Ended July 1,  2006** | ** ** | **Thirteen Weeks  Ended July 2,  2005** | ** ** | **February 14 to July 1, 2006** | ** ** | **January 1 to  February 13,  2006** | ** ** | **Twenty-Six  Weeks  Ended July 2,  2005** | ** ** |
| Compensation expense:                                                 |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
| Stock option grants                                                   |       | $                                                      | 1,619      |                                                   | $          | —                                                   |       | $                                                   | 2,328      |   | $ | 9,305 |   | $ | — |   |
| Restricted stock units                                                |       | —                                                 |       | 256                                                    |       | —                                                   |       | 3,179                                               |       | 489 |   |
|                                                                  |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
|                                                                  |       | 1,619                                                  |       | 256                                                    |       | 2,328                                                    |       | 12,484                                              |       | 489 |   |
|                                                                  |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
| Benefit for income  taxes:                                            |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
| Stock option grants                                                   |       | (627                                                   | )          | —                                                 |       | (903                                                     | )          | (2,857                                              | )          | — |   |
| Restricted stock units                                                |       | —                                                 |       | (96                                                    | )          | —                                                   |       | (976                                                | )          | (183 | ) |
|                                                                  |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
|                                                                  |       | (627                                                   | )          | (96                                                    | )          | (903                                                     | )          | (3,833                                              | )          | (183 | ) |
|                                                                  |       |                                                   |       |                                                   |       |                                                     |       |                                                |       |   |   |
| Stock-based employee compensation expense, net of related tax effects |       | $                                                      | 992        |                                                   | $          | 160                                                      |       | $                                                   | 1,425      |   | $ | 8,651 |   | $ | 306 |   |

 

18

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

**4.Short-Term Borrowing Arrangements**

InFebruary 2006, the Company entered into a new senior secured asset-basedrevolving credit facility agreement (the “Credit Facility”) with third partyinstitutional lenders which expires February 14, 2011. The Credit Facilityprovides senior secured financing of up to $600 million, subject to aborrowing base consisting of certain eligible inventory and receivables, minuscertain reserves.  A portion of theCredit Facility, not to exceed $40 million, is also available to aCanadian subsidiary of the Company subject to the Canadian borrowing base.  The Credit Facility replaced the$250 million senior revolving credit facility amended November 2004,which allowed for up to $50 million in borrowings from additional lines ofcredit outside the agreement, including CAD $40 million covering the Company’sCanadian operations (the “2004 Credit Agreement”).  The Company incurred deferred financing costsof approximately $11 million related to the Credit Facility, which arebeing amortized over five years on a straight-line basis.

Under the CreditFacility, interest on all borrowings is determined, at the Company’s option, oneither of two alternative rates, specifically (1) a variable margin aboveLIBOR or (2) a variable margin above the federal funds effective rate plus0.50%.  In addition to paying interest onoutstanding principal under the Credit Facility, the Company is required to paya variable rate commitment fee in respect of the unutilized commitmentsthereunder.  The Credit Facility requiresthe Company to comply with financial ratio maintenance covenants if the excessavailability under the Credit Facility, at any time, does not exceed$75 million and also contains certain restrictive covenants including theCompany’s ability to pay dividends, which the Company has never paid in thepast, and certain customary affirmative covenants and events of default.  During the period February 14 toJuly 1, 2006 the Company always maintained excess availability above$75 million.  As of July 1,2006, the Company had $155.1 million in borrowings under the CreditFacility at an average interest rate of 6.7%. Such borrowings have been classified as short-term as of July 1,2006 as the Company expects to have the ability and intent to pay theseborrowings from existing current assets by the end of the fiscal year.  At various times during the twenty-six weeksended July 1, 2006 the Company borrowed against its Credit Facility and the2004 Credit Agreement during the successor and predecessor periods,respectively, for working capital needs. The Company also had $135.4 million of letters of creditoutstanding as of July 1, 2006 issued under the Credit Facility, whichincluded standby letters of credit and import letters of credit used formerchandise purchases.  The Company isnot obligated under any formal or informal compensating balance requirements.

**5.Comprehensive Loss**

Comprehensive loss forthe thirteen weeks ended July 1, 2006 and July 2, 2005 is as follows (inthousands):
| ** **                                                                        | ** ** | **Successor Entity**                              | ** ** | **Predecessor Entity**                            | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen Weeks  Ended July 1,  2006** | ** ** | **Thirteen Weeks  Ended July 2,  2005** | ** ** |
| Net loss                                                                          |       | $                                                      | (39,127    | )                                                      | $          | (5,932 | ) |
| Other  comprehensive income (loss) — foreign currency translation adjustment |       | 2,520                                                  |       | (389                                                   | )          |
|                                                                              |       |                                                   |       |                                                   |       |
| **Comprehensive loss**                                                            |       | $                                                      | (36,607    | )                                                      | $          | (6,321 | ) |

 

19

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

Comprehensive loss forthe period February 14 to July 1, 2006, January 1 to February 13, 2006 and thetwenty-six weeks ended July 2, 2005 is as follows (in thousands):
| ** **                                                                      | ** ** | **Successor Entity**                            | ** ** | **Predecessor Entity**                         | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **February 14 to  July 1, 2006** | ** ** | **January 1 to  February 13,  2006** | ** ** | **Twenty-Six Weeks  Ended July 2, 2005** | ** ** |
| Net loss                                                                        |       | $                                                    | (56,699    | )                                                   | $          | (47,904 | ) | $ | (10,006 | ) |
| Other  comprehensive income (loss)—foreign currency translation adjustment |       | 1,954                                                |       | 253                                                 |       | (572 | ) |
|                                                                            |       |                                                 |       |                                                |       |   |   |
| **Comprehensive loss**                                                          |       | $                                                    | (54,745    | )                                                   | $          | (47,651 | ) | $ | (10,578 | ) |

** **

**6.  Restructuring and Asset Impairment Charge**

In fiscal 2001,the Company developed and committed to a strategic initiative designed toimprove store performance and profitability. This initiative called for the closing of certain under-performingstores, which did not meet the Company’s profit objectives.  In connection with this initiative, theCompany recorded a pre-tax restructuring and asset impairment charge of$37.8 million ($23.7 million after-tax) in the fourth quarter offiscal 2001.  A pre-tax reserve of$20.5 million was established for estimated lease commitments through 2012for stores to be closed.  The reserveconsiders estimated sublease income. Because all of the stores were leased, the Company is not responsiblefor the disposal of property other than fixtures.  A pre-tax writedown of $9.5 million wasrecorded as a reduction in property and equipment for fixed asset impairmentsfor these stores.  The fixed assetimpairments represent fixtures and leasehold improvements.  A pre-tax reserve of $4.0 million wasestablished for other estimated 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 the restructuringcharge were based on estimates and may be subject to change in the future.  The Company has closed all of the initiallyidentified stores other than one store, which the Company decided to keep openand whose reserve was reversed.  Inaddition, the Company reopened one of the previously closed stores during thesecond quarter of 2006 and plans to reopen a second previously closed store duringthe third quarter of 2006.

The followingtable displays a roll forward of the activity and significant components sinceDecember 31, 2005, and the reserve remaining as of July 1, 2006:

 
| ** **             | ** ** | **Predecessor  Entity**                                    | ** ** | ** **      | ** ** | **Successor Entity**                       | ** ** |
|------------------------|------------|------------------------------------------------------------|------------|-----------------|------------|-------------------------------------------------|------------|
| **(in millions)** | ** ** | **Remaining at   December 31,   2005** | ** ** | **Usage  2006** | ** ** | **Remaining   at July 1,  2006** | ** ** |
|                   |       |                                                       |       |            |       |                                            |       |
| **Cash  components:**  | ** ** | ** **                                                 | ** ** | ** **      | ** ** | ** **                                      | ** ** |
| Lease  commitments     |       | $                                                          | 5.4        |            | $          | (2.0                                            | )          | $ | 3.4 |   |
|                   |       |                                                       |       |            |       |                                            |       |
| **Total**              |       | $                                                          | 5.4        |            | $          | (2.0                                            | )          | $ | 3.4 |   |

 

The restructuringreserve balance is included in accrued expenses and other current liabilitiesin the Condensed Consolidated Balance Sheet. The 2006 usage primarily consists of payments for leasecommitments.  The 2006 activity alsoincludes the reversal of estimated lease commitment costs of approximately$333,000 which were not needed, offset by an increase to lease commitment costsof approximately $247,000 due to changes in estimates based on currentnegotiations.  The net change in therestructuring reserve is recorded in selling, general and administrativeexpense in the Condensed Consolidated Statements of Operations.

20

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

**7.Identifiable Intangible Assets**

In connection withthe Transactions, the Company’s intangible assets were revalued with the assistanceof an independent third party.  Thecarrying amount and accumulated amortization of identifiable intangible assetsconsisted of the following:

 
| ** **                                       | ** ** | **Successor Entity**    | ** ** | **Predecessor Entity**       | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                          | ** ** | **July 1,   2006** | ** ** | **December 31,   2005** | ** ** | **July 2,   2005** | ** ** |
|                                             |       |                         |       |                              |       |   |   |
| Intangible  assets subject to amortization:      |       |                         |       |                              |       |   |   |
| Credit card  customer relationships              |       | $                            | 10,163     |                              | $          | — |   | $ | — |   |
| Customer list                                    |       | 406                          |       | —                            |       | — |   |
| Favorable leases                                 |       | 27,834                       |       | 2,900                             |       | 2,900 |   |
|                                             |       |                         |       |                              |       |   |   |
|                                             |       | 38,403                       |       | 2,900                             |       | 2,900 |   |
| Less: accumulated amortization                   |       | (3,204                       | )          | (1,599                            | )          | (1,509 | ) |
|                                             |       |                         |       |                              |       |   |   |
| Total intangible  assets subject to amortization |       | 35,199                       |       | 1,301                             |       | 1,391 |   |
| Total  indefinite-lived trademarks               |       | 122,688                      |       | —                            |       | — |   |
|                                             |       |                         |       |                              |       |   |   |
| Total identifiable  intangible assets            |       | $                            | 157,887    |                              | $          | 1,301 |   | $ | 1,391 |   |

 

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 thirteenweeks ended July 1, 2006 and July 2, 2005 amortization expense of $2.2 millionand $47,000, respectively, was recorded by the Company and is included inselling, general and administrative expenses in the Condensed ConsolidatedStatement of Operations.  For the periodFebruary 14 to July 1, 2006, January 1 to February 13,2006, and the twenty-six weeks ended July 2, 2005, amortization expense of $3.2million, $25,000 and $94,000, respectively, 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** | ** ** |
|----------------------|------------|------------------|------------|
| 2006                 |       | $                | 4,342      |   |
| 2007                 |       | 7,997            |       |
| 2008                 |       | 7,054            |       |
| 2009                 |       | 3,526            |       |
| 2010                 |       | 2,805            |       |
| 2011 and  thereafter |       | 9,475            |       |
|                 |       |             |       |
| Total                |       | $                | 35,199     |   |

 

**8.Guarantees**

The Company hasassigned property at a retail location in which the Company guarantees thepayment of rent over the specified lease term in the event of non-performance.  As of July 1, 2006, the maximum potentialamount of future payments the Company could be required to make under such guaranteeis approximately $0.6 million.

 

21

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** **

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

**9.Accounts Payable**

Accounts payableincludes amounts for gift card liabilities of $33.5 million,$35.8 million and $26.9 million as of July 1, 2006, December 31,2005 and July 2, 2005, respectively. Gift cards that are not expected to be redeemed are recorded as areduction to selling, general and administrative expense in the CondensedConsolidated Statements of Operations. Such amounts recognized for the thirteen weeks ended July 1, 2006 andJuly 2, 2005 were approximately $1.0 million and $0.5 million,respectively.  For the periodFebruary 14 to April 1, 2006, the period January 1 toFebruary 13, 2006 and the twenty-six weeks ended July 2, 2005, suchamounts recognized were approximately $1.6 million, $0.5 million and$1.3 million, respectively.

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

Senior secured notes andother long-term debt consists of the following (in thousands):
| ** **                                      | ** ** | **Successor Entity**    | ** ** | **Predecessor Entity**       | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                         | ** ** | **July 1,   2006** | ** ** | **December 31,   2005** | ** ** | **July 2,   2005** | ** ** |
|                                            |       |                         |       |                              |       |   |   |
|                                            |       |                         |       |                              |       |   |   |
|                                            |       |                         |       |                              |       |   |   |
| Senior secured floating  rate notes due 2014    |       | $                            | 650,000    |                              | $          | — |   | $ | — |   |
| Mortgage note payable                           |       | 2,108                        |       | 2,139                             |       | 2,168 |   |
|                                            |       |                         |       |                              |       |   |   |
|                                            |       | 652,108                      |       | 2,139                             |       | 2,168 |   |
| Less: current portion  of mortgage note payable |       | (64                          | )          | (63                               | )          | (60 | ) |
|                                            |       |                         |       |                              |       |   |   |
| Total                                           |       | $                            | 652,044    |                              | $          | 2,076 |   | $ | 2,108 |   |

 

Senior securedfloating rate notes due 2014 consists of $650 million aggregate principalamount of Senior Secured Floating Rate Notes due 2014 of Linens ‘nThings, Inc. and Linens ‘n Things Center, Inc.

The Notes bearinterest at a per annum rate equal to LIBOR plus 5.625%, which is paid everythree months on January 15, April 15, July 15 andOctober 15, commencing April 15, 2006.  The interest rate on the Notes is resetquarterly.  The Notes mature onJanuary 15, 2014.  As ofJuly 1, 2006 the interest rate on the Notes was 10.7%.

On July 7, 2006 theIssuers entered into a Zero Cost Interest Rate Collar Hedge to mitigate the interestrisk associated with the LIBOR component of the interest rate on theNotes.  The hedge is based on the averageLIBOR rate with an upper strike rate at 6.51% and a lower strike rate at 4.45%,payable and reset on the quarterly dates stipulated in the Notes with atermination date of January 15, 2008. Simultaneously, the Issuers purchased a one-year Forward-Starting Cap,with the first reset date to begin on January 11, 2008, based on the averageLIBOR rate with a strike rate of 6.51%, payable quarterly on the datesstipulated in the Notes.  The Issuerspaid a premium of $700,000 to purchase the Forward-Starting Cap.

The Notes are guaranteedon a senior basis by the Company and by certain of the Company’s domesticsubsidiaries other than the Issuers (collectively, the “Note Guarantors”), andare secured by first-priority liens on all of the Company’s and Note Guarantors’equipment, intellectual property rights and related general intangibles and thecapital stock of the Issuers and certain subsidiaries and by second-priorityliens on the Issuers’ and the Note Guarantors’ inventory, accounts receivable,cash, securities and other general intangibles. The lien on capital stock may be released under certaincircumstances.  As a result of the filingof a registration statement on Form S-4 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$130.0 million of the Notes, separate financial statements ofthe Issuer or Note Guarantor would be required under these SECrules to be included in the Company’s SEC filings.

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

The indenture thatgoverns the Notes provides, however, with respect to any direct or indirectsubsidiary of Linens ‘n Things, Inc., that the securities of the subsidiary arereleased from the lien on capital stock on the date that the lien triggersthis separate financial statement requirement.  Accordingly, for anysubsidiary with securities that equal or exceed the 20% threshold, the lien onthe capital stock 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 Issuerssell certain assets or experience specific kinds of changes in control, theIssuers must offer to repurchase the Notes. The Issuers may, at their option, redeem the Notes at any time on orafter 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.

Mortgage notepayable represents 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 ofapproximately $1.6 million in August 2012.

**11.Income Taxes**

For thePredecessor Entity period January 1 to February 13, 2006, theeffective tax rate of 30.7% is lower than the statutory federal rate of 35.0%primarily due to non-deductible transaction costs.  The Successor Entity estimated effective taxrate for the period February 14 to July 1, 2006 was 38.8%.  This exceeds the statutory federal tax rateof 35.0% primarily due to expected deferred state tax benefits.  Purchase accounting adjustments resulted inan increase to net deferred tax liabilities of $152,892 as indicated in thetable below (in thousands):

 
| **Component**                                                                                         | ** ** | **Pretax Purchasing Accounting Adjustment** | ** ** | **Tax Rate** | ** ** | **Deferred Tax  (Asset)  Liability** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------|------------|--------------------------------------|------------|
| Trademarks                                                                                            |       | $122,688                                              |       | 39.2%        | (1)        | $48,094                              |       |
| Deferred rent and deferred rent credits                                                               |       | 233,016                                               |       | 39.2         | %          | 91,342                               |       |
| Other intangibles                                                                                     |       | 16,847                                                |       | 39.2         | %          | 6,604                                |       |
| Valuation allowance for state tax loss carryovers, net of federal  benefit                            |       | 8,214                                                 |       | N/A          |       | 8,214                                |       |
| Deferred rent and deferred rent credits—Canada                                                   |       | 17,002                                                |       | 35.5%        | (2)        | 6,035                                |       |
|                                                                                                  |       |                                                  |       |         |       |                                 |       |
| Preliminary estimate of deductible portion of certain capitalized  transaction costs                  |       | (17,855                                               | )          | 39.2         | %          | (7,000                               | )          |
| Other                                                                                                 |       |                                                  |       |         |       | (397                                 | )          |
|                                                                                                  |       |                                                  |       |         |       |                                 |       |
|                                                                                                  |       |                                                  |       |         |       | 152,892                              |       |
|                                                                                                  |       |                                                  |       |         |       |                                 |       |
| Subsequent purchase accounting adjustment identified during the  quarterly period ending July 1, 2006 |       |                                                  |       |         |       | 1,169                                |       |
|                                                                                                  |       |                                                  |       |         |       |                                 |       |
|  As adjusted through July 1, 2006                                                                |       |                                                  |       |         |       | $154,061                             |       |

----

*(1)**         *Includes federalrate of 35.0% plus blended state rate of 4.2%, net of federal benefit.

*(2)**         *Includes Canadianfederal and provincial taxes.

 

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**

** **

**12.Recent Accounting Pronouncements**

In July 2006, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return inaccordance 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 48 and in subsequent periods. Additionally, FIN 48 provides guidance on derecognition,classification, accounting in interim periods, interest and penalties anddisclosure requirements for uncertain tax positions.  The accounting provisions of FIN 48 willbe effective for the Company beginning December 31, 2006.  The Company is in the process of determiningthe effect, if any, that the adoption of FIN 48 will have on its financialstatements.

**13.Related Party Transactions**

**ManagementServices Agreement**

Upon consummationof the Merger, the Company entered into a management services agreement withApollo Management V, L.P., NRDC Linens B LLC and Silver Point Capital FundInvestments LLC (each of whom is an affiliate of the Company).  Under this management services agreement, theSponsors 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 $2.0 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 $15.0 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**

The onlystockholders of the Company are Linens Investors, LLC, a limited liabilitycompany owned by the Sponsors, and two executives of the Company, Robert J.DiNicola, Chairman and Chief Executive Officer, and F. David Coder, ExecutiveVice President, Store Operations.  Inconnection therewith, Linens Investors, LLC has entered into a stockholders’agreement with the Company, and each of the other stockholders have enteredinto joinder agreements 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.

**14.Supplemental Condensed Consolidating Financial Information**

OnFebruary 14, 2006 Linens ‘n Things, Inc. and Linens ‘n ThingsCenter, Inc. (collectively, the “Issuers”), issued $650 millionaggregate principal amount of Senior Secured Floating Rate Notes due 2014 in aprivate offering.  The Notes are fullyand unconditionally guaranteed, jointly and severally, on a senior basis by theCompany, and by each of the Company’s direct and indirect subsidiaries thatguarantee the Company’s new asset-based revolving credit facility except forits Canadian subsidiaries.  The Company’sCanadian subsidiaries (the “Non-Guarantors”) are not guarantors of the Notes.

24

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The followingtables present the supplemental condensed consolidating financial informationfor the Company (Parent), the Co-Issuers, the Guarantors (excluding the Companywhich is also a Guarantor but is separately presented) and the Non-Guarantors,together with eliminations, as of and for the periods indicated.  The Company has not presented separatefinancial statements and other disclosures concerning the Co-Issuers,Guarantors and Non-Guarantors because management has determined that suchinformation is not meaningful to investors. The accounting policies for Parent, Co-Issuers, Guarantors, andNon-Guarantors are the same as those described for the Company’s predecessorentity, Linens ’n Things, Inc. and Subsidiaries in its AnnualReport on Form 10-K Equivalent under “Summary of Significant AccountingPolicies.”  The financial information maynot necessarily be indicative of the financial position, results of operationsor cash flows had the Parent, Co-Issuers, Guarantors and Non-Guarantorsoperated as independent entities.

The information as of July 1, 2006, and for the thirteenweeks ended July 1, 2006 and the period February 14 to July 1, 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 July 2, 2005, and forthe thirteen weeks and twenty-six weeks ended July 2, 2005 and the periodJanuary 1 to February 13, 2006, presents the financial position andresults of operations and cash flows, respectively, of the Predecessor Entity.

 

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**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)(Successor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETJULY 1, 2006(In Thousands)**
| ** **                                                             | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                                             | * *   | * *    | * *    | * *       | * *   | * *       | * *   | * *           | * *      | * *         | * *   | * *         | * *   |
| Current assets:                                                        | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents                                              |       | $           | —      |           | $          | 184            |       | $                  | 7,550         |             | $          | 5,760            |       | $ | — |   | $ | 13,494 |   |
| Accounts receivable                                                    |       | —      |        | 590            |       | 36,786         |       | 2,319              |          | —           |       | 39,695           |       |
| Inventories                                                            |       | —      |        | 16,463         |       | 784,502        |       | 53,858             |          | —           |       | 854,823          |       |
| Prepaid expenses and other current assets                              |       | —      |        | 38,716         |       | 31,722         |       | 4,220              |          | —           |       | 74,658           |       |
| Current deferred taxes                                                 |       | —      |        | (29            | )          | 5,442          |       | 186                |          | —           |       | 5,599            |       |
| **Total current assets**                                               |       | —      | ** **  | **55,924**     | ** ** | **866,002**    | ** ** | **66,343**         | ** **    | **—**       | ** ** | **988,269**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Property and equipment, net                                            |       | —      |        | 7,988          |       | 538,809        |       | 43,984             |          | —           |       | 590,781          |       |
| Identifiable intangible assets, net                                    |       | —      |        | 803            |       | 155,134        |       | 1,950              |          | —           |       | 157,887          |       |
| Goodwill                                                               |       | —      |        | 7,599          |       | 253,204        |       | 16,512             |          | —           |       | 277,315          |       |
| Intercompany receivables                                               |       | —      |        | —         |       | 631,189        |       | —             |          | (631,189         | )          | —           |       |
| Intercompany notes receivable                                          |       | —      |        | 1,098,043      |       | —         |       | 24,364             |          | (1,122,407       | )          | —           |       |
| Investment in subsidiaries                                             |       | 595,351     |        | 855,220        |       | —         |       | —             |          | (1,450,571       | )          | —           |       |
| Deferred financing cost and other noncurrent assets,  net              |       | —      |        | 34,788         |       | 562            |       | 14                 |          | —           |       | 35,364           |       |
|                                                                   | ** ** | ** **  |        |           |       |           |       |               |          |             |       |             |       |
| **Total assets**                                                       | ** ** | **$**       | **595,351** | ** **     | **$**      | **2,060,365**  | ** ** | **$**              | **2,444,900** | ** **       | **$**      | **153,167**      | ** ** | **$** | **(3,204,167** | **)** | **$** | **2,049,616** | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Liabilities and Shareholders’  Equity**                         |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Current liabilities:                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Accounts payable                                                       |       | $           | —      |           | $          | 10             |       | $                  | 217,090       |             | $          | 18,705           |       | $ | — |   | $ | 235,805 |   |
| Accrued expenses and other current liabilities                         |       | —      |        | 38,317         |       | 131,194        |       | 9,981              |          | —           |       | 179,492          |       |
| Current deferred taxes                                                 |       | —      |        | —         |       | —         |       | —             |          | —           |       | —           |       |
| Short-term borrowings                                                  |       | —      |        | 155,006        |       | 64             |       | —             |          | —           |       | 155,070          |       |
| **Total current liabilities**                                          | ** ** | **—**  | ** **  | **193,333**    | ** ** | **348,348**    | ** ** | **28,686**         | ** **    | **—**       | ** ** | **570,367**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| Intercompany payable                                                   |       | —      |        | 622,018        |       | —         |       | 9,170              |          | (631,188         | )          | —           |       |
| Intercompany notes payable                                             |       | —      |        | —         |       | 1,073,800      |       | 48,607             |          | (1,122,407       | )          | —           |       |
| Senior secured notes and other long-term debt, net of  current portion |       | —      |        | 650,000        |       | 2,044          |       | —             |          | —           |       | 652,044          |       |
| Deferred income taxes and other long-term liabilities                  |       | —      |        | (337           | )          | 223,815        |       | 8,376              |          | —           |       | 231,854          |       |
| **Total liabilities**                                                  | ** ** | **—**  | ** **  | **1,465,014**  | ** ** | **1,648,007**  | ** ** | **94,839**         | ** **    | **(1,753,595**   | **)**      | **1,454,265**    | ** ** |
| ** **                                                             | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total shareholders’ equity**                                    | ** ** | **595,351** | ** **  | **595,351**    | ** ** | **796,893**    | ** ** | **58,328**         | ** **    | **(1,450,572**   | **)**      | **595,351**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |               |          |             |       |             |       |
| **Total  liabilities and shareholders’ equity**                   | ** ** | **$**       | **595,351** | ** **     | **$**      | **2,060,365**  | ** ** | **$**              | **2,444,900** | ** **       | **$**      | **153,167**      | ** ** | **$** | **(3,204,167** | **)** | **$** | **2,049,616** | ** ** |

26

----

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)(Predecessor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETDECEMBER 31, 2005(In Thousands)**
| ** **                                                             | ** ** | **Co-Issuers** | ** **    | **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  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  receivables                                              |       | —         |          | 856,999        |       | —             |       | (856,999         | )           | —           |       |
| Intercompany  notes receivable                                         |       | 1,096,991      |          | —         |       | 23,306             |       | (1,120,297       | )           | —           |       |
| Investment in  subsidiaries                                            |       | 490,933        |          | —         |       | —             |       | (490,933         | )           | —           |       |
| Deferred  financing cost 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         |          | 144,840        |       | 10,360             |       | —           |        | 199,024          |       |
| Current deferred  taxes                                                |       | 222            |          | 4,179          |       | —             |       | —           |        | 4,401            |       |
| **Total  current liabilities**                                         | ** ** | **44,030**     | ** **    | **398,418**    | ** ** | **28,559**         | ** ** | **—**       | ** **  | **471,007**      | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| Intercompany  payable                                                  |       | 848,054        |          | —         |       | 8,945              |       | (856,999         | )           | —           |       |
| Intercompany  notes payable                                            |       | —         |          | 1,073,800      |       | 46,497             |       | (1,120,297       | )           | —           |       |
| Senior secured  notes and other long-term debt, net of current portion |       | —         |          | 2,076          |       | —             |       | —           |        | 2,076            |       |
| Deferred income  taxes and other long-term liabilities                 |       | 8,402          |          | 300,637        |       | 18,849             |       | —           |        | 327,888          |       |
| **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** | ** ** |

 

27

----

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)(Predecessor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETJULY 2, 2005(In Thousands)**
| ** **                                                             | ** ** | **Co-Issuers** | ** **  | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
| **Assets**                                                             | * *   | * *       | * *    | * *       | * *   | * *           | * *   | * *         | * *    | * *         | * *   |
| Current assets:                                                        | ** ** | ** **     | ** **  | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Cash and cash  equivalents                                             |       | $              | 173         |           | $          | 9,764              |       | $                | 12,256      |             | $          | — |   | $ | 22,193 |   |
| Accounts  receivable                                                   |       | 466            |        | 31,573         |       | 2,211              |       | —           |        | 34,250           |       |
| Inventories                                                            |       | 15,056         |        | 735,987        |       | 48,034             |       | —           |        | 799,077          |       |
| Prepaid expenses  and other current assets                             |       | 29             |        | 36,927         |       | 1,934              |       | —           |        | 38,890           |       |
| Current deferred  taxes                                                |       | —         |        | 862            |       | 758                |       | —           |        | 1,620            |       |
| **Total  current assets**                                              | ** ** | **15,724**     | ** **  | **815,113**    | ** ** | **65,193**         | ** ** | **—**       | ** **  | **896,030**      | ** ** |
|                                                                   |       |           |        |           |       |               |       |             |        |             |       |
| Property and  equipment, net                                           |       | 7,495          |        | 542,338        |       | 36,910             |       | —           |        | 586,743          |       |
| Identifiable  intangible assets, net                                   |       | 375            |        | 903            |       | 113                |       | —           |        | 1,391            |       |
| Goodwill                                                               |       | —         |        | 18,126         |       | —             |       | —           |        | 18,126           |       |
| Intercompany  receivable                                               |       | 132,095        |        | —         |       | —             |       | (132,095         | )           | —           |       |
| Intercompany  notes receivable                                         |       | 200,832        |        | —         |       | 21,876             |       | (222,708         | )           | —           |       |
| Investment in  subsidiaries                                            |       | 453,833        |        | —         |       | —             |       | (453,833         | )           | —           |       |
| Deferred  financing cost and other noncurrent assets, net              |       | 1              |        | 11,610         |       | 10                 |       | —           |        | 11,621           |       |
|                                                                   |       |           |        |           |       |               |       |             |        |             |       |
| **Total  assets**                                                      | ** ** | **$**          | **810,355** | ** **     | **$**      | **1,388,090**      | ** ** | **$**            | **124,102** | ** **       | **$**      | **(808,636** | **)** | **$** | **1,513,911** | ** ** |
|                                                                   |       |           |        |           |       |               |       |             |        |             |       |
| **Liabilities  and Shareholders’ Equity**                         |       |           |        |           |       |               |       |             |        |             |       |
| Current  liabilities:                                                  |       |           |        |           |       |               |       |             |        |             |       |
| Accounts payable                                                       |       | $              | (14         | )              | $          | 223,781            |       | $                | 21,075      |             | $          | — |   | $ | 244,842 |   |
| Accrued expenses  and other current liabilities                        |       | 1,391          |        | 132,082        |       | 4,093              |       | —           |        | 137,566          |       |
| Current deferred  taxes                                                |       | —         |        | —         |       | —             |       | —           |        | —           |       |
| **Total  current liabilities**                                         | ** ** | **1,377**      | ** **  | **355,863**    | ** ** | **25,168**         | ** ** | **—**       | ** **  | **382,408**      | ** ** |
|                                                                   |       |           |        |           |       |               |       |             |        |             |       |
| Intercompany  payable                                                  |       | —         |        | 112,431        |       | 19,664             |       | (132,095         | )           | —           |       |
| Intercompany  notes payable                                            |       | —         |        | 179,064        |       | 43,644             |       | (222,708         | )           | —           |       |
| Senior secured  notes and other long-term debt, net of current portion |       | —         |        | 2,108          |       | —             |       | —           |        | 2,108            |       |
| Deferred income  taxes and other long-term liabilities                 |       | 8,388          |        | 302,651        |       | 17,767             |       | —           |        | 328,806          |       |
| **Total  liabilities**                                                 | ** ** | **9,765**      | ** **  | **952,117**    | ** ** | **106,243**        | ** ** | **(354,803**     | **)**       | **713,322**      | ** ** |
| ** **                                                             | ** ** | ** **     | ** **  | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| **Total  shareholders’ equity**                                   | ** ** | **800,590**    | ** **  | **435,973**    | ** ** | **17,859**         | ** ** | **(453,833**     | **)**       | **800,589**      | ** ** |
|                                                                   |       |           |        |           |       |               |       |             |        |             |       |
| **Total liabilities and  shareholders’ equity**                   | ** ** | **$**          | **810,355** | ** **     | **$**      | **1,388,090**      | ** ** | **$**            | **124,102** | ** **       | **$**      | **(808,636** | **)** | **$** | **1,513,911** | ** ** |

 

28

----

 

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FORTHE 13-WEEK PERIOD ENDED JULY 1, 2006**

**(InThousands)**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------|-------------|------------------|------------|------------------|------------|
| * *                                                | * *   | * *   | * *   | * *       | * *   | * *       | * *   | * *           | * *    | * *         | * *   | * *         | * *   |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **15,774**     | ** ** | **$**              | **552,785** | ** **       | **$**      | **43,024**       | ** ** | **$** | **—** | ** ** | **$** | **611,583** | ** ** |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Cost of sales,  including buying and distribution costs |       | —     |       | 9,499          |       | 340,901        |       | 22,865             |        | —           |       | 373,265          |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Gross profit**                                        | ** ** | **—** | ** ** | **6,275**      | ** ** | **211,884**    | ** ** | **20,159**         | ** **  | **—**       | ** ** | **238,318**      | ** ** |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Selling, general and  administrative expenses           |       | —     |       | 3,506          |       | 258,713        |       | 18,068             |        | —           |       | 280,287          |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Operating profit (loss)**                             |       | —     | ** ** | **2,769**      | ** ** | **(46,829**    | **)**      | **2,091**          | ** **  | **—**       | ** ** | **(41,969**      | **)**      |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Interest income                                         |       | —     |       | (27,988        | )          | —         |       | (28                | )           | 27,983           |       | (33              | )          |
| Interest expense                                        |       | —     |       | 22,341         |       | 27,119         |       | 368                |        | (27,983          | )          | 21,845           |       |
| Interest (income)  expense, net                         |       | —     |       | (5,647         | )          | 27,119         |       | 340                |        | —           |       | 21,812           |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Income (loss) before income  taxes**                  | ** ** | **—** | ** ** | **8,416**      | ** ** | **(73,948**    | **)**      | **1,751**          | ** **  | **—**       | ** ** | **(63,781**      | **)**      |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Provision (benefit) for  income taxes                   |       | —     |       | 3,171          |       | (27,862        | )          | 37                 |        | —           |       | (24,654          | )          |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **5,245**      | ** ** | **$**              | **(46,086** | **)**            | **$**      | **1,714**        | ** ** | **$** | **—** | ** ** | **$** | **(39,127** | **)** |

 

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE13-WEEK PERIOD ENDED JULY 2, 2005**

**(InThousands)**
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| * *                                                | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**          | **16,478** | ** **     | **$**      | **524,645**        | ** ** | **$**            | **32,194** | ** **       | **$**      | **—** | ** ** | **$** | **573,317** | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Cost of sales,  including buying and distribution costs |       | 9,339          |       | 309,554        |       | 17,481             |       | —           |       | 336,374          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Gross  profit**                                       | ** ** | **7,139**      | ** ** | **215,091**    | ** ** | **14,713**         | ** ** | **—**       | ** ** | **236,943**      | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Selling, general  and administrative expenses           |       | 4,301          |       | 227,611        |       | 13,790             |       | —           |       | 245,702          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **2,838**      | ** ** | **(12,520**    | **)**      | **923**            | ** ** | **—**       | ** ** | **(8,759**       | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest income                                         |       | (305           | )          | (106           | )          | (32                | )          | 314              |       | (129             | )          |
| Interest expense                                        |       | 149            |       | 782            |       | 250                |       | (314             | )          | 867              |       |
| Interest  (income) expense, net                         |       | (156           | )          | 676            |       | 218                |       | —           |       | 738              |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Income  (loss) before income taxes**                  | ** ** | **2,994**      | ** ** | **(13,196**    | **)**      | **705**            | ** ** | **—**       | ** ** | **(9,497**       | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Provision  (benefit) for income taxes                   |       | 1,128          |       | (4,919         | )          | 226                |       | —           |       | (3,565           | )          |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**          | **1,866**  | ** **     | **$**      | **(8,277**         | **)**      | **$**            | **479**    | ** **       | **$**      | **—** | ** ** | **$** | **(5,932** | **)** |

 

29

----

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THEPERIOD FEBRUARY 14, 2006 TO JULY 1, 2006**

**(In Thousands)**
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------|-------------|------------------|------------|------------------|------------|
| * *                                                | * *   | * *   | * *   | * *       | * *   | * *       | * *   | * *           | * *    | * *         | * *   | * *         | * *   |
| **Net  sales**                                          | ** ** | **$**      | **—** | ** **     | **$**      | **23,934**     | ** ** | **$**              | **833,441** | ** **       | **$**      | **62,053**       | ** ** | **$** | **—** | ** ** | **$** | **919,428** | ** ** |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Cost of sales,  including buying and distribution costs |       | —     |       | 14,199         |       | 516,114        |       | 32,020             |        | —           |       | 562,333          |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Gross  profit**                                       |       | —     | ** ** | **9,735**      | ** ** | **317,327**    | ** ** | **30,033**         | ** **  | **—**       | ** ** | **357,095**      | ** ** |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Selling, general  and administrative expenses           |       | —     |       | 6,727          |       | 382,587        |       | 28,734             |        | —           |       | 418,048          |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Operating  profit (loss)**                            |       | —     | ** ** | **3,008**      | ** ** | **(65,260**    | **)**      | **1,299**          | ** **  | **—**       | ** ** | **(60,953**      | **)**      |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| Interest income                                         |       | —     |       | (45,402        | )          | (81            | )          | (49                | )           | 45,413           |       | (119             | )          |
| Interest expense                                        |       | —     |       | 32,355         |       | 44,267         |       | 623                |        | (45,413          | )          | 31,832           |       |
| Interest  (income) expense, net                         |       | —     |       | (13,047        | )          | 44,186         |       | 574                |        | —           |       | 31,713           |       |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Income  (loss) before income taxes**                  | ** ** | **—** | ** ** | **16,055**     | ** ** | **(109,446**   | **)**      | **725**            | ** **  | **—**       | ** ** | **(92,666**      | **)**      |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
|  Provision (benefit) for income taxes              |       | —     |       | 6,180          |       | (41,844        | )          | (303               | )           | —           |       | (35,967          | )          |
|                                                    |       |       |       |           |       |           |       |               |        |             |       |             |       |
| **Net  income (loss)**                                  | ** ** | **$**      | **—** | ** **     | **$**      | **9,875**      | ** ** | **$**              | **(67,602** | **)**            | **$**      | **1,028**        | ** ** | **$** | **—** | ** ** | **$** | **(56,699** | **)** |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **  | ** **       | ** ** | ** **       | ** ** |

 

 

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THEPERIOD JANUARY 1, 2006 TO FEBRUARY 13, 2006**

**(InThousands)**

 
| ** **                                              | ** ** | **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  profit (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 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** | **)** |

 

30

----

 

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE26-WEEK PERIOD ENDED JULY 2, 2005**

**(InThousands)**

 
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| * *                                                | * *   | * *       | * *   | * *       | * *   | * *           | * *   | * *         | * *   | * *         | * *   |
| **Net  sales**                                          | ** ** | **$**          | **32,743** | ** **     | **$**      | **1,050,873**      | ** ** | **$**            | **60,647** | ** **       | **$**      | **—** | ** ** | **$** | **1,144,263** | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Cost of sales,  including buying and distribution costs |       | 18,698         |       | 619,178        |       | 33,051             |       | —           |       | 670,927          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Gross  profit**                                       | ** ** | **14,045**     | ** ** | **431,695**    | ** ** | **27,596**         | ** ** | **—**       | ** ** | **473,336**      | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Selling, general  and administrative expenses           |       | 8,972          |       | 451,658        |       | 27,226             |       | —           |       | 487,856          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **5,073**      | ** ** | **(19,963**    | **)**      | **370**            | ** ** | **—**       | ** ** | **(14,520**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest income                                         |       | (1,172         | )          | (116           | )          | (81                | )          | 745              |       | (624             | )          |
| Interest expense                                        |       | 154            |       | 1,952          |       | 724                |       | (745             | )          | 2,085            |       |
| Interest  (income) expense, net                         |       | (1,018         | )          | 1,836          |       | 643                |       | —           |       | 1,461            |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| ** Income (loss) before income taxes**             | ** ** | **6,091**      | ** ** | **(21,799**    | **)**      | **(273**           | **)**      | **—**       | ** ** | **(15,981**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
|  Provision (benefit) for income taxes              |       | 2,294          |       | (8,181         | )          | (88                | )          | —           |       | (5,975           | )          |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**          | **3,797**  | ** **     | **$**      | **(13,618**        | **)**      | **$**            | **(185**   | **)**            | **$**      | **—** | ** ** | **$** | **(10,006** | **)** |

 

31

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Successor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE PERIOD FEBRUARY 14, 2006 TO JULY 1, 2006(In Thousands)**

** **
| ** **                                                                                                            | ** ** | **Parent**   | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash flows from operating  activities:**                                                                            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                                                     |       | $            | —     |           | $          | 9,875          |       | $                  | (67,602    | )                | $          | 1,028            |       | $ | — |   | $ | (56,699 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:                                 |       |         |       |           |       |           |       |               |       |             |       |             |       |
| Depreciation and  amortization                                                                                        |       | —       |       | 796            |       | 43,144         |       | 2,876              |       | —           |       | 46,816           |       |
| Deferred income taxes                                                                                                 |       | —       |       | (3,723         | )          | (16,927        | )          | (1,774             | )          | —           |       | (22,424          | )          |
| Share-based  compensation                                                                                             |       | —       |       | 2,328          |       | —         |       | —             |       | —           |       | 2,328            |       |
| Loss on disposal of  assets                                                                                           |       | —       |       | —         |       | 73             |       | —             |       | —           |       | 73               |       |
| Changes in assets and  liabilities net effect of acquisition:                                                         |       |         |       |           |       |           |       |               |       |             |       |             |       |
| Decrease in accounts  receivable                                                                                      |       | —       |       | 59             |       | 5,553          |       | 619                |       | —           |       | 6,231            |       |
| Increase in inventories                                                                                               |       | —       |       | (2,045         | )          | (28,165        | )          | (3,223             | )          | —           |       | (33,433          | )          |
| Increase in prepaid  expenses and other current assets                                                                |       | —       |       | (38,383        | )          | (3,757         | )          | (3,270             | )          | —           |       | (45,410          | )          |
| Decrease in  identifiable intangible assets, net, goodwill, deferred financing cost and  other noncurrent assets, net |       | —       |       | 1,651          |       | 456            |       | 479                |       | —           |       | 2,586            |       |
| Increase (decrease) in  accounts payable                                                                              |       | —       |       | 27             |       | (40,773        | )          | 929                |       | —           |       | (39,817          | )          |
| Increase (decrease) in  accrued expenses and other liabilities                                                        |       | —       |       | 18,355         |       | (34,484        | )          | 3,924              |       | —           |       | (12,205          | )          |
| **Net cash (used in) provided by  operating activities**                                                              | ** ** | **—**   | ** ** | **(11,060**    | **)**      | **(142,482**   | **)**      | **1,588**          | ** ** | **—**       | ** ** | **(151,954**     | **)**      |
| **Cash flows from investing  activities:**                                                                            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Acquisition of the  Company, net of cash acquired                                                                     |       | —       |       | (1,220,466     | )          | 7,633          |       | 7,331              |       | —           |       | (1,205,502       | )          |
| Investment in Linens ‘n  Things, Inc                                                                             |       | (650,149     | )          | —         |       | —-        |       | —             |       | 650,149          |       | —           |       |
| Additions to property  and equipment                                                                                  |       | —       |       | (245           | )          | (22,362        | )          | (2,615             | )          | —           |       | (25,222          | )          |
| Addition to investment  in subsidiary                                                                                 |       | (1           | )          | (116           | )          | —         |       | —             |       | 117              |       | —           |       |
| **Net cash (used in) provided by  investing activities**                                                              | ** ** | **(650,150** | **)**      | **(1,220,827** | **)**      | **(14,729**    | **)**      | **4,716**          | ** ** | **650,266**      | ** ** | **(1,230,724**   | **)**      |
| **Cash flows from financing  activities:**                                                                            | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of common  stock to Linens Investors LLC and others                                                          |       | 650,150      |       | —         |       | —         |       | —             |       | —           |       | 650,150          |       |
| Investment from Parent                                                                                                |       | —       |       | 650,150        |       | —         |       | 116                |       | (650,266         | )          | —           |       |
| Issuance of floating  rate notes                                                                                      |       | —       |       | 650,000        |       | —         |       | —             |       | —           |       | 650,000          |       |
| Intercompany movements                                                                                                |       | —       |       | (163,831       | )          | 164,697        |       | (866               | )          | —           |       | —           |       |
| Financing and direct  acquisition costs                                                                               |       | —       |       | (59,254        | )          | —         |       | —             |       | —           |       | (59,254          | )          |
| Increase in borrowings                                                                                                |       | —       |       | 155,006        |       | 64             |       | —             |       | —           |       | 155,070          |       |
| **Net cash provided by (used in)  financing activities**                                                              | ** ** | **650,150**  | ** ** | **1,232,071**  | ** ** | **164,761**    | ** ** | **(750**           | **)**      | **(650,266**     | **)**      | **1,395,966**    | ** ** |
| Effect of exchange rate  changes on cash and cash equivalents                                                         |       | —       |       | —         |       | —         |       | 206                |       | —           |       | 206              |       |
| Net increase in cash  and cash equivalents                                                                            |       | —       |       | 184            |       | 7,550          |       | 5,760              |       | —           |       | 13,494           |       |
| **Cash and cash equivalents at  beginning of period**                                                                 | ** ** | **—**   | ** ** | **—**     | ** ** | **—**     | ** ** | **—**         | ** ** | —           | ** ** | **—**       | ** ** |
| **Cash and cash equivalents at end of period**                                                                        | ** ** | **$**        | **—** | ** **     | **$**      | **184**        | ** ** | **$**              | **7,550**  | ** **       | **$**      | **5,760**        |       | $ | — | ** ** | **$** | **13,494** | ** ** |

 

32

----

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE PERIOD JANUARY 1, 2006 TO FEBRUARY 13, 2006**

**(InThousands)**

 
| ** **                                                                                                           | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash flows  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           |       |
| Changes in assets and liabilities net 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          | )          |
| Decrease in identifiable intangible assets, net,  goodwill, deferred financing cost and other noncurrent assets, net |       | 11             |       | 9,558          |       | 54                 |       | —           |       | 9,623            |       |
| (Decrease) increase in accounts payable                                                                              |       | (1             | )          | 8,465          |       | (1,220             | )          | —           |       | 7,244            |       |
| (Decrease) increase in accrued expenses and other  liabilities                                                       |       | (27,640        | )          | 25,490         |       | (4,160             | )          | —           |       | (6,310           | )          |
| **Net  cash used in operating activities**                                                                           | ** ** | **(13,310**    | **)**      | **(45,893**    | **)**      | **(5,943**         | **)**      | **—**       | ** ** | **(65,146**      | **)**      |
|                                                                                                                 |       |           |       |           |       |               |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                                           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property and equipment                                                                                 |       | (30            | )          | (5,430         | )          | (2,316             | )          | —           |       | (7,776           | )          |
| **Net  cash used in investing activities**                                                                           | ** ** | **(30**        | **)**      | **(5,430**     | **)**      | **(2,316**         | **)**      | **—**       | ** ** | **(7,776**       | **)**      |
| **Cash  flows from financing activities:**                                                                           | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Federal tax  benefit from issuance of common stock under stock incentive plans                                       |       | 4,298          |       | —         |       | —             |       | —           |       | 4,298            |       |
| Intercompany  cash movements                                                                                         |       | (52,158        | )          | 49,564         |       | 2,594              |       | —           |       | —           |       |
| Increase in  treasury stock                                                                                          |       | —         |       | 674            |       | —             |       | —           |       | 674              |       |
| **Net  cash (used in) provided by financing activities**                                                             | ** ** | **(47,860**    | **)**      | **50,238**     | ** ** | **2,594**          | ** ** | **—**       | ** ** | **4,972**        | ** ** |
| Effect of  exchange rate changes on cash and cash equivalents                                                        |       | —         |       | —         |       | 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** | ** ** |

 

33

----

 

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE 26-WEEK PERIOD ENDED JULY 2, 2005**

**(InThousands)**

 
| ** **                                                                                                                       | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| **Cash  flows from operating activities:**                                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                                                               |       | $              | 3,797      |           | $          | (13,618            | )          | $                | (185       | )                | $          | — |   | $ | (10,006 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:                                            |       |           |       |           |       |               |       |             |       |             |       |
| Depreciation and amortization                                                                                                    |       | 608            |       | 40,783         |       | 2,284              |       | —           |       | 43,675           |       |
| Deferred income taxes                                                                                                            |       | 1,790          |       | (5,072         | )          | 177                |       | —           |       | (3,105           | )          |
| Share-based  compensation                                                                                                        |       | 489            |       | —         |       | —             |       | —           |       | 489              |       |
| Loss on disposal of assets                                                                                                       |       | —         |       | 339            |       | —             |       | —           |       | 339              |       |
| Changes in assets and liabilities net of acquisition:                                                                            |       |           |       |           |       |               |       |             |       |             |       |
| Decrease (increase) in accounts receivable                                                                                       |       | 291            |       | (8,084         | )          | (740               | )          | —           |       | (8,533           | )          |
| Increase in inventories                                                                                                          |       | (556           | )          | (78,982        | )          | (5,722             | )          | —           |       | (85,260          | )          |
| Decrease (increase) in prepaid expenses and other  current assets                                                                |       | 56             |       | (83            | )          | (19                | )          | —           |       | (46              | )          |
| Decrease (increase) in identifiable intangible  assets, net, goodwill, deferred financing cost and other noncurrent assets,  net |       | 48             |       | (2,107         | )          | (93                | )          | —           |       | (2,152           | )          |
| (Decrease) increase in accounts payable                                                                                          |       | (1             | )          | (8,056         | )          | 7,712              |       | —           |       | (345             | )          |
| Decrease in accrued expenses and other liabilities                                                                               |       | (30,637        | )          | (33,077        | )          | (1,592             | )          | —           |       | (65,306          | )          |
| **Net  cash (used in) provided by operating activities**                                                                         | ** ** | **(24,115**    | **)**      | **(107,957**   | **)**      | **1,822**          | ** ** | **—**       | ** ** | **(130,250**     | **)**      |
|                                                                                                                             |       |           |       |           |       |               |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to property and equipment                                                                                              |       | (173           | )          | (46,444        | )          | (6,224             | )          | —           |       | (52,841          | )          |
| Addition to investment in subsidiary                                                                                             |       | (126           | )          | —         |       | —             |       | 126              |       | —           |       |
| **Net  cash (used in) provided by investing activities**                                                                         | ** ** | **(299**       | **)**      | **(46,444**    | **)**      | **(6,224**         | **)**      | **126**          | ** ** | **(52,841**      | **)**      |
| **Cash  flows from financing activities:**                                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of common stock under stock incentive plans                                                                             |       | 1,769          |       | —         |       | 126                |       | (126             | )          | 1,769            |       |
| Intercompany movements                                                                                                           |       | (152,231       | )          | 151,072        |       | 1,159              |       | —           |       | —           |       |
| Federal tax benefit from common stock issued under  stock incentive plans                                                        |       | 144            |       | —         |       | —             |       | —           |       | 144              |       |
| Decrease in treasury stock                                                                                                       |       | (68            | )          | (29            | )          | —             |       | —           |       | (97              | )          |
| **Net  cash (used in) provided by financing activities**                                                                         | ** ** | **(150,386**   | **)**      | **151,043**    | ** ** | **1,285**          | ** ** | **(126**         | **)**      | **1,816**        | ** ** |
| Effect of  exchange rate changes on cash and cash equivalents                                                                    |       | —         |       | —         |       | (541               | )          | —           |       | (541             | )          |
| Net decrease in  cash and cash equivalents                                                                                       |       | (174,800       | )          | (3,358         | )          | (3,658             | )          | —           |       | (181,186         | )          |
| **Cash  and cash equivalents at beginning of period**                                                                            | ** ** | **174,973**    | ** ** | **13,122**     | ** ** | **15,914**         | ** ** | —           | ** ** | **204,009**      | ** ** |
| **Cash and cash equivalents at  end of period**                                                                                  | ** ** | **$**          | **173**    | ** **     | **$**      | **9,764**          | ** ** | **$**            | **12,256** | ** **       | **$**      | **—** | ** ** | **$** | **22,193** | ** ** |

 

 

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**Item****   2.****               Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**LINENS HOLDING CO.AND SUBSIDIARIES (AND PREDECESSOR)MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussionand analysis should be read in conjunction with the Condensed ConsolidatedFinancial Statements of the Company and the notes thereto appearing elsewherein this document.

**General**

The Company is a holdingcompany.  It does not hold any assetsother than its investment in Linens ‘n Things, Inc., which the Company acquiredin February 2006.  See Note 1 to theCondensed Consolidated Financial Statements for further details concerning theacquisition of Linens ‘n Things, Inc. Linens ‘n Things, Inc., together with its subsidiaries, is the operatingsubsidiary of the Company.

The Company, under thename “Linens ‘n Things,” is one of the leading national large format specialtyretailers of home textiles, housewares and home accessories, carrying bothnational brands and private label goods. As of July 1, 2006, the Company operated 555 stores in 47 states and insix provinces across Canada.

**CriticalAccounting Policies**

The following includes discussion and analysis aboutthe Condensed Consolidated Financial Statements of Linens Holding Co. and itssubsidiaries and predecessor.  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 14 to the CondensedConsolidated Financial Statements) because management has determined that thedifferences in such financial statements are minor.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts and timing of revenues and of expensesduring the reporting periods.  We baseour estimates on historical experience and on other assumptions that we believeto be relevant 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 Condensed Consolidated FinancialStatements.  The Company bases theseestimates on historical results and various other assumptions believed to bereasonable at the time.  These criticalaccounting estimates are discussed in detail in the Company’s predecessorentity Annual Report on Form 10-K Equivalent for Linens ‘n Things, Inc. andSubsidiaries.

*BusinessCombination*

On February 14, 2006, theCompany 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 purchase priceand related costs were preliminarily allocated to the estimated fair values ofthe 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 purchase priceover the fair value of the Company’s net assets was allocated to goodwill.

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*Valuationof Inventory*

Merchandiseinventory is a significant portion of the Company’s balance sheet, representingapproximately 41.7% of total assets at July 1, 2006.  Inventories are valued using the lower ofcost 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 Company estimatesfuture sales returns and records a provision in the period that the relatedsales 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 financial statements as ofJuly 1, 2006, December 31, 2005 and July 2, 2005, the Company’s sales returnsreserve was approximately $5.6 million, $7.1 million and $5.6 million,respectively.

*Impairmentof Long-Lived Assets (including Goodwill)*

In accordance with SFASNo. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,”long-lived assets, such as property and equipment and purchased intangibleassets subject to amortization, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying value of an asset may notbe fully recoverable.  Recoverability ofassets to be held and used is measured by a comparison of the carrying amountof an asset to estimated undiscounted future cash flows expected to begenerated by the asset.  If the carryingamount of an asset exceeds its estimated future cash flows, an impairmentcharge is recognized for the amount that the carrying value of the assetexceeds the fair value of the asset.

In accordance with SFASNo. 142, “Goodwill and Other Intangible Assets,” goodwill and intangibleassets 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.

The Company’s judgmentsregarding the existence of impairment indicators are based on market conditionsand operational performance.  As of July1, 2006, December 31, 2005 and July 2, 2005, the Company’s net value forproperty and equipment was approximately $590.8 million, $612.2 million and$586.7 million, respectively, goodwill was approximately $277.3 million, $18.1million and $18.1 million, respectively, and identifiable intangible assets,net was $157.9 million, $1.3 million and $1.4 million, respectively.  The increase in goodwill and identifiableintangible assets, net was due to the acquisition.  There was no impairment loss recognized forany of the periods reported.

*StoreClosure Costs*

In fiscal 2001, theCompany recorded a pre-tax restructuring and asset impairment charge of $37.8million ($23.7 million after-tax) related to the closing of certainunder-performing stores.  As of July 1,2006, December 31, 2005 and July 2, 2005, the Company had $3.4 million, $5.4million and $6.2 million, respectively, remaining related

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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.  The Companycontinues to negotiate and/or explore lease buyouts or sublease agreements forcertain of these stores.  The activity inthe twenty-six-week period ended July 1, 2006 includes the reversal ofestimated lease commitment costs of approximately $333,000 which were notneeded, offset by an increase to lease commitment costs of approximately$247,000 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*

The Company purchasesthird party insurance for worker’s compensation, medical and general liabilitycosts that exceed certain limits for each type of insurance program.  The Company is responsible for the payment ofclaims under these insured excess limits. The Company establishes accruals for its insurance programs based onavailable claims data and historical trend and experience, as well as lossdevelopment factors for its medical insurance prepared with the assistance ofthird party actuaries.  The ultimate costof these claims may be greater than or less than the established accrual.  The accrued obligation for theseself-insurance programs was approximately $14.7 million as of July 1, 2006,$15.3 million as of December 31, 2005 and $11.5 million as of July 2, 2005.

*Stock-basedCompensation*

SFAS No. 123 (Revised2004) requires the recognition of compensation expense in the CondensedConsolidated 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 tovesting.  Prior to adopting SFAS No. 123(Revised 2004), the Company applied the recognition and measurement principlesof Accounting Principles Board Opinion No. 25, and related Interpretations, inaccounting for its stock-based compensation plans.  All employee stock options were granted at orabove the grant date market price. Accordingly, no compensation cost was recognized for fixed stock optiongrants in prior periods.

*Litigation*

The Company records anestimated liability related to various claims and legal actions arising in theordinary course of business, which is based on available information and advicefrom outside counsel where applicable. As additional information becomes available, the Company assesses thepotential liability related to its pending claims and may adjust its estimatesaccordingly.

**Impactof the Merger and Transactions**

On February 14, 2006, theCompany acquired all of the outstanding common stock of Linens ‘n Things, Inc.for total cash consideration of approximately $1.3 billion.

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 Linens Holding Co.to acquire the Company and related preliminary purchase accounting adjustmentswere “pushed down” and recorded in Linens ‘n Things, Inc. and its subsidiaries’financial statements and resulted in a new basis of accounting for the “successor”period beginning on the day the Transactions were completed.  As a result, the purchase price and relatedcosts were allocated to the estimated fair values of the assets acquired andliabilities assumed at the time of the acquisition based on management’s bestestimates, which were based in part on the work of third-party appraisersengaged to perform valuations of certain of the tangible and intangible assetsacquired.  In essence, the Company’sassets and liabilities were adjusted to fair value as of the closing date ofthe Transactions, and the excess of the total purchase price over the fairvalue of the Company’s net assets was allocated to goodwill.

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| *Cost of  Acquisition*                                           | * * | * * | * *  | * *  | * *  |
|------------------------------------------------------------------|----------|----------|-----------|-----------|-----------|
| Cash Paid                                                        |     | $        | 1,295,834 |      |      |   |
| Transaction  costs                                               |     | 22,824   |      |      |      |
|                                                             |     |     |      | $         | 1,318,658 |   |
| *Net  Assets Acquired:*                                          | * * | * * | * *  | * *  | * *  |
| Historical net  assets                                           |     | 820,408  |      |      |      |
| 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                                              |     |     |      | 1,053,154 |      |
| Excess of costs  of acquisition over net assets acquired         |     |     |      | $         | 265,504   |   |
|                                                             |     |     |      |      |      |
| *Allocated  to:*                                                 | * * | * * | * *  | * *  | * *  |
| Property and  equipment                                          |     |     |      | (57       | )         |
| Definite lived  intangibles                                      |     |     |      | 38,330    |      |
| Indefinite lived  intangibles                                    |     |     |      | 122,688   |      |
| Unfavorable  lease liability                                     |     |     |      | (20,000   | )         |
| Goodwill                                                         |     |     |      | 277,435   |      |
| Deferred Income  taxes                                           |     |     |      | (152,892  | )         |
|                                                             |     |     |      | $         | 265,504   |   |
|                                                                  |          |          |           |           |           |  |  |

 

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  |   |

 

In connection with theTransactions, the Company incurred significant additional indebtedness,including $650.0 million aggregate principal amount on the Senior SecuredFloating Rate Notes due 2014 issued by two of the Company’s subsidiaries (the “Notes”),which will increase the Company’s interest expense.  The Company’s depreciation and amortizationexpense will increase significantly, primarily due to increases in the fairvalues of its tangible assets and amortizable intangible assets as a directresult of these adjustments.

The following discussionand analysis of the Company’s historical financial condition and results ofoperation covers periods prior to and after the consummation of theTransactions.  Significant additionalliquidity requirements, resulting primarily from increased interest expense,and other factors related to the Transactions, such as increased depreciationand amortization as a result of the application of purchase accounting, hassignificantly affected our financial condition, results of operations andliquidity going forward.

**Resultsof Operations**

*Impactof Adoption of SFAS 123 (Revised 2004)*

On January 1, 2006, theCompany adopted SFAS 123 (Revised 2004) requiring the recognition ofcompensation expense in the Condensed Consolidated Statements of Income relatedto the fair value of its employee share-based options.  SFAS No. 123 (Revised 2004) revises SFAS No.123, “Accounting for Stock-Based Compensation”, and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”

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The Company recognizesthe cost of all time-based employee stock options on a straight-lineattribution basis and the cost of all performance-based employee stock optionson an accelerated basis in accordance with Financial Accounting Standards BoardInterpretation No. 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans” over their respective vesting periods,net of estimated forfeitures.  TheCompany 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 or above the grant datemarket price.  Accordingly, for thethirteen and twenty-six weeks ended July 2, 2005, the Company did not recognizecompensation expense for stock option grants and amortized restricted stockunit grants at fair market value at the date of grant over specified vestingperiods.  For the period January 1 toFebruary 13, 2006, the Company recognized approximately $9.3 million and $3.2million of total unrecognized compensation cost as of December 31, 2005 relatedto stock option grants and restricted stock unit awards, respectively, underthe Company’s stock option plans.  Theconsummation of the Merger accelerated the recognition of compensation cost,and, accordingly, all of this cost was included in selling, general andadministrative expense in the Condensed Consolidated Statements of Operationsin the period from January 1, 2006 to February 13, 2006 (predecessorentity).  In connection with the Merger,the Company adopted the Linens Holding Co. Stock Option Plan.  The compensation cost that has been chargedagainst income for stock option grants from the Company to eligible employeesof the Company and its subsidiaries was $1.6 million for the thirteen weeksended July 1, 2006 and $2.3 million for the period February 14, 2006 to July 1,2006 (successor entity) and is included in selling, general and administrativeexpense in the Condensed Consolidated Statements of Operations.

As a result of theTransactions, the current year’s financial results for the thirteen andtwenty-six weeks ended July 1, 2006 have been separately presented in theCondensed Consolidated Statements of Operations split between the “PredecessorEntity”, covering the period January 1, 2006 through February 13, 2006, thedate of the consummation of the Transactions, and the “Successor Entity”covering the period February 14, 2006 through July 1, 2006.  The results for the comparable period in theprior year are presented under “Predecessor Entity.”  For comparative purposes, the Company combinedthe two periods from January 1, 2006 through July 1, 2006 in its discussionbelow.  This combination is not GAAPpresentation.  However, the Companybelieves this presentation is useful to provide the reader a more accuratecomparison.

*ThirteenWeeks Ended July 1, 2006 Compared with Thirteen Weeks Ended July 2, 2005*

Net sales for thethirteen weeks ended July 1, 2006 increased approximately 6.7% to $611.6million compared to $573.3 million for the same period last year.  The increase in net sales is due to theopening of new stores and a slight increase in comparable store sales.  Comparable store sales increased 0.2% for thethirteen weeks ended July 1, 2006 compared to a decline of 6.8% for the sameperiod last year.  The improvement incomparable store sales is due to higher guest traffic, which was positivelyimpacted by the shift of the Easter Holiday season to the second quarter ofthis year, offset by a decrease in average transaction value due to markdownsassociated with the Company’s efforts to clear nonproductive and agedinventory.  At July 1, 2006, the Companyoperated 555 stores, including 30 stores in Canada, as compared with 516stores, including 29 stores in Canada, at July 2, 2005.  Store square footage increased approximately6.5% to 18.5 million at July 1, 2006 compared with 17.3 million at July 2,2005.  During the thirteen weeks endedJuly 1, 2006, the Company opened six stores and closed no stores as comparedwith opening 17 stores and closing no stores during the same period last year.

In addition to the costof inventory sold, the Company includes its buying and distribution expenses inits cost of sales.  Buying expensesinclude all direct and indirect costs to procure merchandise.  Distribution expenses include the cost ofoperating the Company’s distribution centers and freight expense related totransporting merchandise.  Gross profitfor the thirteen weeks ended July 1, 2006 was $238.3 million, or 39.0% of netsales, compared with $236.9 million, or 41.3% of net sales, for the same periodlast year.  During the second quarter,the decrease in gross margin as a percentage of net sales resulted from adecrease in markup due to sales mix and an increase in markdowns which wereoffset by improved sales and vendor allowances. These markdowns were associated with the Company’s efforts to sellnonproductive and aged inventory in order to transition to newer assortmentsand position the Company for the Back-to-School and Holiday season.

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The Company’s selling,general and administrative expenses (“SG&A”) consist of store sellingexpenses, occupancy costs, advertising expenses and corporate officeexpenses.  SG&A for the thirteenweeks ended July 1, 2006 was $280.3 million, or 45.9% of net sales, comparedwith $245.7 million, or 42.8% of net sales, for the same period last year.  The increase in SG&A as a percent of netsales is primarily due to an increase in selling and occupancy costs as aresult of new store additions and costs associated with the purchase of theCompany.  Fixed costs, such as occupancy,increased as a percentage of net sales as a result of faster growth than theCompany’s net sales.  In response to itssales performance, the Company reduced certain variable corporate overheadexpenses, but maintained overall store payroll as a percentage of net sales tosupport sales.  Marketing as a percentageof net sales was 3.7% for the thirteen weeks ended July 1, 2006 versus 3.9% forthe thirteen weeks ended July 2, 2005.  Marketing expenditures were redirected to thesecond half of the year in order to focus on capturing more of theBack-to-School and Holiday season.

Operating loss for thethirteen weeks ended July 1, 2006 was approximately $42.0 million, or (6.9%) ofnet sales, compared with an operating loss of $8.8 million, or (1.5%) of netsales, for the same period last year.

Net interest expense forthe thirteen weeks ended July 1, 2006 increased to approximately $21.8 millionfrom $0.7 million during the same period last year primarily due to theadditional interest expense associated with the Notes issued on February 14,2006.  In addition, lower averageinvestment balances and higher average borrowings required to fund workingcapital needs and an increase in average borrowing interest rates alsocontributed to the overall increase in net interest expense**.**

The Company’s income taxbenefit was approximately $24.7 million for the thirteen weeks ended July 1,2006 compared with an income tax benefit of $3.6 million for the same periodlast year.  This increase in tax benefitis due to additional pretax losses caused in part by additional merger-relatedinterest.  The Company presently expectsthat it will realize the federal tax benefit for losses incurred in thethirteen week period ending July 1, 2006 against taxable income currentlyprojected to be generated in the fourth quarter of 2006.  The Company’s effective tax rate for thethirteen weeks ended July 1, 2006 increased to 38.7% compared to 37.5% for thesame period last year.

As a result of thefactors described above, net loss for the thirteen weeks ended July 1, 2006 wasapproximately $39.1 million compared with a net loss of $5.9 million for thesame period last year.

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###  

*Twenty-SixWeeks Ended July 1, 2006 Compared with Twenty-Six Weeks Ended July 2, 2005*

The following table setsforth the comparative condensed consolidated statements of operations for thetwenty-six weeks ended July 1, 2006 and July 2, 2005 on a combined basis,including the increase or decrease between the periods presented (inthousands):
| ** **                                              | ** ** | **Twenty-Six Weeks Ended July 1, 2006**          | ** **  | ** **                                                                 | ** ** | ** **   | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------|-------------|----------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                              | ** ** | **February 14 to  July 1, 2006  (Successor  Entity)** | ** **  | **January 1 to  February 13,  2006  (Predecessor  Entity)** | ** ** | **Combined** | ** ** | **Twenty-Six  Weeks Ended  July 2, 2005** | ** ** | **Increase  (Decrease)** | ** ** |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| **Net sales**                                           | ** ** | **$**                                                                     | **919,428** | ** **                                                                 | **$**      | **284,971**  | ** ** | **$** | **1,204,399** | ** ** | **$** | **1,144,263** | ** ** | **$** | **60,136** | ** ** |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| Cost of sales,  including buying and distribution costs |       | 562,333                                                                   |        | 180,675                                                                    |       | 743,008      |       | 670,927 |   | 72,081 |   |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| **Gross profit (loss)**                                 | ** ** | **357,095**                                                               | ** **  | **104,296**                                                                | ** ** | **461,391**  | ** ** | **473,336** | ** ** | **(11,945** | **)** |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| Selling, general and  administrative expenses           |       | 418,048                                                                   |        | 174,138                                                                    |       | 592,186      |       | 487,856 |   | 104,330 |   |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| **Operating loss**                                      | ** ** | **(60,953**                                                               | **)**       | **(69,842**                                                                | **)**      | **(130,795** | **)**      | **(14,520** | **)** | **(116,275** | **)** |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| Interest income                                         |       | (119                                                                      | )           | (668                                                                       | )          | (787         | )          | (624 | ) | (163 | ) |
| Interest expense                                        |       | 31,832                                                                    |        | —                                                                     |       | 31,832       |       | 2,085 |   | 29,747 |   |
| Net interest expense  (income)                          |       | 31,713                                                                    |        | (668                                                                       | )          | 31,045       |       | 1,461 |   | 29,584 |   |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| **Loss before benefit for income  taxes**               | ** ** | **(92,666**                                                               | **)**       | **(69,174**                                                                | **)**      | **(161,840** | **)**      | **(15,981** | **)** | **(145,859** | **)** |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| Benefit for income  taxes                               |       | (35,967                                                                   | )           | (21,270                                                                    | )          | (57,237      | )          | (5,975 | ) | (51,262 | ) |
|                                                    |       |                                                                      |        |                                                                       |       |         |       |   |   |   |   |
| **Net loss**                                            | ** ** | **$**                                                                     | **(56,699** | **)**                                                                      | **$**      | **(47,904**  | **)**      | **$** | **(104,603** | **)** | **$** | **(10,006** | **)** | **$** | **(94,597** | **)** |

Net sales for the twenty-six weeks ended July 1, 2006increased approximately 5.3% to $1,204.4 million compared to $1,144.3 millionfor the same period last year.  Theincrease in sales is due to new store openings and an increase in guest trafficoffset by a decline in average transaction value.  During the twenty-six weeks ended July 1,2006, the Company opened 13 stores and closed no stores as compared withopening 25 stores and closing one store during the same period last year.

Comparable store salesdecreased 1.8% for the twenty-six weeks ended July 1, 2006 compared to adecline of 6.1% for the same period last year. The continued decrease in comparable store sales is due to a decline in averagetransaction value due to markdowns associated with the Company’s efforts toclear nonproductive and aged inventory offset by an increase in guest traffic.

Gross profit for thetwenty-six weeks ended July 1, 2006 was $461.4 million, or 38.3% of net sales,compared with $473.3 million, or 41.4% of net sales, for the same period lastyear.  The decrease in gross profit as apercentage of net sales was primarily caused by increased markdowns offset byimprovements in markup.  The markdownswere associated with the Company’s efforts to sell nonproductive and agedinventory in order to

 

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transition to newerassortments and position the Company for the Back-to-School and Holidayseason.  Improvements in markup were dueto improved inventory acquisition costs and increased vendor allowances.

SG&A for thetwenty-six weeks ended July 1, 2006 was $592.2 million, or 49.2% of net sales,compared with $487.8 million, or 42.7% of net sales, for the same period lastyear.  The increase in SG&A isprimarily due to higher store selling expenses and occupancy costs as a resultof new store additions and costs incurred due to the purchase of theCompany.  In addition, due to the Company’ssales performance, particularly in the first quarter, fixed costs such asoccupancy and corporate office expenses as a percentage of net sales aregreater.

Operating loss for thetwenty-six weeks ended July 1, 2006 was approximately $130.8 million or (10.9%)of net sales, compared with an operating loss of $14.5 million or (1.3%) of netsales, for the same period last year.

Net interest expense forthe twenty-six weeks ended July 1, 2006 increased to approximately $31.0million from $1.5 million during the same period last year primarily due to theadditional interest expense associated with the Notes issued on February 14, 2006.  In addition, lower average investmentbalances and higher average borrowings required to fund working capital needsand an increase in average borrowing interest rates also contributed to theoverall increase in net interest expense.

The Company’s income taxbenefit was approximately $57.2 million for the twenty-six weeks ended July 1,2006, compared with an income tax benefit of $6.0 million for the same periodlast year.  This increase in tax benefitis due to additional pretax losses caused in part by additional merger-relatedinterest.  The Company presently expectsthat it will realize the federal tax benefit for losses incurred in thetwenty-six week period ending July 1, 2006 against taxable income currentlyprojected to be generated in the fourth quarter of 2006.  Due to an increase in nondeductible expensesrelated to the merger, the Company’s effective tax rate for the twenty-sixweeks ended July 1, 2006 declined to 35.4% compared to 37.4% for the sameperiod last year.

As a result of the factorsdescribed above, net loss for the twenty-six weeks ended July 1, 2006 wasapproximately $104.6 million compared with a net loss of $10.0 million for thesame period last year.

**Liquidityand Capital Resources**

In connection with theTransactions, the Company had significant cash outlays during the thirteen-weekand twenty-six-week periods ended July 1, 2006 and became highly leveraged uponthe issuance of $650 million aggregate principal amount of the Notes.  As of December 31, 2005, the Company had noindebtedness outstanding except for a $2.1 million mortgage noteobligation.  Cash outlays for the paymentof interest are significantly higher in the current fiscal year compared to thelast fiscal year as a result of the Notes.

The Notes consist of $650million aggregate principal amount of Senior Secured Floating Rate Notes due2014 of Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc. (the “Issuers”).  The Notes bear interest at a per annum rateequal to LIBOR plus 5.625%, which is paid every three months on January 15,April 15, July 15 and October 15, commencing April 15, 2006.  The interest rate on the Notes is resetquarterly.  The Notes mature on January15, 2014.  As of July 1, 2006, theinterest rate on the Notes was 10.7%.  OnJuly 7, 2006 the Issuers entered into a Zero Cost Interest Rate Collar Hedge tomitigate the interest risk associated with the LIBOR component of the interestrate on the Notes.  The hedge is based onthe average LIBOR rate with an upper strike rate at 6.51% and a lower strikerate at 4.45%, payable and reset on the quarterly dates stipulated in the Noteswith a termination date of January 15, 2008. Simultaneously, the Issuers purchased a one-year Forward-Starting Cap,with the first reset date to begin on January 11, 2008, based on the averageLIBOR rate with a strike rate of 6.51%, payable quarterly on the datesstipulated in the Notes.  The Issuerspaid a premium of $700,000 to purchase the Forward-Starting Cap.

All obligations under theNotes are unconditionally guaranteed by the Company and certain of its existingand future domestic subsidiaries other than the Issuers.  All obligations under the Notes, and theguarantees of those obligations, are secured, by first-priority liens, subjectto permitted liens, on all of the Company’s, the Issuers’ and the subsidiaryguarantors’ equipment, intellectual property rights and related generalintangibles and the capital stock of the Issuers and certain of thesubsidiaries.  The Notes are also securedby second-priority liens on the Issuers’ and the subsidiary guarantors’inventory, accounts receivable, cash, securities and other general intangibles.

 

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The lien on capital stockmay be released under certain circumstances. As a result of the filing of a registration statement on Form S-4 withthe SEC with respect to the Notes, the Issuers and theguarantors 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 $130.0million 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.

Concurrent with theclosing of the Merger in February 2006, the Issuers also entered into a newsenior secured asset-basedrevolving credit facility agreement(the “Credit Facility”) with third-party institutional lenders whichexpires February 14, 2011.  The CreditFacility provides senior securedfinancing of up to $600 million, subject to a borrowing base consisting ofcertain 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.  TheCredit Facility replaced the $250 million senior revolving credit facilityamended November 2004, which allowed for up to $50 million in borrowings fromadditional lines of credit outside the agreement, including CAD $40 millioncovering the Company’s Canadian operations. 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. During the period February 14 to July 1, 2006 the Company alwaysmaintained excess availability under the Credit Facility above $75 million and,accordingly, is not subject to compliance with certain financial ratiomaintenance covenants as of July 1, 2006. As of July 1, 2006, the Issuers had $155.1 million in borrowingsunder the Credit Facility at an average interest rate of 6.7%.  Such borrowings have been classified asshort-term as of July 1, 2006 as the Company expects to have the abilityand intent to pay these borrowings from existing current assets by the end ofthe fiscal year.  In accordance with theseasonal nature of the Company’s business, the Issuers may from time to timeborrow under its Credit Facility, including during the third and fourthquarters.  These borrowings are notcurrently expected to peak in excess of approximately $286 million for thethird quarter, and are intended to be used for working capital, debt servicerequirements and similar general corporate needs.  The Company also had $135.4 million ofletters of credit outstanding as of July 1, 2006 issued under the CreditFacility, which includes standby letters of credit and import letters of creditused for merchandise purchases.  TheCompany is not obligated under any formal or informal compensating balancerequirements.

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.

The Company funds its operations through a combinationof internally generated cash from operations and from borrowings under theCredit Facility.  The Company’s primaryuses of cash are working capital requirements, new store expenditures, newstore inventory purchases and debt service requirements.  The Company anticipates that cash generatedfrom operations together with amounts available under the Credit Facility willbe sufficient to meet its future working capital requirements, new storeexpenditures, new store inventory purchases and debt service obligations asthey become due.  However, the Company’sability to fund future operating expenses and capital expenditures and itsability to make scheduled payments of interest on, to pay principal on orrefinance indebtedness and to satisfy any other present or future debtobligations will depend on future operating performance which will be affectedby general economic, financial and other factors beyond the Company’s control.

Asa result of the Transactions, the cash flow results for the twenty-six-weekperiod ended July 1, 2006 have been separately presented in the CondensedConsolidated Statements of Cash Flows split between the “Predecessor Entity”,covering the period January 1 to February 13, 2006 and the “Successor Entity”covering the period February 14 to July 1, 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 through July 1, 2006 in its

 

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discussionbelow.  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.

Netcash used in operating activities for the periods February 14 to July 1, 2006and January 1 to February 13, 2006 was $152.0 million and $65.1 million,respectively.  Net cash used in operatingactivities for the combined twenty-six weeks ended July 1, 2006 was $217.1million compared with $130.2 million used in operating activities for the sameperiod last year.  The increase in netcash used in operating activities is due to the timing of vendor payments, anincrease to prepaid rent due to timing of payments and additional costsincurred by the Company resulting from the consummation of the Transactions.

Net cash used ininvesting activities for the periods February 14 to July 1, 2006 and January 1to February 13, 2006 was $1,230.7 million and $7.8 million, respectively.  Net cash used in investing activities for thecombined twenty-six weeks ended July 1, 2006 was $1,238.5 million compared with$52.8 million used in investing activities for the same period last year.  Excluding acquisition cost in connection withthe Transaction, net cash used in investing activities was $33.0 million, adecrease from the prior year due to fewer new store openings.  The Company currently estimates capitalexpenditures will be approximately $80 million to $85 million in fiscal 2006,primarily to open approximately 25 to 30 new stores, to maintain existingstores, and for system enhancements.

Net cash provided byfinancing activities for the periods February 14 to July 1, 2006 and January 1to February 13, 2006 was $1,395.9 million and $5.0 million, respectively.  Net cash provided by financing activities forthe combined twenty-six weeks ended July 1, 2006 was $1,400.9 million comparedwith $1.8 million provided by financing activities for the same period lastyear.  The increase is due to theissuance of the Notes, the issuance of Company stock primarily to the Sponsorsin connection with the Transactions and an increase in borrowings under theCredit Facility to fund working capital needs.

Management regularlyreviews 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, its availability under theCredit Facility, its access to increases to the Credit Facility or additionalcapacity from new credit facilities will be sufficient to fund its expectedcapital expenditures, working capital and non-acquisition business expansionrequirements as they become due.  TheCompany cannot, however, give any assurances that it will be able to obtainaccess to increase to the Credit Facility or additional capacity from newcredit facilities in the future.

**Off-BalanceSheet Arrangements**

The Company does not haveany transactions or relationships that could be considered material off-balancesheet arrangements.

**Inflation**

The Company does notbelieve that its operating results have been materially affected by inflationduring the preceding three years.  Therecan be no assurance, however, that the Company’s operating results will not beaffected by inflation in the future.

**Seasonality**

The Company’s business issubject to substantial seasonal variations. Historically, the Company has realized a significant portion of its netsales and net income for the year during the third and fourth quarters.  The Company’s quarterly results of operationsmay also fluctuate significantly as a result of a variety of other factors,including the timing of new store openings. The Company believes this is the general pattern associated with itssegment of the retail industry and expects this pattern will continue in thefuture.  Consequently, comparisonsbetween quarters are not necessarily meaningful and the results for any quarterare not necessarily indicative of future results.

 

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**Item 3.            Quantitative and Qualitative Disclosures About MarketRisk**

The Company continuouslyevaluates the market risk associated with its financial instruments.  Market risks relating to the Company’soperations result primarily from changes in interest rates.  The Company does not engage in financialtransactions for trading or speculative purposes.

Since fiscal year end2005, market risk exposure has significantly increased due to the issuance ofthe Notes in connection with the Merger and Transactions.

**InterestRate Risk**

The Company’s financialinstruments include cash and cash equivalents and borrowings under the CreditFacility and the Notes.  The CreditFacility and the Notes carry floating rate interest and, therefore, the Company’sresults of operations for fiscal 2006 will be exposed to changes in interestrates.  As of July 1, 2006, the Companyhad $155.1 million in borrowings under the Credit Facility at an averageinterest rate of 6.7% and $650.0 million aggregate principal amount in Notes atan interest rate of 10.7% (see Notes 4 and 10 to the Condensed ConsolidatedFinancial Statements).  As of July 1,2006 a one percentage point change in floating rate interest would cause anincrease to interest expense of approximately $8.1 million.

On July 7, 2006 theIssuers entered into a Zero Cost Interest Rate Collar Hedge to mitigate theinterest risk associated with the LIBOR component of the interest rate on theNotes.  The hedge is based on the averageLIBOR rate with an upper strike rate at 6.51% and a lower strike rate at 4.45%,payable and reset on the quarterly dates stipulated in the Notes with atermination date of January 15, 2008. Simultaneously, the Issuers purchased a one-year Forward-Starting Cap,with the first reset date to begin on January 11, 2008, based on the averageLIBOR rate with a strike rate of 6.51%, payable quarterly on the datesstipulated in the Notes.  The Issuerspaid a premium of $700,000 to purchase the Forward-Starting Cap.

**ForeignCurrency Risk**

The Company enters intosome purchase obligations outside of the United States, which are predominatelysettled in U.S. dollars, and therefore, the Company does not have a materialexposure to foreign currency exchange risks. The Company operated 30 stores in Canada as of July 1, 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 July 1, 2006 and for thetwenty-six-week period then ended the Company did not hedge against foreigncurrency risks.

**Item 4.            Controls and Procedures**

**DisclosureControls and Procedures**

The Company’s management,including its Chief Executive Officer and its Chief Financial Officer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of July 1, 2006.  Based upon thatevaluation, the Company’s management, including the Chief Executive Officer andthe Chief Financial Officer, concluded that the Company’s disclosure controlsand procedures are effective as of the end of the period covered by thisreport.

**Changesin Internal Control Over Financial Reporting**

Our management determinedthat as of the end of fiscal 2005, we did not have adequate review controls toensure the propriety of the accounting for the classification of capitalexpenditures related to store self-development transactions.  Our accounting treatment for capitalexpenditures related to store self-development transactions, initially recordedon the balance sheet as other current assets and on the cash flow statement asa change in other

 

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current assets, was subsequently determined to beincorrect according to generally accepted accounting principles, whichprinciples provide that capital expenditures related to store self-developmenttransactions should be recorded on the balance sheet as property and equipmentand on the cash flow statement as additions to property and equipment.  Our management corrected the accountingrelated to store self-development transactions prior to the issuance of thefinancial statements for the fiscal year ended December 31, 2005.  There was no change in the overall cash flowgenerated by us and the incorrect accounting had no impact on our incomestatement.  The control deficiency thatresulted in the incorrect accounting for the classification of capitalexpenditures related to store self-development transactions represented amaterial weakness in our internal control over financial reporting as ofDecember 31, 2005.  Our management hasimplemented review controls to ensure the propriety of our accounting for thesetransactions.

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.

There have been nosignificant changes to the Company’s internal control over financial reportingduring the most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

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#### **PART II - OTHER INFORMATION**

**Item 1.            Legal Proceedings**

The Company is subject tolitigation in the normal course of business, but it does not believe that theresolution of any pending proceedings will have a material impact on theCompany’s financial position or results of operations.

**Item 1A.         Risk Factors**

The following riskscomprise all the material risks of which the Company is aware of; however,these risks and uncertainties may not be the only ones the Company faces.  Additional risks and uncertainties notpresently known to the Company or that it currently believes are immaterial mayalso adversely affect the Company’s business or financial performance.  The following risks could materially harm theCompany’s business, financial condition, future results and cash flow.

**RisksRelated to The Company’s Business**

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

The retail industry issubject to changing merchandise trends and consumer preferences.  The Company’s success depends in large parton its ability to identify merchandise trends as well as to anticipate, gaugeand react to changing consumer demands in a timely manner.  The Company cannot give assurance that itsmerchandise selections will accurately reflect the preferences of its guests atany given time.  In addition, any declinein the popularity or quality of any of the Company’s key brands could adverselyaffect its business.  Furthermore, theproducts the Company sells often require long lead times to order and mustappeal to consumers whose preferences cannot be predicted with certainty andoften change rapidly.  Consequently, theCompany must stay abreast of changing lifestyle and consumer trends andanticipate trends and fashions that will appeal to its guests.  If the Company miscalculates the market forits merchandise or the purchasing preferences of its guests, the Company’sbusiness and financial results could be adversely affected.

*TheCompany does not have long-term contracts with any of its vendors and if it isunable to purchase suitable merchandise in sufficient quantities at competitiveprices, the Company may be unable to offer a merchandise mix that is attractiveto its guests and its sales may be harmed.*

Third-party vendorsmanufacture virtually all of the products that the Company offers.  In fiscal 2005, the Company purchased itsmerchandise from approximately 1,200 vendors. Many of the Company’s key vendors limit the number of retail channelsthey use to sell their merchandise and competition among retailers to obtainand sell these goods is intense.  Inaddition, nearly all of the brands of the Company’s top vendors are sold bycompeting retailers, and some of its top vendors also have their own dedicatedretail stores.  Moreover, the Companytypically buys products from its vendors on a purchase order basis.  The Company has no long-term purchasecontracts with any of its vendors and, therefore, has no contractual assurancesof continued supply, pricing or access to products, and any vendor could changethe terms upon which they sell to it or discontinue selling to it at anytime.  In fiscal 2005, products suppliedby the Company’s 25 largest vendors represented approximately 40% of itspurchases, with its top three vendors supplying approximately 14% and itslargest single vendor supplying approximately 8% of the Company’s purchases forthat year.

If the Company’srelationships with its vendors were disrupted, it might not be able to acquirethe merchandise it requires in sufficient quantities or on terms acceptable toit.  Any inability to acquire suitablemerchandise 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 theCompany’s merchandise is delivered to it by its vendors as finished goods andis manufactured in numerous locations. The Company’s vendors rely on third party carriers to delivermerchandise to its distribution facilities. In addition, the Company’s success depends on its ability to efficientlysource and distribute merchandise to its retail stores and online guests.  Events such as labor disputes, naturaldisasters, availability of raw materials, vendor financial

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liquidity, inclementweather, work stoppages or boycotts affecting the manufacturing ortransportation sectors could increase the cost or reduce the supply ofmerchandise available to the Company and could adversely affect its results ofoperations.  Upon the loss of one or moreof the Company’s vendors, it may not be able to develop relationships with newvendors, and products from alternative sources, if available, may be moreexpensive or of a different or inferior quality from the ones it currentlysells.

In addition, asignificant portion of the Company’s merchandise is currently sourced by it orby its domestic suppliers from foreign vendors. As a result, events resulting in the disruption of trade from othercountries or the imposition of additional regulations relating to duties uponimports could cause significant delays or interruptions in the supply of theCompany’s merchandise or increase its costs, either of which could have amaterial adverse effect on its business. Examples of such events include:

•                       political unrest, terroristactivities, war or other hostilities;

•                       strikes and laborproblems;

•                       economic upheaval;

•                       import duties and quotas;and

•                       loss or change in “MostFavored Nation” status of the United States with a particular foreign country.

An increase in the costto manufacture, or a disruption in shipments to the Company, of foreign-sourcedproducts could decrease its sales and 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 reliesheavily on print advertising, especially direct mail, to promote new storeopenings, to increase consumer awareness of its product offerings and pricingand to drive store traffic.  In addition,the Company relies and will increasingly rely on other forms of mediaadvertising.  The Company’s future growthand profitability will depend in large part upon the effectiveness andefficiency of its advertising and marketing programs.  In order for the Company’s advertising andmarketing programs to be successful, it must:

•                       effectively manageadvertising and marketing costs in order to maintain acceptable operatingmargins and return on the Company’s marketing investment; and

•                       convert customerawareness into actual store visits and product purchases.

The Company’s plannedadvertising and marketing expenditures may not result in increased total orcomparable store sales or generate sufficient levels of product awareness.  The Company may not be able to manage itsadvertising and marketing expenditures on a cost-effective basis.

There are a limitednumber of companies capable of distributing the Company’s direct mailadvertising at the volume levels it requires. If any of these companies cease operations, or if their expenses (e.g.,postage, printing and paper costs) increase substantially, then it is likelythat the Company’s advertising expenses will increase, which will have anegative effect on its business and operating results.

*Weakeconomic conditions may significantly impact discretionary consumer spendingand reduce the Company’s sales and profitability.*

Most of the products theCompany sells are not consumer necessities. Purchases of the Company’s merchandise are largely dependent upondiscretionary spending by its guests.  Anumber of external economic factors could affect purchases by the Company’sguests of the type of merchandise it offers, including:

•                       disposable income orconsumer confidence in future economic conditions;

•                       general economic andbusiness conditions; and

•                       increased interest ratesor consumer debt levels.

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Decreases in consumerconfidence and consumer spending could adversely impact the Company’s sales andresults of operations.  Reduced consumerspending may also require increased markdowns and increased promotionalexpenses, which would adversely impact the Company’s results of operations.

*Competitivefactors could reduce the Company’s sales and profitability.*

The U.S. retail homefurnishings market is highly fragmented and intensely competitive.  The Company competes with many differenttypes of retailers, including among others department stores, massmerchandisers and discounters, specialty retail stores, home improvementcenters, warehouse clubs and other retailers. 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 quicklyresponding to changing consumer demands;

•                       increasing customerawareness and traffic to the Company’s stores;

•                       variety and fashion ofthe products the Company offers;

•                       maintaining favorablebrand recognition and achieving customer perception of value;

•                       effectively marketing andcompetitively pricing the Company’s products to its target guests; and

•                       competing with entities that have substantially greater financial and otherresources than the Company does.

Competition by existingor future competitors, including aggressive price competition, could result inthe need to reduce the Company’s prices or increase its spending and couldresult in a decrease in its sales and profitability and require a change in itsoperating strategies.

*Attritionamong the Company’s buyers or key sales associates could adversely affect itsfinancial performance and its growth.*

The Company’s success islargely dependent on the efforts and abilities of its buyers and key salesassociates. The Company’s ability to meet its labor needs generally is subjectto numerous factors, including the availability of a sufficient number ofqualified persons in the work force, unemployment levels, the wages andbenefits it pays, prevailing wage rates, changing demographics, health andother insurance costs and changes in employment legislation.  If the Company was to lose buyers or keysales associates and not promptly fill their positions with comparablyqualified individuals, its ability to benefit from long-standing relationshipswith key vendors or to provide relationship-based guest service may suffer.  The Company cannot give assurance that itwill not suffer significant attrition among its current buyers or key salesassociates.  The loss of theseindividuals could adversely affect the Company’s business.

*TheCompany may not be successful in opening and operating new stores profitably ormaking its recently opened stores profitable.*

Although at a decreasedrate as compared to prior years, the Company plans to open a number of newstores as part of its growth strategy. There are many risks inherent in the Company’s store expansion strategy,and it cannot give assurance that it will be able to achieve its expansiongoals.  The Company’s ability to grow itsstore base and operate its new and recently opened stores profitably will beaffected by many factors, including:

•                       risks inherent inconstructing, furnishing and supplying a store in a timely and cost effectivemanner, including obtaining necessary permits and zoning approvals;

•                       integrating the new storeinto the Company’s distribution network;

•                       the Company’s ability tomaintain financing on commercially reasonable terms;

•                       the Company’s ability toidentify and secure favorable sites for its new stores in well-trafficked areasand to negotiate satisfactory rent and other lease terms;

•                       the competition forfavorable store sites;

•                       the presence of othercomplementary retail outlets at the locations where the Company opens its newstores;

•                       the proximity of theCompany’s competitors’ stores;

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•                       the impact on sales atthe Company’s existing stores if it locates new stores in the same market;

•                       the Company’s ability toinvest in and expand its distribution, information technology, management andlogistics infrastructure to support a continually increasing store base;

•                       the Company’s ability toattract, train and retain good and experienced store managers and storepersonnel for its new stores; and

•                       acceptance of the Company’snew stores in markets where it has limited or no existing presence.

The Company intends toopen additional stores in new markets, as well as in existing markets, infiscal 2006, 2007 and beyond.  The newmarkets the Company enters may have different competitive conditions, consumertrends and discretionary spending patterns than its existing markets, which maycause the Company’s stores in these new markets to be less successful thanstores in its existing markets.

Where the Company addsstores into its existing markets, it may not be able to attract sufficient newcustomers to these new stores and, in addition, these new stores may have theeffect of reducing sales from the Company’s existing stores in those markets,which may have an adverse effect on its results of operations.

The Company cannot giveassurance that its new or recently opened stores will meet its internalfinancial operating targets or that the Company will be able to operate its newor recently opened stores profitably. The Company also cannot give assurance that the operating results of itsnew or recently built stores will be comparable to the operating results of itsmature existing stores.

*Adisruption in the operation of the Company’s distribution centers would impactits ability to deliver merchandise to its stores, which could adversely impactthe Company’s sales and its results of operations.*

The Company’s inventoryis generally shipped by its suppliers to one of its three distribution centers,which are located in Shepherdsville, Kentucky; Swedesboro, New Jersey andGreensboro, North Carolina.  At theCompany’s distribution centers, the merchandise is processed, sorted andshipped to its stores.  Events such asfire or other catastrophic events, any malfunction or disruption of the Company’scentralized information systems or shipping problems may result in delays ordisruptions in the timely distribution of merchandise to its stores, whichcould adversely impact its sales and its results of operations.  Additionally, increases in variable expensessuch as fuel costs associated with the Company’s distribution operations mayadversely impact its results of operations.

*TheCompany’s revenues and cash requirements are affected by the seasonal nature ofits business.*

The Company’s business issubject to substantial seasonal variations. Historically, the Company has realized a significant portion of its netsales and substantially all of its earnings for the year during the third andfourth quarters, with a majority of sales and earnings for these quartersrealized in the fourth quarter.  TheCompany’s quarterly results of operations may also fluctuate significantly as aresult of a variety of other factors, including the timing of new storeopenings, holiday spending patterns and general economic conditions.  The Company believes this is the typicalpattern associated with its segment of the retail industry, and it expects thispattern will continue in the future.  Inanticipation of its peak selling season, the Company incurs substantialadditional costs, including additional inventory, payroll and advertisingcosts.  If for any reason the Company’ssales during the fourth quarter of any year were significantly belowexpectations, its results of operations for that full year would be materiallyadversely affected.

*Aproblem with the Company’s management information systems could impact its flowof product and information and adversely affect its operating productivity andresults of operations.*

The Company reliesheavily upon its existing management information systems in operating andmonitoring all aspects of its business, including sales, warehousing,distribution, purchasing, inventory control, merchandise planning andreplenishment and its financial systems. The bulk of the Company’s management information systems are centrallylocated at its headquarters, with offsite backup at other locations.  Any extended disruption in the operation ofthe Company’s management information systems could have an adverse effect onits operating productivity and results of operations.

Furthermore, to keep pacewith changing technology, the Company must continuously provide for the designand implementation of new information technology systems as well asenhancements of its existing systems. Any failure to

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adequately maintain andupdate the information technology systems supporting the Company’s salesoperations or inventory control could prevent it from processing and deliveringmerchandise, which could adversely affect its business.

*TheCompany’s business can be affected by extreme or unseasonable weatherconditions.*

Extreme weatherconditions in the areas in which the Company’s stores are located couldadversely affect its business.  Forexample, heavy snowfall, rainfall or other extreme weather conditions over aprolonged period might make it difficult for the Company’s guests to travel toits stores and thereby reduce its sales and profitability.  The Company’s business is also susceptible tounseasonable weather conditions.  Forexample, extended periods of unseasonably warm weather temperatures during thewinter season could render a portion of the Company’s inventory incompatiblewith those conditions.  Reduced salesfrom extreme or prolonged unseasonable weather conditions would adverselyaffect the Company’s business.

*Actsof terrorism could adversely affect the Company’s business.*

The economic downturnthat followed the terrorist attacks of September 11, 2001 had a materialadverse effect on the Company’s business. Any further acts of terrorism or other future conflict may disruptcommerce and undermine consumer confidence, cause a downturn in the economygenerally, cause consumer spending or shopping center traffic to decline orreduce the desire of the Company’s guests to make discretionary purchases.  Any of the foregoing factors could negativelyimpact the Company’s sales revenue, particularly in the case of any terroristattack targeting retail space, such as a shopping center.  Furthermore, an act of terrorism or war, orthe threat thereof, could negatively impact the Company’s business byinterfering with its ability to obtain merchandise from foreign manufacturers.  Any future inability to obtain merchandisefrom the Company’s foreign manufacturers or to substitute other manufacturers,at similar costs and in a timely manner, could adversely affect its business.

*TheCompany is subject to numerous regulations that could affect its operations.*

The Company is subject tocustoms, truth-in-advertising and other laws, including consumer protectionregulations and zoning and occupancy ordinances, which regulate retailersgenerally and/or govern the importation, promotion and sale of merchandise andthe operation of retail stores and warehouse facilities.  Although the Company undertakes to monitorchanges in these laws, if these laws change without its knowledge, or areviolated by importers, designers, manufacturers or distributors, the Companycould experience delays in shipments and receipt of goods or be subject tofines or other penalties under the controlling regulations, any of which couldadversely affect its business.

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

The Company and itssubsidiaries currently own its trademarks and service marks, including the “Linens‘n Things” and “LNT” marks.  The Company’strademarks and service marks are registered with both the United States Patentand Trademark Office and the Canadian Intellectual Property Office.  The laws of some foreign countries do notprotect proprietary rights to the same extent as do the laws of the UnitedStates.  Moreover, the Company is unableto predict the 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, thirdparties may assert claims against the Company alleging infringement,misappropriation or other violations of their trademarks, copyrights or patents(including with respect to alleged proprietary designs) or other proprietaryrights, whether or not the claims have merit. Claims like these may be time consuming and expensive to defend andcould result in the Company being required to cease using the trademark,copyright or patent, design or other rights and selling the allegedlyinfringing products, or to acquire licenses to continue using such intellectualproperty.  This might have an adverseaffect on the Company’s sales or business operations and cause it to incursignificant litigation costs and expenses.

 

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* *

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

The Company makesdecisions regarding the purchase of its merchandise well in advance of theseason in which it will be sold, generally six months to one year.  If the Company’s sales during any season,particularly a peak season, are significantly lower than it expects for anyreason, it may not be able to adjust its expenditures for inventory and otherexpenses in a timely fashion and may be left with a substantial amount ofunsold inventory.  If that occurs, theCompany may be forced to rely on markdowns or promotional sales to dispose ofexcess inventory.  This could have anadverse effect on the Company’s margins and operating income.  At the same time, if the Company fails topurchase a sufficient quantity of merchandise or if its vendors do not have thecapacity to handle its new purchase commitments, the Company may not have anadequate supply of products to meet guest demand.  This may cause the Company to lose sales oradversely affect its reputation.

*Changesin the Company’s credit card arrangements, applicable regulations and consumercredit patterns could adversely impact its ability to facilitate the provisionof consumer credit to its guests and adversely affect its business.*

The Company maintains aproprietary credit card program through which credit is extended to guestsunder the “Linens ‘n Things” name. Changes in the Company’s proprietary credit card arrangements thatadversely impact its ability to facilitate the provision of consumer credit mayadversely affect its performance.  Creditcard operations are subject to numerous federal and state laws that imposedisclosure and other requirements upon the origination, servicing andenforcement of credit accounts and limitations on the maximum amount of financecharges that may be charged by a credit provider.  Any effect of these regulations or change inthe regulation of credit arrangements that would materially limit theavailability of credit to the Company’s guest base could adversely affect itsbusiness.  In addition, changes in creditcard use, payment patterns and default rates may result from a variety ofeconomic, legal, social and other factors that the Company cannot control orpredict with certainty.

*Failureto maintain competitive terms under the Company’s loyalty programs couldadversely affect its business.*

As part of its strategy,the Company intends to formalize and maintain loyalty programs that aredesigned to cultivate long-term relationships with its customers and enhancethe quality of service it provides to its customers.  The Company must constantly monitor andupdate the terms of its loyalty programs so that it continues to meet the demandsand needs of its customers and remain competitive with loyalty programs offeredby its competitors.  The Company’sfailure to provide quality service and competitive loyalty programs to itscustomers could adversely affect 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 the Company’s current leasesare terminated 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 ofits store locations. The Company’s current leases expire at various datesthrough 2029 subject, in many cases, to renewal options for periods rangingfrom five to 20 years.  The Company’sability to renew any expired lease or, if such lease cannot be renewed, itsability to lease a suitable alternate location, and its ability to enter intoleases for new stores on favorable terms will depend on many factors which arenot within the Company’s control, such as conditions in the local real estatemarket, competition for desirable properties and its relationships with currentand prospective landlords.  If theCompany is unable to renew existing leases or lease suitable alternatelocations, or enter into leases for new stores on favorable terms, its growthand its profitability may be significantly harmed.

*Restrictionscontained in some of the Company’s leases relating to change of control of theCompany may make any change of control more difficult or impair its ability toretain such leases in the event of a change of control.*

Approximately 5% of theCompany’s leases contain, and leases related to new stores may contain, variousrestrictions relating to a change of control of the Company.  In such cases, a change of control of theCompany without the consent of the landlord may result in a violation of theterms of such lease, thereby exposing the Company 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.

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*The Company has identified certain issues relating toits internal controls and procedures, which, if not remedied effectively, couldhave an adverse effect on its business.*

On February 7, 2005, theOffice of the Chief Accountant of the SEC issued a clarification regardinglease accounting under Generally Accepted Accounting Principles in the UnitedStates (“GAAP”).  As a result of thisclarification, the Company reviewed its lease accounting practices anddetermined that its former methods of accounting for leases and landlordallowances were not consistent with the views expressed by the SEC.  As a result, management has concluded thatthe Company’s internal control over the selection and monitoring of appropriateassumptions and factors affecting accounting for leases and landlord allowanceswas not effective as of the end of fiscal 2004. Such internal control deficiencies resulted in the restatement ofcertain of the Company’s financial statements and constituted a materialweakness in its internal control over financial reporting. The Company madethis determination in consultation with the audit committee of the Company’sboard of directors and senior management. Consequently, the Company’s assessment resulted in an attestation reportwith an opinion from its independent registered public accounting firm that theCompany had not maintained effective internal control over financial reportingas of January 1, 2005.  In addition,during the fourth quarter of 2004, management determined that there was amaterial weakness in the design of controls over inventory existence, due tothe timing of the Company’s physical inventory counts and its cycle countingprocedures over inventory.  In responseto this control deficiency the Company enhanced its inventory cycle countprocedures within the fourth quarter of 2004 to confirm the existence ofinventory.

The Company’s managementalso determined that as of the end of fiscal 2005 it did not have adequatereview controls to ensure the propriety of the accounting for theclassification of capital expenditures related to store self-developmenttransactions.  The Company’s accountingtreatment for capital expenditures related to store self-developmenttransactions, initially recorded on the balance sheet as other current assetsand on the cash flow statement as a change in other current assets, wassubsequently determined to be incorrect according to generally acceptedaccounting principles, which principles provide that capital expendituresrelated to store self-development transactions should be recorded on thebalance sheet as property and equipment and on the cash flow statement asadditions to property and equipment.  TheCompany’s management corrected the accounting related to store self-developmenttransactions prior to issuance of the financial statements for the fiscal yearended December 31, 2005.  There was nochange in the overall cash flow generated by the Company and the incorrectaccounting had no impact on its income statement.  The control deficiency that resulted in theincorrect accounting for the classification of capital expenditures related tostore self-development transactions represented a material weakness in theCompany’s internal control over financial reporting as of December 31,2005.  The Company’s management hasimplemented review controls to ensure the propriety of its accounting for thesetransactions.

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.

Although the Company hastaken certain actions to address these issues discussed above, if the Companyis unable to identify and remedy all such issues promptly and effectively, itcould have a material adverse effect on its business, results of operations andfinancial condition.  Maintainingeffective control over financial reporting is necessary for the Company toproduce reliable financial reports and is important in helping to preventfinancial fraud.  If the Company’smanagement or its independent registered public accounting firm were toconclude again in the future that the Company’s internal control over financialreporting was ineffective, investors could lose confidence in its reportedfinancial information.

*TheCompany is indirectly owned and controlled by the Sponsors, and their interestsas equity holders may conflict with creditors.*

The Company is indirectlyowned and controlled by affiliates of Apollo Management, L.P., National Realty& Development Corp. and Silver Point Capital Fund Investments LLC (the “Sponsors”),and the Sponsors have the ability to elect all of the members of the Company’sboard 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 extraordinarytransactions.  The interests of theSponsors may not in all cases be aligned with the interests ofnoteholders.  For example, if the Companyencounters financial difficulties or is unable to pay its indebtedness as itmatures,

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the interests of itsequity holders might conflict with the interests of noteholders.  In addition, the Company’s equity holders mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transactions might involve risks to noteholders.  Furthermore, the Sponsors may in the futureown businesses that directly or indirectly compete with the Company.  One or more of the Sponsors also may pursueacquisition opportunities that may be complementary to the Company’s business,and as a result, those acquisition opportunities may not be available to theCompany.  So long as the Sponsorscontinue to own a significant amount of the Company’s combined voting power,even if such amount is less than 50%, they will continue to be able to stronglyinfluence or effectively control its decisions.

**RisksRelated to the Company’s Substantial Debt**

*TheCompany’s substantial leverage may impair its financial condition and preventit from fulfilling the Company’s obligations under the Notes.*

The Company has a substantialamount of indebtedness.  As of July 1,2006, the Company’s total debt was $807.1 million, and it had $280.3 million ofavailable borrowings under the Credit Facility. For the thirteen and twenty-six weeks ended July 1, 2006, the Companyhad a deficit of earnings to fixed charges of approximately $63.8 million and$161.9 million, respectively.

The Company’s substantialindebtedness could have important consequences, including:

•                    making it more difficult for the Company to satisfy its obligations withrespect to the Notes;

•                    increasing the Company’s vulnerability to general adverse economic andindustry conditions by making it more difficult for it to react quickly tochanging conditions;

•                    limiting the Company’s ability to obtain additional financing to fundfuture working capital, capital expenditures, acquisitions and other generalcorporate requirements;

•                    requiring a substantial portion of the Company’s cash flow from operationsfor the payment of interest on its indebtedness and reducing the Company’sability to use its cash flow to fund working capital, capital expenditures,acquisitions and general corporate requirements;

•                    exposing the Company to risks inherent in interest rate fluctuationsbecause some of its borrowings will be at variable rates of interest, whichcould result in a higher interest expense in the event of increases in interestrates;

•                    limiting the Company’s flexibility in planning for, or reacting to, changesin its business, and the industry in which it operates; and

•                    placing the Company at a competitive disadvantage compared with itscompetitors that have less indebtedness.

*Despitecurrent indebtedness levels, the Company and its subsidiaries may still be ableto incur substantially more indebtedness. This could further exacerbate the risks associated with the Company’ssubstantial leverage.*

Subject to specifiedlimitations, the indenture governing the Notes and the credit agreementgoverning the Credit Facility permits the Company and its subsidiaries to incursubstantial additional indebtedness, including $600.0 million of borrowingsunder the Credit Facility that ranks equally with the Notes.  If new indebtedness is added to the Company’sand its subsidiaries’ current indebtedness levels, the risks described abovecould intensify.

*Covenantrestrictions under the Company’s indebtedness may limit its ability to operateits business.*

The credit agreementgoverning the Credit Facility and the indenture governing the Notes do, and itsfuture indebtedness agreements may, contain covenants that may restrict itsability to finance future operations or capital needs or to engage in otherbusiness activities.  The Credit Facilityand the indenture restrict, among other things, the Company’s ability and theability of its restricted subsidiaries to:

•                          incur, assume or guarantee additional indebtedness;

•                          issue redeemable stock and preferred stock;

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•                          repurchase capital stock;

•                          make other restricted payments including, without limitation, payingdividends and making investments;

•                          create liens;

•                          redeem debt that is junior in right of payment to the Notes;

•                          sell or otherwise dispose of assets, including capital stock ofsubsidiaries;

•                          enter into agreements that restrict dividends from subsidiaries;

•                          enter into mergers or consolidations;

•                          enter into transactions with affiliates; and

•                          enter into sale/leaseback transactions.

In addition, the CreditFacility requires the Company to maintain specified financial ratios andsatisfy certain financial condition tests in certain situations.  Events beyond the Company’s control,including changes in general economic and business conditions, may affect itsability to meet those financial ratios and financial condition tests.  The Company cannot give assurance that itwill meet those tests or that the lenders will waive any failure to meet thosetests.  A breach of any of thesecovenants would result in a default under the Credit Facility and theindenture.  If an event of default underthe Credit Facility occurs, the lenders could terminate all commitments to lendand elect to declare all amounts outstanding thereunder, together with accruedinterest, to be immediately due and payable. If the Company was unable to pay such amounts, the lenders could proceedagainst the collateral pledged to them.  The Company has pledged its inventory,accounts receivable, cash, securities, other general intangibles and thecapital stock of certain subsidiaries (its “revolving credit collateral”) tothe lenders on first-priority basis.  Insuch an event, the Company cannot give assurance that it would have sufficientassets to pay amounts due on the Notes. As a result, noteholders may receive less than the full amount theywould be otherwise entitled to receive on the Notes.

*TheCompany will require a significant amount of cash, and its ability to generatesufficient cash depends upon many factors, some of which are beyond itscontrol.*

The Company’s ability tomake payments on and refinance its indebtedness and to fund working capitalneeds and planned capital expenditures depends on its ability to generateadequate cash flow in the future.  Tosome extent, this is subject to general economic, financial, competitive,legislative and regulatory factors and other factors that are beyond theCompany’s control.  For example, theCompany’s need to stock substantial inventory could increase its workingcapital needs.  The Company cannot giveassurance that its business will continue to generate cash flow from operationsat current levels or 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 toobtain additional financing could have a material adverse effect on the Company’sfinancial condition and on its ability to meet its obligations to noteholders.

*Variablerate indebtedness subjects the Company to interest rate risk, which could causeits debt service obligations to increase significantly.*

Certain of the Company’sborrowings, primarily borrowings under the Credit Facility and the Notes, are,and are expected to continue to be, at variable rates of interest and expose theCompany to interest rate risk.  Ifinterest rates increase, the Company’s debt service obligations on the variablerate indebtedness would increase even though theamount borrowed remained the same, and its net income would decrease.  Borrowings under the Credit Facilitybear interest at a rate equal to, at the Company’s option, either (a) analternate base rate determined by reference to the higher of (1) the base ratein 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 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.  Theinitial applicable margin for borrowings under the Credit Facility was 0% withrespect to alternate base rate borrowings and 1.50% with respect to LIBORborrowings.  The applicable margin withrespect to the Notes was a percentage per annum equal to 5.625%.

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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 the Credit Facility andthe Notes.  Pursuant to the indenturegoverning the Notes, the Issuers are required to enter into interest rateswaps, involving the exchange of floating for fixed rate interest payments, orother forms of derivative transactions, to reduce interest ratevolatility.  On July 7, 2006 the Issuersentered into a Zero Cost Interest Rate Collar Hedge to mitigate the interestrisk associated with the LIBOR component of the interest rate on theNotes.  The hedge is based on the averageLIBOR rate with an upper strike rate at 6.51% and a lower strike rate at 4.45%,payable and reset on the quarterly dates stipulated in the Notes with atermination date of January 15, 2008. Simultaneously, the Issuers purchased a one-year Forward-Starting Cap,with the first reset date to begin on January 11, 2008, based on the averageLIBOR rate with a strike rate of 6.51%, payable quarterly on the datesstipulated in the Notes.  The Issuerspaid a premium of $700,000 to purchase the Forward-Starting Cap.

**Item2.            Unregistered Sales of EquitySecurities and Use of Proceeds**

On****May 2, 2006, F. David Coder, ExecutiveVice President, Store Operations purchased 3,000 shares of the Company’s commonstock for aggregate consideration of $150,000.

**Item 6.            Exhibits**

| 31.1 |   | Certification of Principal Executive Officer of  Linens Holding Co. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                  |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Principal Financial Officer of  Linens Holding Co. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                  |
| 31.3 |   | Certification of Principal Executive Officer of  Linens ‘n Things, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                        |
| 31.4 |   | Certification of Principal Financial Officer of  Linens ‘n Things, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                        |
| 31.5 |   | Certification of Principal Executive Officer of  Linens ‘n Things Center, Inc. pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                 |
| 31.6 |   | Certification of Principal Financial Officer of  Linens ‘n Things Center, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                 |
| 32.1 |   | Certification of Principal Executive Officer and  Principal Financial Officer of Linens Holding Co. pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                 |
| 32.2 |   | Certification of Principal Executive Officer and  Principal Financial Officer of Linens ‘n Things, Inc. pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.        |
| 32.3 |   | Certification of Principal Executive Officer and  Principal Financial Officer of Linens ‘n Things Center, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Quarterly Report on Form 10-Q to be signed onits behalf by the undersigned thereunto duly authorized.
|                       | **LINENS HOLDING CO.**                 |
|-----------------------|----------------------------------------|
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Robert J. DiNicola |   |
|                  |                                   | Robert J. DiNicola |
|                  |                                   | Chairman and Chief Executive Officer |
|                  |                                   | (principal executive officer) |
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Francis M. Rowan |   |
|                  |                                   | Francis M. Rowan |
|                  |                                   | Senior Vice President and Chief Financial Officer |
|                  |                                   | (principal financial and accounting officer) |
| ** **            | ** **                             |   |
| ** **            | **LINENS ‘N THINGS, INC.**        |
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Robert J. DiNicola |   |
|                  |                                   | Robert J. DiNicola |
|                  |                                   | Chairman and Chief Executive Officer |
|                  |                                   | (principal executive officer) |
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Francis M. Rowan |   |
|                  |                                   | Francis M. Rowan |
|                  |                                   | Senior Vice President and Chief Financial Officer |
|                  |                                   | (principal financial and accounting officer) |
| ** **            | ** **                             |   |
| ** **            | **LINENS ‘N THINGS CENTER, INC.** |
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Robert J. DiNicola |   |
|                  |                                   | Robert J. DiNicola |
|                  |                                   | Chairman and Chief Executive Officer |
|                  |                                   | (principal executive officer) |
|                  |                                   |   |
|                  |                                   |   |
| Date: August 15, 2006 | By:                                    | /s/ Francis M. Rowan |   |
|                  |                                   | Francis M. Rowan |
|                  |                                   | Senior Vice President and Chief Financial Officer |
|                  |                                   | (principal financial and accounting officer) |

 

 

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