**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark)**
| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|------------|-----------------------------------------------------------------------------------------------------|
|       | ** **                                                                                          |
|       | **For the  Quarterly Period Ended June 30, 2007**                                                   |
|       |                                                                                                |
| ** ** | **or**                                                                                              |
| ** ** | ** **                                                                                          |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

| **Commission file numbers:** | **333-135646-12** |
|------------------------------|-------------------|
| ** **                   | **001-12381**     |
| ** **                   | **333-135646-11** |

 

**LINENS HOLDING CO.**

**LINENS ‘NTHINGS, INC.**

**LINENS ‘NTHINGS CENTER, INC.**

(Exact names of registrants as specified intheir charters)
| **Delaware  Delaware  California**                                 | **20-4192917  22-3463939  59-2740308** |
|--------------------------------------------------------------------|----------------------------------------|
| (States or other  jurisdictions of  incorporation or organization) | (I.R.S. Employer  Identification Nos.) |

 

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

(Address of principal executive offices) (ZipCode)

**(973) 778-1300**

(Registrants’ telephone number, including areacode)

Indicate by check mark whether the registrants(1) have filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) have been subject to such filing requirementsfor the past 90 days:

Yes x     No o

Indicate by check mark whether the registrants arelarge accelerated filers, accelerated filers, or non-acceleratedfilers.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

Large AcceleratedFiler o     AcceleratedFiler o     Non-acceleratedfiler x

Indicateby check mark whether the registrants are a shell company (as defined inRule 12b-2 of the Act):

Yes o     No x

As of July 31, 2007, there were 13,013,000 shares of LinensHolding Co. common stock, $0.01 par value, outstanding; 1,000 shares ofLinens ‘n Things, Inc. common stock, $0.01 par value, outstanding; and 100shares of Linens ‘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 June 30, 2007 and July 1, 2006                                                                                                                                                            | 4            |
|                                                |                                                                                                                                                                                                                                                                                |         |
|                                                | Condensed Consolidated Statements of Operations  (Unaudited) for the twenty-six weeks ended June 30, 2007 (Successor Entity);  the period February 14, 2006 to July 1, 2006 (Successor Entity); and the  period January 1, 2006 to February 13, 2006 (Predecessor Entity)           | 5            |
|                                                |                                                                                                                                                                                                                                                                                |         |
|                                                | Condensed Consolidated Balance Sheets (Unaudited) as  of June 30, 2007; December 30, 2006; and July 1, 2006 (Restated)                                                                                                                                                              | 6            |
|                                                |                                                                                                                                                                                                                                                                                |         |
|                                                | Condensed Consolidated Statements of Cash Flows  (Unaudited) for the twenty-six weeks ended June 30, 2007 (Successor Entity);  the period February 14, 2006 to July 1, 2006 (Successor Entity)(Restated);  and the period January 1, 2006 to February 13, 2006 (Predecessor Entity) | 7            |
|                                                |                                                                                                                                                                                                                                                                                |         |
|                                                | Notes to  Unaudited Condensed Consolidated Financial Statements                                                                                                                                                                                                                     | 8            |
|                                                |                                                                                                                                                                                                                                                                                |         |
| **Item 2.**                                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                                                                                                                                                     | 33           |
|                                                |                                                                                                                                                                                                                                                                                |         |
| **Item 3.**                                         | **Quantitative  and Qualitative Disclosures about Market Risk**                                                                                                                                                                                                                     | 43           |
|                                                |                                                                                                                                                                                                                                                                                |         |
| **Item 4.**                                         | **Controls and  Procedures**                                                                                                                                                                                                                                                        | 45           |
|                                                | ** **                                                                                                                                                                                                                                                                          |         |
| **Part II.**                                        | **Other Information**                                                                                                                                                                                                                                                               |         |
|                                                | ** **                                                                                                                                                                                                                                                                          |         |
| **Item 1.**                                         | **Legal Proceedings**                                                                                                                                                                                                                                                               | 46           |
|                                                | ** **                                                                                                                                                                                                                                                                          |         |
| **Item 1A.**                                        | **Risk Factors**                                                                                                                                                                                                                                                                    | 46           |
|                                                | ** **                                                                                                                                                                                                                                                                          |         |
| **Item 6.**                                         | **Exhibits**                                                                                                                                                                                                                                                                        | 46           |
|                                                | ** **                                                                                                                                                                                                                                                                          |         |
| ** **                                          | **Signatures**                                                                                                                                                                                                                                                                      | 47           |

 

2

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**EXPLANATORY NOTE**

On November 8,2005, Linens Merger Sub Co. was formed by affiliates of Apollo Management,L.P., and National 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. (the “Merger”), and Linens ‘nThings, Inc., as the surviving corporation, became a wholly owned subsidiary ofLinens Holding Co. (the “Company”).  TheMerger was financed in part by the issuance of $650.0 million aggregateprincipal amount of Senior Secured Floating Rate Notes (the “Notes”) due 2014of Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc., a wholly ownedsubsidiary of Linens ‘n Things, Inc.  TheNotes are guaranteed by the Company and each of its domestic subsidiaries(other than Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc.).  This report also contains the condensedconsolidated financial statements of the Company’s predecessor entity, Linens ‘nThings, Inc. and its subsidiaries, for the period January 1, 2006 to February13, 2006.  The accompanying condensedconsolidated financial statements are those of Linens Holding Co. and itssubsidiaries.  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 12) because management hasdetermined that the differences in such financial statements are minor.  Unlessthe context requires otherwise, “we,” “us,” “our,” or the “Company” refer toLinens Holding Co. and its subsidiaries and, for periods prior to February 14,2006, the Company’s predecessor entity and its subsidiaries.

**FORWARD-LOOKING STATEMENTS**

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

These statementsare based on assumptions and assessments made by the Company’s management inlight of its experience and its perception of historical trends, currentconditions, expected future developments and other factors it believes to beappropriate.  The Company believes thereis a reasonable basis for its expectations and beliefs, but they are inherentlyuncertain, the Company may not realize its expectations and its beliefs may notprove correct.  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 to publiclyupdate or revise any forward-looking statement, whether as a result of newinformation, future events or otherwise. Such factors include, withoutlimitation: general economic conditions; changes in the retailing environmentand consumer spending habits; inclement weather and natural disasters;competition from existing and potential competitors; the amount of merchandisemarkdowns; loss or retirement of key members of management; increases in thecosts of borrowings and unavailability of additional debt or equity capital;impact of the Company’s substantial indebtedness on its operating income andits ability to grow; the cost of labor; labor disputes; increased healthcarebenefit costs; other costs and expenses; and other important factors that couldcause actual results to differ materially from those described or implied bythe forward-looking statements contained in this report.  

3

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**PART I – FINANCIAL INFORMATION**

**Item1.   ****Financial Statements**

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands) (Unaudited)**
| ** **                                              | ** ** | **Thirteen Weeks Ended  June 30, 2007** | ** **  | **Thirteen Weeks Ended  July 1, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------|-------------|------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                                  | ** **  | ** **                                                 | ** ** |
| **Net  sales**                                          | ** ** | **$**                                                       | **593,571** | ** **                                                 | **$**      | **611,583** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 346,654                                                     |        | 373,265                                                    |       |
|                                                    |       |                                                        |        |                                                       |       |
| **Gross  profit**                                       | ** ** | **246,917**                                                 | ** **  | **238,318**                                                | ** ** |
| Selling, general  and administrative expenses           |       | 289,179                                                     |        | 283,219                                                    |       |
|                                                    |       |                                                        |        |                                                       |       |
| **Operating  loss**                                     | ** ** | **(42,262**                                                 | **)**       | **(44,901**                                                | **)**      |
|                                                    |       |                                                        |        |                                                       |       |
| Interest income                                         |       | (109                                                        | )           | (33                                                        | )          |
| Interest expense                                        |       | 25,725                                                      |        | 21,845                                                     |       |
|                                                    |       |                                                        |        |                                                       |       |
| Interest  expense, net                                  |       | 25,616                                                      |        | 21,812                                                     |       |
|                                                    |       |                                                        |        |                                                       |       |
| Other income, net                                       |       | (1,425                                                      | )           | (2,932                                                     | )          |
|                                                    |       |                                                        |        |                                                       |       |
| **Loss  before benefit for income taxes**               | ** ** | **(66,453**                                                 | **)**       | **(63,781**                                                | **)**      |
| Benefit for  income taxes                               |       | (24,467                                                     | )           | (24,654                                                    | )          |
|                                                    |       |                                                        |        |                                                       |       |
| **Net  loss**                                           | ** ** | **$**                                                       | **(41,986** | **)**                                                      | **$**      | **(39,127** | **)** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

4

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands) (Unaudited)**
| ** **                                              | ** ** | **Twenty-six Weeks  Ended June 30, 2007** | ** **    | **February 14, 2006 to  July 1, 2006** | ** ** | ** **  | ** ** | **January 1, 2006 to  February 13, 2006** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------|---------------|-----------------------------------------------------------------|------------|-------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Successor Entity)**                                   | ** **    | **(Successor Entity)**                                     | ** ** | ** **  | ** ** | **(Predecessor  Entity)**                                          | ** ** |
| ** **                                              | ** ** | ** **                                                    | ** **    | ** **                                                      | ** ** |        |       | ** **                                                         | ** ** |
| **Net sales**                                           | ** ** | **$**                                                         | **1,165,131** | ** **                                                      | **$**      | **919,428** | ** ** |                                                               |       | **$** | **284,971** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 704,730                                                       |          | 562,333                                                         |       |        |       | 180,675                                                            |       |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| **Gross profit**                                        | ** ** | **460,401**                                                   | ** **    | **357,095**                                                     | ** ** |        |       | **104,296**                                                        | ** ** |
| Selling, general and  administrative expenses           |       | 572,115                                                       |          | 420,779                                                         |       |        |       | 175,424                                                            |       |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| **Operating loss**                                      | ** ** | **(111,714**                                                  | **)**         | **(63,684**                                                     | **)**      |        |       | **(71,128**                                                        | **)**      |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| Interest income                                         |       | (264                                                          | )             | (119                                                            | )          |        |       | (668                                                               | )          |
| Interest expense                                        |       | 49,887                                                        |          | 31,832                                                          |       |        |       | —                                                             |       |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| Interest expense  (income), net                         |       | 49,623                                                        |          | 31,713                                                          |       |        |       | (668                                                               | )          |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| Other income, net                                       |       | (2,298                                                        | )             | (2,731                                                          | )          |        |       | (1,286                                                             | )          |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| **Loss before benefit for income  taxes**               | ** ** | **(159,039**                                                  | **)**         | **(92,666**                                                     | **)**      |        |       | **(69,174**                                                        | **)**      |
| Benefit for income  taxes                               |       | (58,879                                                       | )             | (35,967                                                         | )          |        |       | (21,270                                                            | )          |
|                                                    |       |                                                          |          |                                                            |       |        |       |                                                               |       |
| **Net loss**                                            | ** ** | **$**                                                         | **(100,160**  | **)**                                                           | **$**      | **(56,699** | **)**      |                                                               |       | **$** | **(47,904** | **)** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

5

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**LINENSHOLDING CO. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share amounts)(Unaudited)**
| ** **                                                                                                                                                                                               | ** ** | **June 30,  2007** | ** **    | **December 30,  2006** | ** ** | **July 1,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | ** **              | ** **    | ** **                  | ** ** | **(Restated)**         | ** ** |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| Current assets:                                                                                                                                                                                          |       |                    |          |                        |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                                |       | $                       | 16,963        |                        | $          | 12,526                 |       | $ | 13,494 |   |
| Accounts receivable                                                                                                                                                                                      |       | 36,133                  |          | 37,063                      |       | 39,695                 |       |
| Inventories                                                                                                                                                                                              |       | 858,368                 |          | 793,002                     |       | 854,823                |       |
| Prepaid expenses and other current assets                                                                                                                                                                |       | 14,288                  |          | 15,308                      |       | 74,658                 |       |
| Current deferred taxes                                                                                                                                                                                   |       | 17,879                  |          | 16,815                      |       | 6,678                  |       |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total current assets**                                                                                                                                                                                 | ** ** | **943,631**             | ** **    | **874,714**                 | ** ** | **989,348**            | ** ** |
| Property and equipment, net of accumulated  depreciation of $162,059, $100,616 and $43,543 at June 30, 2007, December 30,  2006 and July 1, 2006, respectively                                           |       | 487,489                 |          | 530,829                     |       | 590,781                |       |
| Identifiable intangible assets, net                                                                                                                                                                      |       | 146,434                 |          | 150,044                     |       | 157,887                |       |
| Goodwill                                                                                                                                                                                                 |       | 270,880                 |          | 267,830                     |       | 265,865                |       |
| Deferred financing costs and other noncurrent assets                                                                                                                                                     |       | 42,589                  |          | 34,517                      |       | 35,364                 |       |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total  assets**                                                                                                                                                                                        | ** ** | **$**                   | **1,891,023** | ** **                  | **$**      | **1,857,934**          | ** ** | **$** | **2,039,245** | ** ** |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                           | ** ** | ** **              | ** **    | ** **                  | ** ** | ** **             | ** ** |
| Current liabilities:                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| Accounts payable                                                                                                                                                                                         |       | $                       | 191,021       |                        | $          | 204,760                |       | $ | 191,491 |   |
| Accrued expenses and other current liabilities                                                                                                                                                           |       | 194,280                 |          | 241,911                     |       | 223,806                |       |
| Mortgage note payable on property sold                                                                                                                                                                   |       | 2,043                   |          | —                      |       | —                 |       |
| Short-term borrowings                                                                                                                                                                                    |       | —                  |          | —                      |       | 155,006                |       |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total current liabilities**                                                                                                                                                                            | ** ** | **387,344**             | ** **    | **446,671**                 | ** ** | **570,303**            | ** ** |
| Senior secured notes and other long-term debt                                                                                                                                                            |       | 915,125                 |          | 689,876                     |       | 652,108                |       |
| Noncurrent deferred income taxes                                                                                                                                                                         |       | 74,959                  |          | 125,977                     |       | 176,061                |       |
| Other long-term liabilities                                                                                                                                                                              |       | 58,287                  |          | 50,667                      |       | 45,422                 |       |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total  liabilities**                                                                                                                                                                                   | ** ** | **1,435,715**           | ** **    | **1,313,191**               | ** ** | **1,443,894**          | ** ** |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Shareholders’  equity:**                                                                                                                                                                          | ** ** | ** **              | ** **    | ** **                  | ** ** | ** **             | ** ** |
| Common stock, $0.01 par value; 15,000,000 shares  authorized; 13,013,000 shares issued and outstanding at June 30, 2007 and  December 30, 2006; 13,003,000 shares issued and outstanding at July 1, 2006 |       | 131                     |          | 131                         |       | 130                    |       |
| Additional paid-in capital                                                                                                                                                                               |       | 653,851                 |          | 652,395                     |       | 649,966                |       |
| Retained deficit                                                                                                                                                                                         |       | (206,693                | )             | (106,533                    | )          | (56,699                | )          |
| Accumulated other comprehensive income (loss)                                                                                                                                                            |       | 8,019                   |          | (1,250                      | )          | 1,954                  |       |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total shareholders’ equity**                                                                                                                                                                      | ** ** | **455,308**             | ** **    | **544,743**                 | ** ** | **595,351**            | ** ** |
|                                                                                                                                                                                                     |       |                    |          |                        |       |                   |       |
| **Total  liabilities and shareholders’ equity**                                                                                                                                                     | ** ** | **$**                   | **1,891,023** | ** **                  | **$**      | **1,857,934**          | ** ** | **$** | **2,039,245** | ** ** |

 

*See accompanying Notes to Unaudited CondensedConsolidated 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** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **Twenty-six Weeks  Ended June 30,  2007** | ** ** | **February 14, 2006  to July 1,  2006** | ** ** | ** **                  | ** ** | **January 1, 2006  to February 13,  2006** | ** ** |
| ** **                                                                   | ** ** | ** **                                                | ** ** | **(Restated)**                                              | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                   |       |                                                      |       |                                                        |       |                        |       |   |   |
| Net loss                                                                     |       | $                                                         | (100,160   | )                                                           | $          | (56,699                     | )          |   |   | $ | (47,904 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                                      |       |                                                        |       |                        |       |   |   |
| Depreciation and amortization                                                |       | 64,285                                                    |       | 46,816                                                      |       |                        |       | 12,642 |   |
| Deferred income taxes                                                        |       | (60,738                                                   | )          | (9,902                                                      | )          |                        |       | (6,725 | ) |
| Share-based compensation                                                     |       | 1,455                                                     |       | 2,328                                                       |       |                        |       | 12,484 |   |
| Amortization of deferred financing charges                                   |       | 4,381                                                     |       | 1,610                                                       |       |                        |       | 43 |   |
| Loss on sale and disposals of property and equipment                         |       | 307                                                       |       | 73                                                          |       |                        |       | — |   |
| Changes in assets and liabilities, net of effect of  acquisition:            |       |                                                      |       |                                                        |       |                        |       |   |   |
| Decrease (increase) in accounts receivable                                   |       | 1,184                                                     |       | 6,231                                                       |       |                        |       | (2,240 | ) |
| Increase in inventories                                                      |       | (60,010                                                   | )          | (33,433                                                     | )          |                        |       | (31,886 | ) |
| Decrease (increase) in prepaid expenses and other  current assets            |       | 2,611                                                     |       | (45,410                                                     | )          |                        |       | (12,153 | ) |
| Decrease in identifiable intangible assets and other  noncurrent assets      |       | 72                                                        |       | 236                                                         |       |                        |       | 9,580 |   |
| (Decrease) increase in accounts payable                                      |       | (16,373                                                   | )          | (41,174                                                     | )          |                        |       | 12,010 |   |
| Decrease in accrued expenses and other liabilities                           |       | (38,969                                                   | )          | (18,169                                                     | )          |                        |       | (7,807 | ) |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Net  cash used in operating activities**                                   | ** ** | **(201,955**                                              | **)**      | **(147,493**                                                | **)**      | ** **                  | ** ** | **(61,956** | **)** |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Acquisition of the Predecessor Entity, net of cash  acquired(1)              |       | —                                                    |       | (1,205,502                                                  | )          |                        |       | — |   |
| Additions to property and equipment                                          |       | (22,495                                                   | )          | (29,630                                                     | )          |                        |       | (10,956 | ) |
| Proceeds from sale of property and equipment                                 |       | 3,300                                                     |       | —                                                      |       |                        |       | — |   |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Net  cash used in investing activities**                                   | ** ** | **(19,195**                                               | **)**      | **(1,235,132**                                              | **)**      | ** **                  | ** ** | **(10,956** | **)** |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **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                                       |       | (2,095                                                    | )          | (59,220                                                     | )          |                        |       | — |   |
| Federal tax benefit from common stock issued under  stock incentive plans    |       | —                                                    |       | —                                                      |       |                        |       | 4,298 |   |
| Net increase in borrowings under revolving credit  facility                  |       | 227,325                                                   |       | 155,006                                                     |       |                        |       | — |   |
| Decrease in treasury stock                                                   |       | —                                                    |       | —                                                      |       |                        |       | 674 |   |
| Payments on mortgage note                                                    |       | (33                                                       | )          | (23                                                         | )          |                        |       | (10 | ) |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Net  cash provided by financing activities**                               | ** ** | **225,197**                                               | ** ** | **1,395,913**                                               | ** ** | ** **                  | ** ** | **4,962** | ** ** |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                |       | 390                                                       |       | 206                                                         |       |                        |       | 125 |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 4,437                                                     |       | 13,494                                                      |       |                        |       | (67,825 | ) |
| **Cash  and cash equivalents at beginning of period**                        | ** ** | **12,526**                                                | ** ** | **—**                                                  | ** ** | ** **                  | ** ** | **158,158** | ** ** |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Cash  and cash equivalents at end of period**                              | ** ** | **$**                                                     | **16,963** | ** **                                                  | **$**      | **13,494**                  | ** ** | ** ** | ** ** | **$** | **90,333** | ** ** |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Supplemental  disclosure of cash flow information**                        | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Cash  paid during the period for:**                                        | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Interest (net of amounts capitalized)                                        |       | $                                                         | 43,131     |                                                        | $          | 14,031                      |       |   |   | $ | 135 |   |
| Income taxes                                                                 |       |                                                      |       |                                                        |       |                        |       |   |   |
| Income taxes paid                                                            |       | $                                                         | 9,527      |                                                        | $          | 25,761                      |       |   |   | $ | 57 |   |
| Income tax  refunds                                                          |       | $                                                         | 947        |                                                        | $          | 261                         |       |   |   | $ | — |   |
|                                                                         |       |                                                      |       |                                                        |       |                        |       |   |   |
| **Non-cash transactions:**                                                   | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Increase (decrease) in  goodwill due to purchase accounting adjustments, net |       | $                                                         | 3,050      |                                                        | $          | (120                        | )          |   |   | $ | — |   |
| Decrease in accrued  additions to property and equipment                     |       | $                                                         | 6,453      |                                                        | $          | 4,408                       |       |   |   | $ | 3,180 |   |

 

----

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

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

7

----

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

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**1. Basisof Presentation**

On November 8, 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 holdingcompany.  On February 14, 2006, LinensMerger Sub Co. merged with and into Linens ‘n Things, Inc. (the “Merger”), andLinens ‘n Things, Inc., as the surviving corporation, became a wholly ownedsubsidiary of Linens Holding Co. (the “Company”).  The acquisition and related financings arereferred to collectively as the “Transactions” and are discussed in more detailin Note 3 to the audited consolidated financial statements included in theCompany’s 2006 Annual Report on Form 10-K. As a result of the consummation of the Transactions, a new entity (the “Successor”or “Successor Entity”) was formed for financial accounting purposes with an effectivedate of February 14, 2006, consisting of Linens Holding Co. andSubsidiaries.  The condensed consolidatedfinancial statements as of June 30, 2007 and July 1, 2006, for the twenty-sixweeks ended June 30, 2007 and for the period February 14, 2006 to July 1,2006 show the financial position and results of operations and cash flows ofthe Successor Entity, Linens Holding Co. and Subsidiaries.  The condensed consolidated financialstatements for the period January 1, 2006 to February 13, 2006 showthe results of operations and cash flows of Linens ’n Things, Inc.and Subsidiaries (the “Predecessor” or “Predecessor Entity”).

The accompanyingcondensed consolidated financial statements are unaudited.  In the opinion of management, theaccompanying condensed consolidated financial statements for the SuccessorEntity and Predecessor Entity include all normal and recurring adjustments thatare considered necessary to present fairly the financial position and theresults of operations and cash flows for the respective periods presented.  As a result of the consummation of theTransactions, the condensed consolidated financial statements for the periodsafter February 13, 2006 are presented on a different basis than that forthe periods before February 14, 2006 as a result of the application ofpurchase accounting as of February 14, 2006 and, therefore, are notcomparable.

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of 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 ended December 30,2006 included in the Company’s 2006 Annual Report on Form 10-K availablefrom the Securities and Exchange Commission (“SEC”) or through the Company’swebsite at *lnt.com* posted on March 27, 2007under *SEC Filings*.  All significant intercompany accounts andtransactions have been eliminated.

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 its subsidiariesor Linens ‘n Things Center, Inc. and its subsidiaries (collectively, the “Issuers”as described in Note 12) because management has determined that the differencesin such financial statements are minor.  

The Predecessor adopted SEC StaffAccounting Bulletin No. 108, “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*” (“SAB No. 108”) effective January 1,2006, the beginning of the 52-week period ended December 30, 2006, whichis more fully described in Note 2 to the audited consolidated financialstatements included in the Company’s 2006 Annual Report on Form 10-K under “*Summary of Significant AccountingPolicies – Adoption of Staff Accounting Bulletin No. 108*.” In accordance with the requirements of SAB No. 108 and to conform to thecurrent period’s presentation, the Company has restated certain balances atJuly 1, 2006 in the accompanying condensed consolidated balance sheets. 

8

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

The cumulative effect of the January1, 2006 adoption of SAB 108 by the Predecesor to certain accounts on theCompany’s balance sheet at July 1, 2006 is as follows (in thousands):

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

 

The adoption of SAB No.108 by the Predecessor did not impact the Company’s results of operations andcash flows for any of the periods presented.

Certain other priorperiod amounts have been reclassified to conform to the current period’spresentation.  Additionally, the Companycorrected its reporting of cash flows for the period February 14, 2006 to July1, 2006.  Additions to property andequipment on the condensed consolidated statements of cash flows was adjustedto exclude accrued additions.  Thiscorrection increased additions to property and equipment with an offsettingreduction to net cash used in operating activities by $4.4 million for theperiod February 14, 2006 to July 1, 2006. 

**2.Share-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 (Revised 2004)”), requiring the recognition of compensationcost for all equity classified awards granted, modified or settled after theeffective date and for the unvested portion of awards outstanding as of theeffective date using the fair-value measurement method.  SFAS No. 123 (Revised 2004) revised SFASNo. 123, “*Accounting for Stock-Based Compensation*,”and superseded Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*.”

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 StockAppreciation Rights and Other Variable Stock Option or Award Plans*”over their respective vesting periods, net of estimated forfeitures.

**Share-basedCompensation Plans—Predecessor Entity**

Prior to the completionof the Merger, the Company granted stock options and restricted stock units fora fixed number of shares to employees and directors under share-basedcompensation plans, which are more fully described in Note 13 to the auditedconsolidated financial statements included in the Company’s 2006 Annual Reporton Form 10-K under “*Share-basedCompensation Plans—Predecessor Entity*.”  The exercise prices ofthe stock options were equal to the fair market value of the underlying sharesat the date of grant.  Compensationexpense for restricted stock awards was measured at fair value on the date ofgrant based on the number of shares granted and the quoted market price of theCompany’s common stock.  Such value wasrecognized as an expense over the vesting period of the award adjusted foractual forfeitures.

Upon completion of theMerger 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.

9

----

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

Therewere no share-based grants during the period January 1, 2006 toFebruary 13, 2006.  The totalintrinsic value of stock options and restricted stock units exercised due tothe Merger was approximately $20.0 million and $4.4 million,respectively, for the period January 1, 2006 to February 13, 2006.

The total fair value ofstock options and restricted stock units vested during the period fromJanuary 1, 2006 to February 13, 2006 was approximately$11.2 million and $4.0 million, respectively.  

As of January 1, 2006,there was approximately $9.3 million and $3.2 million of totalunrecognized compensation cost related to stock option grants and restrictedstock unit awards, respectively, under the share-based compensation plans.  The consummation of the Merger acceleratedthe recognition of compensation cost and, accordingly, all of this cost wasincluded in selling, general and administrative expense in the condensedconsolidated statements of operations for the period January 1, 2006 toFebruary 13, 2006.

**Share-basedCompensation Plans—Successor Entity**

On February 14,2006, the board of directors (the “Board”) and stockholders of Linens HoldingCo. adopted the Linens Holding Co. Stock Option Plan (the “Plan”). The Planprovides employees or directors of the Company or its subsidiaries who are in aposition to contribute to the long-term success of these entities, with optionsto acquire shares in the Company to aid in attracting, retaining and motivatingpersons of outstanding ability.  The Planwas amended in March 2006 to increase the number of shares of commonstock, par value $0.01 per share, of Linens Holding Co. (the “Common Stock”)available for issuance under the Plan to 1,157,298 shares.

As of June 30, 2007, atotal of 953,696 stock options were outstanding.  

Stock options granted underthe Plan to each optionee are equally divided between a “Time Option” and a “PerformanceOption,” as those terms are defined in the standard form of option grantletter.  For each stock option grantedthe estimated fair market value of the underlying shares at the date of grantwas less than or equal to the stock option’s exercise price of $50.00 pershare, and expire seven years after the date of grant.  Time Options become vested and exercisable infour equal installments on either (1) each of February 14, 2007,February 14, 2008, February 14, 2009, and February 14, 2010 withrespect to options initially granted March 27, 2006 or (2) on each of the firstfour anniversaries of the date of grant for all other options.  With respect to Performance Options and asprovided for and defined in the standard form of grant letter, the stockoptions become vested and exercisable in two equal installments from ameasurement date if, on such measurement date, the value per share equals orexceeds a target stock price. 

The following is asummary of share-based option activity for the twenty-six weeks ended June 30,2007:

 
| **Successor Entity**                  | ** ** |
|---------------------------------------|------------|
| Options                               | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (years)** | ** ** |
|                                  |       |   |   |   |   |   |   |
| **Outstanding  at December 30, 2006** | ** ** | **839,946** | ** ** | **$** | **50.00** | ** ** | ** ** | ** ** |
| Options granted                       |       | 195,750 |   | 50.00 |   |   |   |
| Exercised                             |       | — |   | — |   |   |   |
| Canceled                              |       | (82,000 | ) | 50.00 |   |   |   |
|                                  |       |   |   |   |   |   |   |
| **Outstanding  at June 30, 2007**     | ** ** | **953,696** | ** ** | **$** | **50.00** | ** ** | **5.99** | ** ** |
|                                  |       |   |   |   |   |   |   |
| **Exercisable  at June 30, 2007**     | ** ** | **178,658** | ** ** | **$** | **50.00** | ** ** | **5.80** | ** ** |

 

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

10

----

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

The weighted-average grantdate fair value of options granted during the twenty-six weeks ended June 30,2007 and the period February 14, 2006 to July 1, 2006 was $ 9.34 and $17.39,respectively.

There were no stockoption exercises during the twenty-six weeks ended June 30, 2007 and the periodFebruary 14, 2006 to July 1, 2006.

The following is asummary of the activity for nonvested stock option grants as of June 30, 2007and the changes for the twenty-six weeks then ended:
|                                     | ** ** | **Successor Entity  Stock Options** | ** ** |
|-------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **Options**                                   | ** ** | **Fair Value(1)** | ** ** |
| **Nonvested  at December 30, 2006** | ** ** | **736,946**                                   | ** ** | **$** | **17.41** | ** ** |
| Grants                              |       | 195,750                                       | ** ** | **$** | **9.34** | ** ** |
| Vested                              |       | (76,595                                       | )          | **$** | **17.46** | ** ** |
| Canceled                            |       | (81,063                                       | )          | **$** | **17.38** | ** ** |
|                                |       |                                          |       |   |   |
| **Nonvested at June 30, 2007**      | ** ** | **775,038**                                   | ** ** | **$** | **15.37** | ** ** |

 

----

(1)          Represents the weighted-average grant date fair value per option, usingthe Monte Carlo simulation option-pricing model for Performance Options, andthe Black-Scholes option-pricing model for Time Options.

The total fair value ofstock options vested during the twenty-six weeks ended June 30, 2007 and theperiod February 14, 2006 to July 1, 2006 was approximately $1.3 million and$1.5 million, respectively.

As of June 30, 2007,there was approximately $8.7 million of total unrecognized compensationcost related to stock option grants both under and outside the Plan.  This cost is expected to be recognized over aremaining weighted-average period of 2.5 years.  The compensation cost that has been charged againstincome for stock option grants was approximately $0.9 million and $1.6million for the thirteen weeks ended June 30, 2007 and July 1, 2006,respectively.  The compensation cost thathas been charged against income for stock option grants was approximately$1.5 million and $2.3 million for the twenty-six weeks ended June 30, 2007and for the period February 14, 2006 to July 1, 2006, respectively.  Such compensation cost is included inselling, general and administrative expenses in the condensed consolidatedstatements of operations.

Prior to the adoption ofSFAS 123 (Revised 2004) the Company used the Black-Scholes option-pricingmodel for estimating the fair value for all options granted.  Beginning in the first quarter of 2006, theCompany used the Monte Carlo simulation option-pricing model for estimating thefair value of Performance Options and the Black-Scholes option-pricing modelfor Time Options.  This change was madein order to provide a better estimate of fair value.  The Monte Carlo option-pricing model isparticularly useful in the valuation of options with complicated features thatmake them difficult to value through a straight-forward Black-Scholes-stylecomputation.

11

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

Presented below is acomparative summary of valuation assumptions for grants issued in each of theindicated periods:
| Valuation Assumptions:                           | ** ** | **Thirteen Weeks  Ended  June 30, 2007  (Monte Carlo  Simulation and  Black-Scholes)** | ** ** | **Thirteen Weeks Ended  July 1, 2006  (Monte Carlo  Simulation and  Black-Scholes)** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| Weighted-average  calculated value of options granted |       | $                                                                                                               | 9.14       |                                                                                                               | $          | 17.21 |   |
| Expected  volatility (1)                              |       | N/A                                                                                                             |       | N/A                                                                                                                |       |
| Weighted-average  volatility (1)                      |       | 33.7                                                                                                            | %          | 36.8                                                                                                               | %          |
| Weighted-average  expected term (in years)            |       | 3.4                                                                                                             |       | 3.7                                                                                                                |       |
| Dividend yield                                        |       | —                                                                                                          |       | —                                                                                                             |       |
| Risk-free  interest rate                              |       | 4.5% - 5.1                                                                                                      | %          | 4.8% - 5.2                                                                                                         | %          |
| Weighted-average  risk-free interest rate             |       | 4.6                                                                                                             | %          | 4.9                                                                                                                | %          |
| Weighted average  expected annual forfeiture          |       | 2.0                                                                                                             | %          | 1.4                                                                                                                | %          |
|                                                       |            |                                                                                                                 |            |                                                                                                                    |            |  |  |

 
| Valuation Assumptions:                           | ** ** | **Twenty-six Weeks  Ended  June 30, 2007  (Monte Carlo  Simulation and  Black-Scholes)  (Successor Entity)** | ** ** | **February 14, 2006  to July 1, 2006  (Monte Carlo  Simulation and  Black-Scholes)  (Successor Entity)** | ** ** | ** ** | ** ** | **January 1, 2006 to  February 13, 2006  (Black-Scholes)  (Predecessor Entity)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| Weighted-average  calculated value of options granted |       | $                                                                                                                                          | 9.34       |                                                                                                                                             | $          | 17.39      |       |                                                                                                           |       | No  Grants |   |
| Expected  volatility (1)                              |       | N/A                                                                                                                                        |       | N/A                                                                                                                                              |       |       |       | No  Grants                                                                                                     |       |
| Weighted-average  volatility (1)                      |       | 34.0                                                                                                                                       | %          | 38.0                                                                                                                                             | %          |       |       | No  Grants                                                                                                     |       |
| Weighted-average  expected term (in years)            |       | 3.4                                                                                                                                        |       | 3.7                                                                                                                                              |       |       |       | No  Grants                                                                                                     |       |
| Dividend yield                                        |       | —                                                                                                                                     |       | —                                                                                                                                           |       |       |       | No  Grants                                                                                                     |       |
| Risk-free  interest rate                              |       | 4.4% - 5.1                                                                                                                                 | %          | 4.7% - 5.2                                                                                                                                       | %          |       |       | No  Grants                                                                                                     |       |
| Weighted-average  risk-free interest rate             |       | 4.6                                                                                                                                        | %          | 4.8                                                                                                                                              | %          |       |       | No  Grants                                                                                                     |       |
| Weighted average  expected annual forfeiture          |       | 2.0                                                                                                                                        | %          | 3.9                                                                                                                                              | %          |       |       | No Grants                                                                                                      |       |
|                                                       |            |                                                                                                                                            |            |                                                                                                                                                  |            |            |            |                                                                                                                |            |  |  |

 

----

(1)          The Company used the average of the historicalvolatility of each of the component companies included in theStandard & Poor’s Specialty Retail Index as a substitute for expectedvolatility.

It is not possible forthe Company, whose stock is not publicly traded, to use Company-specificvolatility in determining a reasonable estimate of fair value of optionsgranted.  Accordingly, the Company isrequired to use an alternative measurement method.  Under the alternative measurement method, anonpublic entity uses a calculated volatility, determined by applying thehistorical volatility of an appropriate index of public entities, as an inputto the valuation models.  The Companyused the Standard & Poor’s 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 dividendsand, 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.

Share-based employeecompensation expense included in net loss in the condensed consolidatedstatements of operations, net of related tax effects, is detailed as follows:

12

----

**LINENS HOLDING CO. ANDSUBSIDIARIES (AND PREDECESSOR)NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont’d**
| ** **                                                                 | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | **Successor Entity**                                 | ** ** | ** **                                                      | ** ** | **Predecessor  Entity** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------|------------|
| **(In thousands)**                                                    | ** ** | **Thirteen Weeks  Ended June 30,  2007** | ** ** | **Thirteen Weeks  Ended July 1,  2006** | ** ** | **Twenty-six  Weeks Ended  June 30, 2007** | ** ** | **February 14,  2006 to July 1,**

**2006** | ** ** | ** **              | ** ** | **January 1, 2006**

**to February 13,  2006** | ** ** |
| **Compensation  expense:**                                                 | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** **                                                | ** ** | ** **                                                      | ** ** |                    |       | ** ** | ** ** |
| Stock option grants                                                        |       | $                                                       | 884        |                                                   | $          | 1,619                                                     |       | $                                                               | 1,455      |                    | $          | 2,328 |   |   |   | $ | 9,305 |   |
| Restricted stock units                                                     |       | —                                                  |       | —                                                 |       | —                                                    |       | —                                                          |       |                    |       | 3,179 |   |
|                                                                       |       |                                                    |       |                                                   |       |                                                      |       |                                                            |       |                    |       |   |   |
|                                                                       |       | 884                                                     |       | 1,619                                                  |       | 1,455                                                     |       | 2,328                                                           |       |                    |       | 12,484 |   |
|                                                                       |       |                                                    |       |                                                   |       |                                                      |       |                                                            |       |                    |       |   |   |
| **Benefit  for income taxes:**                                             | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** **                                                | ** ** | ** **                                                      | ** ** |                    |       | ** ** | ** ** |
| Stock option grants                                                        |       | (325                                                    | )          | (627                                                   | )          | (539                                                      | )          | (903                                                            | )          |                    |       | (2,861 | ) |
| Restricted stock units                                                     |       | —                                                  |       | —                                                 |       | —                                                    |       | —                                                          |       |                    |       | (978 | ) |
|                                                                       |       |                                                    |       |                                                   |       |                                                      |       |                                                            |       |                    |       |   |   |
|                                                                       |       | (325                                                    | )          | (627                                                   | )          | (539                                                      | )          | (903                                                            | )          |                    |       | (3,839 | ) |
|                                                                       |       |                                                    |       |                                                   |       |                                                      |       |                                                            |       |                    |       |   |   |
| **Share-based employee  compensation expense, net of related tax effects** |       | $                                                       | 559        |                                                   | $          | 992                                                       |       | $                                                               | 916        |                    | $          | 1,425 |   |   |   | $ | 8,645 |   |

 

**3. ComprehensiveLoss**

Comprehensive loss forthe thirteen weeks ended June 30, 2007 and July 1, 2006 is as follows:
| (In thousands)                      | ** ** | **Thirteen Weeks  Ended June 30,  2007** | ** **  | **Thirteen Weeks  Ended July 1,  2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|-------------|--------------------------------------------------------|------------|
| Net loss                                 |       | $                                                       | (41,986     | )                                                      | $          | (39,127 | ) |
| Other  comprehensive income              |       |                                                    |        |                                                   |       |
| Foreign currency adjustments             |       | 7,942                                                   |        | 2,520                                                  |       |
| Unrealized gain on hedge arrangements(1) |       | 82                                                      |        | —                                                 |       |
|                                     |       |                                                    |        |                                                   |       |
| **Comprehensive loss**                   | ** ** | **$**                                                   | **(33,962** | **)**                                                  | **$**      | **(36,607** | **)** |

 

----

(1)          On July 7, 2006 the Issuers entered into azero cost interest rate collar agreement to hedge the cash flows associatedwith the LIBOR component of the interest rate on the Notes.  On July 7, 2006 the Issuers also purchased aone-year forward-starting interest rate cap agreement which takes effect onJanuary 15, 2008 (see Note 9 to the unaudited condensed consolidated financialstatements for disclosures regarding these derivatives).

13

----

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

Comprehensive loss forthe twenty-six weeks ended June 30, 2007, the period February 14, 2006 to July1, 2006 and the period January 1, 2006 to February 13, 2006 is as follows:
|                                          | ** ** | **Successor Entity**                                 | ** **  | ** **                                                  | ** ** | **Predecessor  Entity** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------|-------------|-------------------------------------------------------------|------------|-------------------------|------------|
| **(In thousands)**                  | ** ** | **Twenty-six  Weeks Ended  June 30, 2007** | ** **  | **February 14,  2006 to July 1,  2006** | ** ** | ** **              | ** ** | **January 1,  2006 to  February 13,  2006** | ** ** |
| Net loss                                 |       | $                                                         | (100,160    | )                                                           | $          | (56,699                 | )          |   |   | $ | (47,904 | ) |
| Other  comprehensive income              |       |                                                      |        |                                                        |       |                    |       |   |   |
| Foreign currency adjustments             |       | 9,220                                                     |        | 1,954                                                       |       |                    |       | 253 |   |
| Unrealized gain on hedge arrangements(1) |       | 49                                                        |        | —                                                      |       |                    |       | — |   |
|                                     |       |                                                      |        |                                                        |       |                    |       |   |   |
| **Comprehensive loss**                   | ** ** | **$**                                                     | **(90,891** | **)**                                                       | **$**      | **(54,745**             | **)**      | ** ** | ** ** | **$** | **(47,651** | **)** |

 

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(1)          On July 7, 2006 the Issuers entered into azero cost interest rate collar agreement to hedge the cash flows associatedwith the LIBOR component of the interest rate on the Notes.  On July 7, 2006 the Issuers also purchased aone-year forward-starting interest rate cap agreement which takes effect onJanuary 15, 2008 (see Note 9 to the unaudited condensed consolidated financialstatements for disclosures regarding these derivatives).

**4.Predecessor Restructuring and Asset Impairment Charge**

In fiscal 2001, thePredecessor committed to a strategic initiative designed to improve storeperformance and profitability which called for the closing of certainunder-performing stores.  In connectionwith this initiative, the Predecessor recorded a pre-tax restructuring andasset impairment charge in fiscal 2001 of $37.8 million($23.7 million after-tax).  All ofthe stores included in the reserve at June 30, 2007 are closed.  The Company continues to negotiate and/orexplore lease buyouts or sublease agreements for certain of these stores aswell as evaluates reopening stores previously closed.  Certain components of the restructuringcharge were based on estimates and may be subject to change in the future.  

The restructuring reservebalance was approximately $2.7 million, $3.6 million and $3.4 million at June30, 2007, December 30, 2006 and July 1, 2006 and is included in accruedexpenses and other current liabilities in the condensed consolidated balancesheets.  The $0.9 million reduction inthe reserve during the twenty-six weeks ended June 30, 2007 primarily consistsof payments for lease commitments.  

**5.Identifiable Intangible Assets (Including Goodwill)**

The acquisition ofLinens ’n Things, Inc. was 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.  Theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.******

***Goodwill***

The following tablepresents an analysis of the change in goodwill for the twenty-six weeks endedJune 30, 2007:  
| (in thousands)                        | ** ** | **Amount** | ** **  |
|--------------------------------------------|------------|------------|-------------|
|                                       |       |       |        |
| **Balance  at December 30, 2006**          | ** ** | **$**      | **267,830** | ** ** |
| Pre-existing tax  adjustments              |       | 12,634     |        |
| Pre-existing  book adjustments             |       | (11,130    | )           |
| Other – foreign  currency translation |       | 1,546      |        |
|                                       |       |       |        |
| **Balance at June 30, 2007**               | ** ** | **$**      | **270,880** | ** ** |

 

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

***IdentifiableIntangible Assets***

The carrying amount andaccumulated amortization of identifiable intangible assets consists of thefollowing:
| (in thousands)                              | ** ** | **June 30,  2007** | ** **  | **December 30,  2006** | ** ** | **July 1,  2006** | ** ** |
|--------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|------------------------|------------|
|                                             |       |                    |        |                        |       |                   |       |
| Intangible  assets subject to amortization:      |       |                    |        |                        |       |                   |       |
| Credit card customer relationships               |       | $                       | 10,201      |                        | $          | 10,129                 |       | $ | 10,163 |   |
| Customer list                                    |       | 406                     |        | 406                         |       | 406                    |       |
| Favorable leases                                 |       | 23,973                  |        | 23,852                      |       | 27,834                 |       |
|                                             |       |                    |        |                        |       |                   |       |
|                                             |       | 34,580                  |        | 34,387                      |       | 38,403                 |       |
| Less: accumulated amortization                   |       | (10,834                 | )           | (7,031                      | )          | (3,204                 | )          |
|                                             |       |                    |        |                        |       |                   |       |
| Total intangible  assets subject to amortization |       | 23,746                  |        | 27,356                      |       | 35,199                 |       |
| Total  indefinite-lived trademarks               |       | 122,688                 |        | 122,688                     |       | 122,688                |       |
|                                             |       |                    |        |                        |       |                   |       |
| **Total identifiable intangible  assets**        | ** ** | **$**                   | **146,434** | ** **                  | **$**      | **150,044**            | ** ** | **$** | **157,887** | ** ** |

 

Customer list has anestimated life of 5 years, credit card customer relationships have anestimated life of 3 years and favorable leases have an average estimatedlife of 8 years.  For the thirteenweeks ended June 30, 2007 and July 1, 2006 amortization expense of $1.8 millionand $2.2 million, respectively, was recorded by the Company and is included inselling, general and administrative expenses in the condensed consolidatedstatements of operations.  For thetwenty-six weeks ended June 30, 2007, the period February 14, 2006 to July 1,2006 and the period January 1, 2006 to February 13, 2006, amortization expenseof $3.8 million, $3.2 million and $0.02 million, respectively, was recorded bythe Company.

The following is asummary table representing the remaining amortization of identifiableintangible assets, net, with definitive lives, by year (in thousands):

| Fiscal Year                         | ** ** | **Amortization** | ** ** |
|------------------------------------------|------------|------------------|------------|
| 2007 (July 1, 2007 to December 29, 2007) |       | $                | 3,704      |   |
| 2008                                     |       | 6,523            |       |
| 2009                                     |       | 3,143            |       |
| 2010                                     |       | 2,420            |       |
| 2011                                     |       | 2,046            |       |
| 2012 and thereafter                      |       | 5,910            |       |
|                                     |       |             |       |
| Total                                    |       | $                | 23,746     |   |

 

**6.Accrued Expenses and Other Current Liabilities**

Accrued expenses andother current liabilities includes amounts due customers principally for giftcard, customer rebate and sales return liabilities of $47.0 million, $55.3million and $44.3 million as of June 30, 2007, December 30, 2006 and July 1,2006, respectively.  Income from giftcards that are not expected to be redeemed is recorded in other income, net inthe condensed consolidated statements of operations.  Such amounts recognized for the thirteenweeks ended June 30, 2007 and July 1, 2006 were approximately $0.5 million and$1.0 million, respectively.  Such amountsrecognized for the twenty-six weeks ended June 30, 2007, the period February14, 2006 to July 1, 2006 and the period January 1, 2006 to February 13, 2006were approximately $1.5 million, $1.6 million and $0.5 million, respectively.

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

**7.Senior Secured Notes, Asset-based Revolving Credit Facility and Other Long-TermDebt**

Senior secured notes,asset-based revolving credit facility and other long-term debt consistsof the following:
| (in thousands)                          | ** ** | **June 30,  2007** | ** **  | **December 30,  2006** | ** ** | **July 1,  2006** | ** ** |
|----------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|------------------------|------------|
|                                         |       |                    |        |                        |       |                   |       |
| Senior secured  floating rate notes due 2014 |       | $                       | 650,000     |                        | $          | 650,000                |       | $ | 650,000 |   |
| Asset-based  revolving credit facility       |       | 265,125                 |        | 37,800                      |       | —                 |       |
| Mortgage note  payable                       |       | —                  |        | 2,076                       |       | 2,108                  |       |
|                                         |       |                    |        |                        |       |                   |       |
|                                         | ** ** | **$**                   | **915,125** | ** **                  | **$**      | **689,876**            | ** ** | **$** | **652,108** | ** ** |

 

***SeniorSecured Floating Rate Notes Due 2014***

Seniorsecured floating rate notes due 2014 consist of $650.0 million aggregateprincipal amount of Senior Secured Floating Rate Notes due 2014 of Linens ‘nThings, Inc. and Linens ‘n Things Center, Inc.

TheNotes bear interest at a per annum rate equal to LIBOR plus 5.625%, which is tobe paid every three months on January 15, April 15, July 15 and October15.  The interest rate on the Notes isreset quarterly.  The Notes mature onJanuary 15, 2014.  As of June 30,2007 the interest rate on the Notes was 11.0%, based on a LIBOR rate of 5.4%.

OnJuly 7, 2006 the Issuers entered into a zero cost interest rate collar agreementto hedge the cash flows associated with the LIBOR component of the interestrate on the Notes.  On July 7, 2006 theIssuers also purchased a one-year forward-starting interest rate cap agreementwhich takes effect on January 15, 2008 (see Note 9 to the unaudited condensedconsolidated financial statements).

Deferredfinancing costs of approximately $31 million relating to the Notes arebeing amortized over eight years using the effective interest method.

TheNotes are fully and unconditionally guaranteed jointly and severally on asenior 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 filingand effectiveness of a registration statement on Form S-4 with the SECwith respect to the Notes, the Issuers and the NoteGuarantors became subject to applicable SEC rules with respect toinformation required to be included in the prospectus in the registrationstatement.  To the extent that the securities of any Issueror Note 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 Note Guarantor would be required under these SEC rules to beincluded in the Company’s SEC filings.  The indenture that governsthe Notes provides, however, with respect to any direct or indirect subsidiaryof Linens ‘n Things, Inc., that the securities of the subsidiary are releasedfrom the lien on capital stock on the date that the lien triggers thisseparate 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.

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

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

***SeniorSecured Asset-based Revolving Credit Facility***

In February 2006,the Company entered into a new senior secured asset-based revolving creditfacility agreement (the “Original Credit Facility”) with third-partyinstitutional lenders, which expires February 14, 2011.  In May 2007, the Company entered into anamended and restated credit agreement (the “Credit Facility”).  The provisions of the Credit Facility aresubstantially the same as in the Original Credit Facility with severalmodifications that are generally favorable to the Company.  The provisions of the Credit Facility weremodified for: (i)  a $100.0 millionincrease in the Credit Facility maximum availability from $600.0 million to$700.0 million; (ii) a decrease in the “Excess Availability” threshold forpurposes of mandatory compliance with certain financial ratio maintenancecovenants from $75.0 million to $70.0 million; and (iii) several othermodifications that are all favorable to the Company including permitting theCompany to make a one-time change in its fiscal year upon 45 days’ writtennotice to the administrative agents.  Acopy of the Credit Facility is attached as Exhibit 10.1 to Form 8-K filed withthe SEC on May 29, 2007. 

The Credit Facility provides seniorsecured financing of up to $700.0 million, subject to a borrowing baseconsisting of certain eligible inventory and receivables, minus certainreserves.  A portion of the CreditFacility, not to exceed $40.0 million, is also available to a Canadiansubsidiary of the Company subject to the Canadian borrowing base.    The Company incurred deferred financingcosts of approximately $17 million and $2 million related to the OriginalCredit Facility and the Credit Facility, respectively, which are beingamortized over five years on a straight-line basis.

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

Borrowings under theCredit Facility bear interest at a rate equal to, at the Borrowers’ option,either (a) an alternate base rate determined by reference to the higher of(1) the base rate in effect on such day and (2) the federal fundseffective rate plus 0.50% or (b) a LIBOR rate, with respect to anyEurodollar borrowing, determined by reference to the costs of funds for U.S.dollar deposits for the interest period relevant to such borrowing adjusted forcertain additional costs, in each case plus an applicable margin.  In addition to paying interest on outstandingprincipal under the Credit Facility, the Company is required to pay a variablerate commitment fee in respect of the unutilized commitments thereunder.  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 $70.0 million andalso contains certain restrictive covenants including the Company’s ability topay dividends and certain customary affirmative covenants and events ofdefault.  During the twenty-six weeksended June 30, 2007, the Company always maintained excess availability above$70.0 million.  

As of June 30, 2007, theIssuers had (i) $265.1 million in borrowings outstanding under the CreditFacility at an average interest rate of 6.9%; (ii) $17.0 million of cash onhand; (iii) $64.6 million of letters of credit outstanding issued under the CreditFacility, which includes standby letters of credit and import letters of creditused for merchandise purchases; and (iv) $219.1 million of additionalavailability under the Credit Facility.

***Mortgage Note Payable***

Mortgagenote payable represents an 8.2% fixed-rate mortgage note on the land andbuilding of one 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.  In July 2007 the land and building was soldand the mortgage was repaid and, accordingly, the mortgage note is included inmortgage note payable on property sold in the condensed consolidated balancesheets as of June 30, 2007.

**8.Income Taxes (Including the Adoption of FIN No. 48)**

***Adoptionof Financial Accounting Standards Board Interpretation No. 48, “Accounting forUncertainty in Income Taxes – an interpretation of FASB Statement No. 109”***

The Company is subject totax in the United States and in various states and foreign jurisdictions.  The Company, joined by its domesticsubsidiaries, files a consolidated income tax return for Federal income taxpurposes.  With few exceptions, theCompany is no longer subject to U.S. Federal, state and local income tax ornon-U.S. income tax examinations by tax authorities for tax years before2004.  The Internal Revenue Service (“IRS”)commenced an examination of the Company’s U.S. consolidated income tax returnsfor the years 2004 and 2005 and the period January 1, 2006 to February 13,2006, inclusive, in the first quarter of 2007. Based on its work to date, the IRS has not proposed any adjustments toany of the Company’s tax positions.

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

Financial AccountingStandards Board (“FASB”) Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109*”(“FIN No. 48”), was issued in July 2006 and interprets FASB SFAS No. 109, “*Accounting for Income Taxes*.”  FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006.  TheCompany, in its opening balance sheet for 2007, is required to reflect, ascumulative adjustments to the Company’s retained earnings, the impact of FINNo. 48 on its income tax accruals for all prior years subject to adjustment byfederal, state, local and foreign taxing authorities (open years).  The Company has undertaken an analysis of allmaterial tax positions in its tax accruals for all open years and hasidentified all of its outstanding tax positions and estimated the transitionamounts with respect to each item at the effective date.  The Company has determined that no adjustmentto shareholders’ equity is required as a result of applying FIN No. 48.  The Company expects no material change forthe next twelve months as a result of adopting FIN No. 48.  The Company will continue its policy ofclassifying interest on tax liabilities as part of the provision for incometaxes.  The Company does not anticipateany significant payments with respect to any tax assessments within the nexttwelve months.

The Company adopted theprovisions of FIN No. 48 on December 31, 2006. As a result of the implementation of FIN No. 48, the Company recognizedno change with respect to any unrealized tax benefits and therefore made nochange to the December 31, 2006 opening retained earnings balance.  A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (in thousands):
|                                                            | ** ** | **Amount** | ** ** |
|------------------------------------------------------------|------------|------------|------------|
| Beginning  balance at December 31, 2006 (date of adoption) |       | $          | 8,702      |   |
| Additions for  current year tax positions                  |       | 76         |       |
| Additions for  prior year tax positions                    |       | 3,990      |       |
| Reductions for  prior year tax positions                   |       | —     |       |
| Settlements                                                |       | —     |       |
|                                                       |       |       |       |
| Ending balance at June  30, 2007                           |       | $          | 12,768     |   |

 

Included in the endingbalance at June 30, 2007 are approximately $12.8 million of tax positions forwhich the ultimate deductibility is highly certain but for which uncertaintyexists as to the timing of such deductions.

The Company recognizesinterest and penalties accrued related to unrecognized tax benefits as part ofthe provision for income taxes.  At June30, 2007 and December 31, 2006 (the date of adoption), accrued interest andpenalties amounted to approximately $1.4 million and $0.9 million,respectively, and is included in accrued expenses and other current liabilitiesin the condensed consolidated balance sheets. The Company recorded approximately $0.2 million and $0.4 million ofinterest and penalties during the thirteen weeks and twenty-six weeks endedJune 30, 2007, respectively, which is included in benefit for income taxes inthe condensed consolidated statements of operations.

***OtherIncome Taxes***

During the thirteen weeksended June 30, 2007, the Company recorded an income tax benefit ofapproximately $24.5 million at an effective tax benefit rate of 36.8%.  The Federal statutory rate of 35.0% is lowerthan the effective tax benefit rate primarily due to state tax benefits.

During the twenty-sixweeks ended June 30, 2007, the Company recorded an income tax benefit ofapproximately $58.9 million at an effective tax benefit rate of 37.0%.  The Federal statutory rate of 35.0% is lowerthan the effective tax benefit rate primarily due to state tax benefits.

At June 30, 2007, theCompany has approximately $66.7 million of federal net operating losscarryforwards after carryback which expire in 2026 and approximately $200.0million of state net operating loss carryforwards expiring at various datesbetween 2007 and 2026.

In assessing therealizability of deferred tax assets included in the condensed consolidatedbalance sheets, management considers whether it is more likely than not thatsome portion or all of the tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.  Management considers the scheduled reversalof deferred tax liabilities, projected future taxable income and tax planningstrategies in making this assessment. Based upon the level of historical taxable income and projections forfuture taxable income over

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

the periods in which thedeferred tax assets are deductible, management believes it is more likely thannot that the Company will realize the benefits of these deductible differences,net of existing valuation allowances.

**9.****Derivative Financial Instruments**

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

The Company employsderivative financial instruments to manage its exposure to interest ratechanges and to limit the volatility and impact of interest rate changes onearnings and cash flows.

The Company does notenter into other derivative financial instruments for trading or speculativepurposes.  The Company faces credit riskif the counterparties to these transactions are unable to perform theirobligations.  However, the Company seeksto minimize this risk by entering into transactions with counterparties thatare major financial institutions with high credit ratings.

The Company recordsunrealized gains and losses on derivative financial instruments qualifying ascash flow hedges in accumulated other comprehensive income (loss) on thecondensed consolidated balance sheets, to the extent that hedges areeffective.  For derivative financialinstruments which do not qualify as cash flow hedges, any changes in fair valuewould be recorded in the condensed consolidated statements of operations.

The Company may at itsdiscretion terminate or de-designate any such hedging instrumentagreements prior to maturity.  At thattime, any gains or losses previously reported in accumulated othercomprehensive income (loss) on termination would amortize into interest expenseor interest income to correspond to the recognition of interest expense orinterest income on the hedged debt.  Ifsuch debt instrument was also terminated, the gain or loss associated with theterminated derivative included in accumulated other comprehensive income (loss)at the time of termination of the debt would be recognized in the condensedconsolidated statements of operations at that time.

On July 7, 2006 theIssuers entered into a zero cost interest rate collar agreement (the “Collar Agreement”)to hedge the cash flows associated with the LIBOR component of the interestrate on the Notes.  The Collar Agreementprovides for payments to be made to or received from the counterparty where theLIBOR component of the rate in effect for the Notes is below 4.45% or above6.51% for a given reset period.  Suchpayments represent the difference between the rates stated above in the CollarAgreement and those in effect on the Notes for the given reset period.  Payment and reset dates under the CollarAgreement are matched exactly to those of the Notes.  The Collar Agreement has an ultimate maturityof January 15, 2008.  To the extent thatthe three-month LIBOR rate is below the Collar Agreement floor, payment is duefrom the Company to the counterparty for the difference.  To the extent the three-month LIBOR rate isabove the Collar Agreement cap, the Company is entitled to receive thedifference from the counterparty.  At theinception of the Collar Agreement, the Company determined that the hedging relationshipwould have no ineffectiveness, and the Company will continue to verify anddocument that the critical terms of the hedging instrument and the hedged itemare exactly matched.  At June 30, 2007,the notional amount of debt related to the Collar Agreement was $650.0 millionand the fair value of the Collar Agreement was a de minimis liability.

On July 7, 2006 theIssuers also purchased a one-year forward-starting interest rate cap agreement(the “Cap Agreement”) which takes effect on January 15, 2008.  The Cap Agreement provides for payments to bereceived from the counterparty where the LIBOR component of the rate in effecton a LIBOR-based borrowing arrangement is above 6.51% for a given reset period.  Such payments represent the difference betweenthe LIBOR rate stated above in the Cap Agreement and those in effect on aLIBOR-based borrowing arrangement for the given reset period.  Payment and reset dates under the CapAgreement are matched exactly to those of the LIBOR-based borrowing arrangement.  The Cap Agreement has an ultimate maturity ofJanuary 15, 2009.  The Issuers paid apremium of $0.7 million to purchase the Cap Agreement.  The Cap Agreement consists of two components,a forward contract and an interest rate cap agreement.  The Company’s intent is to hedge the cashflow associated with the LIBOR component of the interest rate on a LIBOR-basedborrowing arrangement beyond 6.51% for the period January 15, 2008 throughJanuary 15, 2009.  The forward contractenables the Company to achieve this objective. The Company will assess the effectiveness of the forward contractquarterly.  Once the forward contractbecomes an interest rate cap agreement, effectiveness will be assessed anddocumented as a new relationship.  Theinterest rate cap agreement is expected to be perfectly effective at such time,and the Company will continue to subsequently verify and document that thecritical terms of the interest rate cap agreement and the hedged item continueto match exactly over the remaining life of the relationship.  At June 30, 2007, the notional amount of debtrelated to the Cap Agreement was $650.0 million and the fair value of theinstrument was approximately a $0.04 million asset.

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

The Company hasdetermined that the Collar Agreement and the Cap Agreement have beenappropriately designated and documented as cash flow hedges under SFAS No.133.  As such, changes in the fair valueof the Collar Agreement and the Cap Agreement have been recorded in accumulatedother comprehensive income (loss) on the condensed consolidated balancessheets.  During the thirteen weeks andtwenty-six weeks ended June 30, 2007, the Company has recorded a gain ofapproximately $0.08 million and $0.05 million, respectively, in accumulatedother comprehensive income (loss) related to these changes in fair value.  The Collar Agreement and the Cap Agreementhad no ineffectiveness and provided no amounts received or paid under thehedges that affected net loss during the period.  Both agreements are expected to have noineffectiveness during their contractual lives.

**10. Recent AccountingPronouncements**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115*” (“SFAS No. 159”). SFAS No. 159 permits, but does not require, companies to report at fairvalue the majority of recognized financial assets, financial liabilities andfirm commitments.  Under this standard,unrealized gains and losses on items for which the fair value option is electedare reported in earnings at each subsequent reporting date.  The Company is currently assessing the effectSFAS No. 159 may have, if any, on its consolidated financial statements when itbecomes effective as of the beginning of fiscal 2008.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 158, “**Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R)****”**(“SFASNo. 158”). SFAS No. 158 requires, among other items, recognition of theoverfunded or underfunded status of an entity’s defined benefit postretirementplan as an asset or liability, respectively, in the balance sheet, requires themeasurement of defined benefit postretirement plan assets and obligations as ofthe end of the employer’s fiscal year, and requires recognition of changes infunded status of defined benefit postretirement plans in the year in which thechanges occur in other comprehensive income. SFAS No. 158 is effective as of the end of the fiscal year ending afterJune 15, 2007 and early application is encouraged.  The adoption of SFAS No. 158 is not expectedto have a material effect on the Company’s financial position or results ofoperations.

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “*Fair Value Measurements*” (“SFAS No. 157”) which is effectivefor fiscal years beginning after November 15, 2007 and for interim periodswithin those years.  This statementdefines fair value, establishes a framework for measuring fair value andexpands the related disclosure requirements. The Company is in the process of determining the effect, if any, thatthe adoption of SFAS No. 157 will have on its financial statements.

In September 2006,the SEC staff issued Staff Accounting Bulletin No. 108, “*Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*” (“SABNo. 108”).  SAB No. 108 providesguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment.  SAB No. 108 establishesan approach that requires quantification of financial statement errors based onthe effects on each of the Company’s financial statements and related financialstatement disclosures.  SAB No. 108permits existing public companies to record the cumulative effect of initiallyapplying this approach in the first year ending after November 15, 2006 byrecording the necessary correcting adjustments to the carrying values of assetsand liabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings.  Additionally, the use of the cumulativeeffect transition method requires detailed disclosure of the nature and amountof each individual error being corrected through the cumulative adjustment andhow and when it arose.  At December 31,2006, the Company recorded an adjustment under SAB No. 108 (see Note 1 tothe unaudited condensed consolidated financial statements).

In June 2006, the FASB’sEmerging Issues Task Force reached a consensus on Issue No. 06-3, “*How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should be Presented in the Income Statement (That Is, Gross versusNet Presentation)*” (“EITF 06-3”). EITF 06-3 includes sales, use, value-added and some excise taxes thatare assessed by a governmental authority on specific revenue-producingtransactions between a seller and a customer. EITF 06-3 requires disclosure of the method of accounting for theapplicable assessed taxes and the amount of assessed taxes included in revenuesif such taxes are accounted for under the gross method.  EITF 06-3 became effective for both interimand annual periods beginning in fiscal year 2007.  EITF 06-3 did not impact the Company’s methodfor recording these applicable assessed taxes because the Company hashistorically presented sales excluding such taxes, that is “net” presentation.

**11.Related Party Transactions**

**ManagementServices Agreement**

Upon consummation of theMerger, the Company entered into a management services agreement with ApolloManagement V, L.P., NRDC Linens B LLC and Silver Point Capital Fund InvestmentsLLC (each of whom is an affiliate of the Company).  Under this

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

management servicesagreement, the Sponsors agreed to provide to the Company certain investmentbanking, management, consulting, financial planning and real estate advisoryservices on an ongoing basis for a fee of $2.0 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. Thirty percent of this fee, or $4.5 million, was included as part of thepurchase price and the remaining 70%, or $10.5 million, has been included indeferred financing costs.  These servicesincluded assisting the Company in structuring the Merger, taking into accounttax considerations and optimal access to financing, and assisting in thenegotiation of the Company’s material agreements and financing arrangements inconnection with the Merger.

**Stockholders’Agreement**

The only stockholders ofthe Company are Linens Investors, LLC, a limited liability company owned by theSponsors, two executives of the Company, Robert J. DiNicola, Chairman and ChiefExecutive Officer, and F. David Coder, Executive Vice President, StoreOperations, and one nonemployee director, George G. Golleher.  In connection therewith, Linens Investors,LLC has entered into a stockholders’ agreement with the Company, and each ofthe other stockholders have entered into joinder agreements to be bound by thestockholders’ agreement.  Thestockholders’ agreement sets forth certain provisions relating to themanagement of the Company.  In addition,the stockholders’ agreement contains customary drag along rights, tag alongrights, registration rights, restrictions on the transfer of the Company’scommon stock and an indemnity of the Sponsors.

**12.Supplemental Condensed Consolidating Financial Information**

On February 14, 2006Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc. (collectively,the “Issuers”), issued $650.0 million aggregate principal amount of SeniorSecured Floating Rate Notes due 2014. The Notes are fully and unconditionally guaranteed, jointly andseverally, on a senior basis by the Company, and by each of the Company’sdirect and indirect subsidiaries that guarantee the Company’s new asset-basedrevolving credit facility except for its Canadian subsidiaries.  The Company’s Canadian subsidiaries (the “Non-Guarantors”)are not guarantors of the Notes.

The following tablespresent the supplemental condensed consolidating financial information for theCompany (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, Guarantorsand Non-Guarantors because management has determined that such information isnot meaningful to investors.  Theaccounting policies for Parent, Co-Issuers, Guarantors, and Non-Guarantors arethe same as those more fully described in Note 2 to the audited consolidatedfinancial statements included in the Company’s 2006 Annual Report on Form 10-Kunder “*Summary of SignificantAccounting Policies*”.  Thefinancial information may not necessarily be indicative of the financialposition, results of operations or cash flows had the Parent, Co-Issuers,Guarantors and Non-Guarantors operated as independent entities.

The information (1) at June 30,2007, December 30, 2006 and July 1, 2006 and (2) for the thirteen weeks endedJune 30, 2007 and July 1, 2006, the twenty-six weeks ended June 30, 2007 and theperiod February 14, 2006 to July 1, 2006, presents the financial positionand results of operations and cash flows, respectively, of the SuccessorEntity.  The information for the periodJanuary 1, 2006 to February 13, 2006 presents the results of operationsand cash flows of the Predecessor Entity.

21

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

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For theThirteen Week Period Ended June 30, 2007**

**(InThousands) (Unaudited)**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|-------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **13,995**     | ** ** | **$**                | **526,637** | ** **       | **$**      | **52,939**       | ** ** | **$** | **—** | ** ** | **$** | **593,571** | ** ** |
| Cost of sales,  including buying and distribution costs |       | —     |       | 8,066          |       | 311,006        |       | 27,582               |        | —           |       | 346,654          |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Gross profit**                                        | ** ** | **—** | ** ** | **5,929**      | ** ** | **215,631**    | ** ** | **25,357**           | ** **  | **—**       | ** ** | **246,917**      | ** ** |
| Selling, general and  administrative expenses           |       | —     |       | 5,055          |       | 259,018        |       | 25,106               |        | —           |       | 289,179          |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **—** | ** ** | **874**        | ** ** | **(43,387**    | **)**      | **251**              | ** **  | **—**       | ** ** | **(42,262**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Interest income                                         |       | —     |       | (1             | )          | (9             | )          | (99                  | )           | —           |       | (109             | )          |
| Interest expense                                        |       | —     |       | 5,979          |       | 19,400         |       | 346                  |        | —           |       | 25,725           |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Interest expense, net                                   |       | —     |       | 5,978          |       | 19,391         |       | 247                  |        | —           |       | 25,616           |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Other income, net                                       |       | —     |       | (12            | )          | (275           | )          | (1,138               | )           | —           |       | (1,425           | )          |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **(Loss) income before income  taxes**                  | ** ** | **—** | ** ** | **(5,092**     | **)**      | **(62,503**    | **)**      | **1,142**            | ** **  | **—**       | ** ** | **(66,453**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| (Benefit) provision for  income taxes                   |       | —     |       | (1,950         | )          | (22,730        | )          | 213                  |        | —           |       | (24,467          | )          |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Net (loss) income**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **(3,142**     | **)**      | **$**                | **(39,773** | **)**            | **$**      | **929**          | ** ** | **$** | **—** | ** ** | **$** | **(41,986** | **)** |

 

22

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

 

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For theThirteen Week Period Ended July 1, 2006**

**(InThousands) (Unaudited)**

 
| ** **                                              | ** ** | **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           |       | —     |       | 4,612          |       | 259,776        |       | 18,831               |        | —           |       | 283,219          |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **—** | ** ** | **1,663**      | ** ** | **(47,892**    | **)**      | **1,328**            | ** **  | **—**       | ** ** | **(44,901**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| 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           |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Other income,  net                                      |       | —     |       | (1,106         | )          | (1,063         | )          | (763                 | )           | —           |       | (2,932           | )          |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **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** | **)** |

 

23

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For theTwenty-six Week Period Ended June 30, 2007**

**(InThousands) (Unaudited)**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**      | **—** | ** **     | **$**      | **27,811**     | ** ** | **$**                | **1,041,329** | ** **       | **$**      | **95,991**       | ** ** | **$** | **—** | ** ** | **$** | **1,165,131** | ** ** |
| Cost of sales,  including buying and distribution costs |       | —     |       | 16,520         |       | 639,612        |       | 48,598               |          | —           |       | 704,730          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Gross  profit**                                       | ** ** | **—** | ** ** | **11,291**     | ** ** | **401,717**    | ** ** | **47,393**           | ** **    | **—**       | ** ** | **460,401**      | ** ** |
| Selling, general  and administrative expenses           |       | —     |       | 10,185         |       | 516,626        |       | 45,304               |          | —           |       | 572,115          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **—** | ** ** | **1,106**      | ** ** | **(114,909**   | **)**      | **2,089**            | ** **    | **—**       | ** ** | **(111,714**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest income                                         |       | —     |       | (9             | )          | (9             | )          | (246                 | )             | —           |       | (264             | )          |
| Interest expense                                        |       | —     |       | 14,040         |       | 35,194         |       | 653                  |          | —           |       | 49,887           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest  expense, net                                  |       | —     |       | 14,031         |       | 35,185         |       | 407                  |          | —           |       | 49,623           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Other expense  (income), net                            |       | —     |       | 248            |       | (1,272         | )          | (1,274               | )             | —           |       | (2,298           | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **(Loss)  income before income taxes**                  | ** ** | **—** | ** ** | **(13,173**    | **)**      | **(148,822**   | **)**      | **2,956**            | ** **    | **—**       | ** ** | **(159,039**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| (Benefit) provision  for income taxes                   |       | —     |       | (4,899         | )          | (54,828        | )          | 848                  |          | —           |       | (58,879          | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Net (loss) income**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **(8,274**     | **)**      | **$**                | **(93,994**   | **)**            | **$**      | **2,108**        | ** ** | **$** | **—** | ** ** | **$** | **(100,160** | **)** |

 

24

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For thePeriod February 14, 2006 - July 1, 2006**

**(InThousands) (Unaudited)**

 
| ** **                                              | ** ** | **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           |       | —     |       | 7,384          |       | 384,071        |       | 29,324               |        | —           |       | 420,779          |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **—** | ** ** | **2,351**      | ** ** | **(66,744**    | **)**      | **709**              | ** **  | **—**       | ** ** | **(63,684**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| 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           |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Other income,  net                                      |       | —     |       | (657           | )          | (1,484         | )          | (590                 | )           | —           |       | (2,731           | )          |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **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** | **)** |

 

25

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For thePeriod January 1, 2006 - February 13, 2006**

**(InThousands) (Unaudited)**

 
| ** **                                              | ** ** | **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           |       | 2,571          |       | 164,013        |       | 8,840                |       | —           |       | 175,424          |       |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **364**        | ** ** | **(70,114**    | **)**      | **(1,378**           | **)**      | **—**       | ** ** | **(71,128**      | **)**      |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| 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             | )          |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Other income,  net                                      |       | (452           | )          | (502           | )          | (332                 | )          | —           |       | (1,286           | )          |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **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** | **)** |

 

26

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

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**June 30,2007**

**(InThousands) (Unaudited)**

 
| ** **                                            | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Cash and cash  equivalents                            |       | $           | —      |           | $          | 1,360          |       | $                    | 10,550        |             | $          | 5,053            |       | $ | — |   | $ | 16,963 |   |
| Accounts receivable                                   |       | —      |        | 635            |       | 33,070         |       | 2,428                |          | —           |       | 36,133           |       |
| Inventories                                           |       | —      |        | 14,849         |       | 778,865        |       | 64,654               |          | —           |       | 858,368          |       |
| Prepaid expenses and  other current assets            |       | —      |        | 245            |       | 12,903         |       | 1,140                |          | —           |       | 14,288           |       |
| Current deferred taxes                                |       | —      |        | 249            |       | 17,366         |       | 264                  |          | —           |       | 17,879           |       |
| **Total current assets**                              | ** ** | **—**  | ** **  | **17,338**     | ** ** | **852,754**    | ** ** | **73,539**           | ** **    | **—**       | ** ** | **943,631**      | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and equipment,  net                          |       | —      |        | 6,387          |       | 434,443        |       | 46,659               |          | —           |       | 487,489          |       |
| Identifiable intangible  assets, net                  |       | —      |        | 658            |       | 144,176        |       | 1,600                |          | —           |       | 146,434          |       |
| Goodwill                                              |       | —      |        | 11,254         |       | 241,906        |       | 17,720               |          | —           |       | 270,880          |       |
| Intercompany  receivables                             |       | —      |        | —         |       | 554,158        |       | 13,323               |          | (567,481         | )          | —           |       |
| Intercompany notes  receivable                        |       | —      |        | 1,179,219      |       | —         |       | 25,546               |          | (1,204,765       | )          | —           |       |
| Investment in subsidiaries                            |       | 455,308     |        | 717,203        |       | —         |       | —               |          | (1,172,511       | )          | —           |       |
| Deferred financing  costs and other noncurrent assets |       | —      |        | 41,952         |       | 613            |       | 24                   |          | —           |       | 42,589           |       |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total assets**                                      | ** ** | **$**       | **455,308** | ** **     | **$**      | **1,974,011**  | ** ** | **$**                | **2,228,050** | ** **       | **$**      | **178,411**      | ** ** | **$** | **(2,944,757** | **)** | **$** | **1,891,023** | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities and Shareholders’  Equity**        | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current liabilities:                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                      |       | $           | —      |           | $          | —         |       | $                    | 158,791       |             | $          | 32,230           |       | $ | — |   | $ | 191,021 |   |
| Accrued expenses and  other current liabilities       |       | —      |        | 34,696         |       | 151,183        |       | 8,401                |          | —           |       | 194,280          |       |
| Mortgage note payable  on property sold               |       | —      |        | —         |       | 2,043          |       | —               |          | —           |       | 2,043            |       |
| **Total current liabilities**                         | ** ** | **—**  | ** **  | **34,696**     | ** ** | **312,017**    | ** ** | **40,631**           | ** **    | **—**       | ** ** | **387,344**      | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Intercompany payable                                  |       | —      |        | 567,481        |       | —         |       | —               |          | (567,481         | )          | —           |       |
| Intercompany notes  payable                           |       | —      |        | —         |       | 1,153,800      |       | 50,965               |          | (1,204,765       | )          | —           |       |
| Senior secured notes  and other long-term debt        |       | —      |        | 915,125        |       | —         |       | —               |          | —           |       | 915,125          |       |
| Noncurrent deferred  income taxes                     |       | —      |        | 590            |       | 68,293         |       | 6,076                |          | —           |       | 74,959           |       |
| Other long-term  liabilities                          |       | —      |        | 810            |       | 53,350         |       | 4,127                |          | —           |       | 58,287           |       |
| **Total liabilities**                                 | ** ** | **—**  | ** **  | **1,518,702**  | ** ** | **1,587,460**  | ** ** | **101,799**          | ** **    | **(1,772,246**   | **)**      | **1,435,715**    | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total shareholders’ equity**                   | ** ** | **455,308** | ** **  | **455,309**    | ** ** | **640,590**    | ** ** | **76,612**           | ** **    | **(1,172,511**   | **)**      | **455,308**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total liabilities and shareholders’ equity**   | ** ** | **$**       | **455,308** | ** **     | **$**      | **1,974,011**  | ** ** | **$**                | **2,228,050** | ** **       | **$**      | **178,411**      | ** ** | **$** | **(2,944,757** | **)** | **$** | **1,891,023** | ** ** |

 

27

----

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

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**December 30,2006**

**(InThousands) (Unaudited)**

 
| ** **                                            | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Cash and cash  equivalents                            |       | $           | —      |           | $          | 1,087          |       | $                    | 10,218        |             | $          | 1,221            |       | $ | — |   | $ | 12,526 |   |
| Accounts  receivable                                  |       | —      |        | 435            |       | 33,083         |       | 3,545                |          | —           |       | 37,063           |       |
| Inventories                                           |       | —      |        | 14,822         |       | 728,503        |       | 49,677               |          | —           |       | 793,002          |       |
| Prepaid expenses  and other current assets            |       | —      |        | 141            |       | 14,662         |       | 505                  |          | —           |       | 15,308           |       |
| Current deferred  taxes                               |       | —      |        | 16,561         |       | —         |       | 254                  |          | —           |       | 16,815           |       |
| **Total  current assets**                             | ** ** | **—**  | ** **  | **33,046**     | ** ** | **786,466**    | ** ** | **55,202**           | ** **    | **—**       | ** ** | **874,714**      | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and  equipment, net                          |       | —      |        | 10,154         |       | 477,390        |       | 43,285               |          | —           |       | 530,829          |       |
| Identifiable  intangible assets, net                  |       | —      |        | 731            |       | 147,650        |       | 1,663                |          | —           |       | 150,044          |       |
| Goodwill                                              |       | —      |        | 7,357          |       | 244,485        |       | 15,988               |          | —           |       | 267,830          |       |
| Intercompany  receivables                             |       | —      |        | —         |       | 774,784        |       | 22,986               |          | (797,770         | )          | —           |       |
| Intercompany  notes receivable                        |       | —      |        | 1,176,998      |       | —         |       | 23,314               |          | (1,200,312       | )          | —           |       |
| Investment in  subsidiaries                           |       | 544,742     |        | 802,241        |       | —         |       | —               |          | (1,346,983       | )          | —           |       |
| Deferred  financing costs and other noncurrent assets |       | —      |        | 33,813         |       | 687            |       | 17                   |          | —           |       | 34,517           |       |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  assets**                                     | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**                | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**        | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                                 |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                      |       | $           | —      |           | $          | —         |       | $                    | 181,159       |             | $          | 23,601           |       | $ | — |   | $ | 204,760 |   |
| Accrued expenses  and other current liabilities       |       | —      |        | 38,466         |       | 186,994        |       | 16,451               |          | —           |       | 241,911          |       |
| **Total  current liabilities**                        | ** ** | **—**  | ** **  | **38,466**     | ** ** | **368,153**    | ** ** | **40,052**           | ** **    | **—**       | ** ** | **446,671**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Intercompany  payable                                 |       | —      |        | 797,770        |       | —         |       | —               |          | (797,770         | )          | —           |       |
| Intercompany  notes payable                           |       | —      |        | —         |       | 1,153,800      |       | 46,513               |          | (1,200,313       | )          | —           |       |
| Senior secured  notes and other long-term debt        |       | —      |        | 687,800        |       | 2,076          |       | —               |          | —           |       | 689,876          |       |
| Noncurrent  deferred income taxes                     |       | —      |        | (5,343         | )          | 125,894        |       | 5,426                |          | —           |       | 125,977          |       |
| Other long-term  liabilities                          |       | —      |        | 905            |       | 46,953         |       | 2,809                |          | —           |       | 50,667           |       |
| **Total  liabilities**                                | ** ** | **—**  | ** **  | **1,519,598**  | ** ** | **1,696,876**  | ** ** | **94,800**           | ** **    | **(1,998,083**   | **)**      | **1,313,191**    | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total  shareholders’ equity**                  | ** ** | **544,742** | ** **  | **544,742**    | ** ** | **734,586**    | ** ** | **67,655**           | ** **    | **(1,346,982**   | **)**      | **544,743**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total liabilities and  shareholders’ equity**  | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**                | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |

 

28

----

**LINENS HOLDINGCO. AND SUBSIDIARIES (AND PREDECESSOR)**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**July 1, 2006**

**(InThousands) (Unaudited) (Restated)**

 
| ** **                                            | ** ** | **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            | )          | 6,521          |       | 186                  |          | —           |       | 6,678            |       |
| **Total  current assets**                             | ** ** | **—**  | ** **  | **55,924**     | ** ** | **867,081**    | ** ** | **66,343**           | ** **    | **—**       | ** ** | **989,348**      | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| 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          |       | 241,754        |       | 16,512               |          | —           |       | 265,865          |       |
| 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 costs and other noncurrent assets |       | —      |        | 34,788         |       | 562            |       | 14                   |          | —           |       | 35,364           |       |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  assets**                                     | ** ** | **$**       | **595,351** | ** **     | **$**      | **2,060,365**  | ** ** | **$**                | **2,434,529** | ** **       | **$**      | **153,167**      | ** ** | **$** | **(3,204,167** | **)** | **$** | **2,039,245** | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**        | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                                 |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                      |       | $           | —      |           | $          | —         |       | $                    | 175,395       |             | $          | 16,096           |       | $ | — |   | $ | 191,491 |   |
| Accrued expenses  and other current liabilities       |       | —      |        | 38,327         |       | 172,889        |       | 12,590               |          | —           |       | 223,806          |       |
| Current deferred  taxes                               |       | —      |        | —         |       | —         |       | —               |          | —           |       | —           |       |
| Short-term  borrowings                                |       | —      |        | 155,006        |       | —         |       | —               |          | —           |       | 155,006          |       |
| **Total  current liabilities**                        | ** ** | **—**  | ** **  | **193,333**    | ** ** | **348,284**    | ** ** | **28,686**           | ** **    | **—**       | ** ** | **570,303**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| 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        |       | —      |        | 650,000        |       | 2,108          |       | —               |          | —           |       | 652,108          |       |
| Noncurrent  deferred income taxes                     |       | —      |        | (968           | )          | 171,280        |       | 5,749                |          | —           |       | 176,061          |       |
| Other long-term  liabilities                          |       | —      |        | 631            |       | 42,164         |       | 2,627                |          | —           |       | 45,422           |       |
| **Total  liabilities**                                | ** ** | **—**  | ** **  | **1,465,014**  | ** ** | **1,637,636**  | ** ** | **94,839**           | ** **    | **(1,753,595**   | **)**      | **1,443,894**    | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **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**  | ** ** | **$**                | **2,434,529** | ** **       | **$**      | **153,167**      | ** ** | **$** | **(3,204,167** | **)** | **$** | **2,039,245** | ** ** |

 

29

----

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For theTwenty-six Week Period Ended June 30, 2007**

**(In Thousands)(Unaudited)**

 
| ** **                                                                                          | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  flows from operating activities:**                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net (loss)  income                                                                                  |       | $          | —     |           | $          | (8,274         | )          | $                    | (93,994    | )                | $          | 2,108            |       | $ | — |   | $ | (100,160 | ) |
| Adjustments to reconcile  net (loss) income to net cash provided by (used in) operating activities: |       | —     |       | —         |       | —         |       | —               |       | —           |       |             |       |
| Depreciation and  amortization                                                                      |       | —     |       | 1,247          |       | 58,505         |       | 4,533                |       | —           |       | 64,285           |       |
| Deferred income  taxes                                                                              |       | —     |       | 18,119         |       | (78,992        | )          | 135                  |       | —           |       | (60,738          | )          |
| Share-based  compensation                                                                           |       | —     |       | 1,455          |       | —         |       | —               |       | —           |       | 1,455            |       |
| Amortization of  deferred financing charges                                                         |       | —     |       | 4,381          |       | —         |       | —               |       | —           |       | 4,381            |       |
| Loss on sale and  disposals of property and equipment                                               |       | —     |       | 292            |       | 15             |       | —               |       | —           |       | 307              |       |
| Changes in  assets and liabilities:                                                                 |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| (Increase)  decrease in accounts receivable                                                         |       | —     |       | (199           | )          | 13             |       | 1,370                |       | —           |       | 1,184            |       |
| Increase in  inventories                                                                            |       | —     |       | (27            | )          | (50,362        | )          | (9,621               | )          | —           |       | (60,010          | )          |
| (Increase)  decrease in prepaid expenses and other current assets                                   |       | —     |       | (104           | )          | 1,759          |       | 956                  |       | —           |       | 2,611            |       |
| Decrease  (increase) in identifiable intangible assets and other noncurrent assets                  |       | —     |       | —         |       | 75             |       | (3                   | )          | —           |       | 72               |       |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| (Decrease)  increase in accounts payable                                                            |       | —     |       | —         |       | (22,369        | )          | 5,996                |       | —           |       | (16,373          | )          |
| Decrease in  accrued expenses and other liabilities                                                 |       | —     |       | (6,277         | )          | (23,823        | )          | (8,869               | )          | —           |       | (38,969          | )          |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash provided by (used in) operating activities**                                            | ** ** | **—** | ** ** | **10,613**     | ** ** | **(209,173**   | **)**      | **(3,395**           | **)**      | **—**       | ** ** | **(201,955**     | **)**      |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property and equipment                                                                |       | —     |       | (1,830         | )          | (17,072        | )          | (3,593               | )          | —           |       | (22,495          | )          |
| Proceeds from  sale of property and equipment                                                       |       | —     |       | 3,300          |       | —         |       | —               |       | —           |       | 3,300            |       |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash provided by (used in) investing activities**                                            | ** ** | **—** | ** ** | **1,470**      | ** ** | **(17,072**    | **)**      | **(3,593**           | **)**      | **—**       | ** ** | **(19,195**      | **)**      |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Financing and  direct acquisition costs                                                             |       | —     |       | (12,320        | )          | 9,590          |       | 635                  |       | —           |       | (2,095           | )          |
| Intercompany  movements                                                                             |       | —     |       | (226,815       | )          | 217,020        |       | 9,795                |       | —           |       | —           |       |
| Net increase in  borrowings under revolving credit facility                                         |       | —     |       | 227,325        |       | —         |       | —               |       | —           |       | 227,325          |       |
| Payments on  mortgage note                                                                          |       | —     |       | —         |       | (33            | )          | —               |       | —           |       | (33              | )          |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                                            | ** ** | **—** | ** ** | **(11,810**    | **)**      | **226,577**    | ** ** | **10,430**           | ** ** | **—**       | ** ** | **225,197**      | ** ** |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect  of exchange rate changes on cash and cash equivalents**                                   | ** ** | **—** | ** ** | **—**     | ** ** | **—**     | ** ** | **390**              | ** ** | **—**       | ** ** | **390**          | ** ** |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Net increase in  cash and cash equivalents                                                          |       | —     |       | 273            |       | 332            |       | 3,832                |       | —           |       | 4,437            |       |
| Cash and cash  equivalents at beginning of period                                                   |       | —     |       | 1,087          |       | 10,218         |       | 1,221                |       | —           |       | 12,526           |       |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash and cash equivalents at  end of period**                                                     | ** ** | **$**      | **—** | ** **     | **$**      | **1,360**      | ** ** | **$**                | **10,550** | ** **       | **$**      | **5,053**        | ** ** | **$** | **—** | ** ** | **$** | **16,963** | ** ** |

 

30

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

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod February 14, 2006 - July 1, 2006**

**(InThousands) (Unaudited) (Restated)**

 
| ** **                                                                                           | ** ** | **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) provided by operating  activities: |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and  amortization                                                                       |       | —       |       | 796            |       | 43,144         |       | 2,876                |       | —           |       | 46,816           |       |
| Deferred income  taxes                                                                               |       | —       |       | (6,490         | )          | (7,666         | )          | 4,254                |       | —           |       | (9,902           | )          |
| Share-based  compensation                                                                            |       | —       |       | 2,328          |       | —         |       | —               |       | —           |       | 2,328            |       |
| Amortization of  deferred financing charges                                                          |       | —       |       | 1,610          |       | —         |       | —               |       | —           |       | 1,610            |       |
| Loss on  disposals of property and equipment                                                         |       | —       |       | —         |       | 73             |       | —               |       | —           |       | 73               |       |
| Changes in  assets and liabilities, net of 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  (increase) in identifiable intangible assets and other noncurrent assets                   |       | —       |       | —         |       | 242            |       | (6                   | )          | —           |       | 236              |       |
| (Decrease)  increase in accounts payable                                                             |       | —       |       | —         |       | (42,289        | )          | 1,115                |       | —           |       | (41,174          | )          |
| Increase  (decrease) in accrued expenses and other liabilities                                       |       | —       |       | 19,942         |       | (35,922        | )          | (2,189               | )          | —           |       | (18,169          | )          |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by operating activities**                                             | ** ** | **—**   | ** ** | **(12,308**    | **)**      | **(136,389**   | **)**      | **1,204**            | ** ** | **—**       | ** ** | **(147,493**     | **)**      |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **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           | )          | (27,225        | )          | (2,160               | )          | —           |       | (29,630          | )          |
| Additions to  investment in subsidiary                                                               |       | (1           | )          | (116           | )          | —         |       | —               |       | 117              |       | —           |       |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by investing activities**                                             | ** ** | **(650,150** | **)**      | **(1,220,827** | **)**      | **(19,592**    | **)**      | **5,171**            | ** ** | **650,266**      | ** ** | **(1,235,132**   | **)**      |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **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          |       |
| Financing and  direct acquisition costs                                                              |       | —       |       | (59,220        | )          | —         |       | —               |       | —           |       | (59,220          | )          |
| Intercompany  movements                                                                              |       | —       |       | (162,617       | )          | 163,554        |       | (937                 | )          | —           |       | —           |       |
| Net increase in  borrowings under revolving credit facility                                          |       | —       |       | 155,006        |       | —         |       | —               |       | —           |       | 155,006          |       |
| Payments on  mortgage note                                                                           |       | —       |       | —         |       | (23            | )          | —               |       | —           |       | (23              | )          |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash provided by (used in) financing activities**                                             | ** ** | **650,150**  | ** ** | **1,233,319**  | ** ** | **163,531**    | ** ** | **(821**             | **)**      | **(650,266**     | **)**      | **1,395,913**    | ** ** |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **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** | ** ** |

 

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

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod January 1, 2006 - February 13, 2006**

**(InThousands) (Unaudited)**

 
| ** **                                                                            | ** ** | **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           | )          | (6,108         | )          | 113                  |       | —           |       | (6,725           | )          |
| Share-based  compensation                                                             |       | 12,484         |       | —         |       | —               |       | —           |       | 12,484           |       |
| Amortization of  deferred financing charges                                           |       | —         |       | 43             |       | —               |       | —           |       | 43               |       |
| Changes in  assets and liabilities:                                                   |       |           |       |           |       |                 |       |             |       |             |       |
| (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 and other noncurrent assets               |       | 11             |       | 9,515          |       | 54                   |       | —           |       | 9,580            |       |
| Increase  (decrease) in accounts payable                                              |       | —         |       | 13,064         |       | (1,054               | )          | —           |       | 12,010           |       |
| (Decrease)  increase in accrued expenses and other liabilities                        |       | (27,564        | )          | 24,083         |       | (4,326               | )          | —           |       | (7,807           | )          |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in operating activities**                                            | ** ** | **(13,233**    | **)**      | **(42,780**    | **)**      | **(5,943**           | **)**      | **—**       | ** ** | **(61,956**      | **)**      |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from investing activities:**                                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property and equipment                                                  |       | (107           | )          | (8,533         | )          | (2,316               | )          | —           |       | (10,956          | )          |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                            | ** ** | **(107**       | **)**      | **(8,533**     | **)**      | **(2,316**           | **)**      | **—**       | ** ** | **(10,956**      | **)**      |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash flows  from financing activities:**                                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Intercompany  movements                                                               |       | (52,158        | )          | 49,564         |       | 2,594                |       | —           |       | —           |       |
| Federal tax  benefit from common stock issued under stock incentive plans             |       | 4,298          |       | —         |       | —               |       | —           |       | 4,298            |       |
| Payments on  mortgage note                                                            |       | —         |       | (10            | )          | —               |       | —           |       | (10              | )          |
| Decrease in  treasury stock                                                           |       | —         |       | 674            |       | —               |       | —           |       | 674              |       |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                              | ** ** | **(47,860**    | **)**      | **50,228**     | ** ** | **2,594**            | ** ** | **—**       | ** ** | **4,962**        | ** ** |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect  of exchange rate changes on cash and cash equivalents**                     | ** ** | **—**     | ** ** | **—**     | ** ** | **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** | ** ** |

 

32

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**Item 2.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

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

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following discussion and analysis should be read in conjunctionwith the condensed consolidated financial statements of the Company and thenotes thereto appearing elsewhere in this report.

**General**

The Company is a holding company. It does not hold any assets other than its investment in Linens ‘nThings, Inc., which the Company acquired in February 2006.  Linens ‘n Things, Inc., together with itssubsidiaries, is the operating subsidiary of the Company.

The Company, under the name “Linens ‘n Things,” is one of the leading nationallarge format specialty retailers of home textiles, housewares and homeaccessories, carrying both national brands and private label goods.  As of June 30, 2007, the Company operated 580stores in 47 states and in seven provinces across Canada.

**Critical Accounting Policies**

The following includesdiscussion and analysis about the condensed consolidated financial statementsof Linens Holding Co. and its subsidiaries and Predecessor.  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 12 to the unaudited condensed consolidated financialstatements) because management has determined that the differences in suchfinancial statements are minor.  

The preparation of financial statements in conformity with U.S.generally accepted accounting principles 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.  TheCompany bases its estimates on historical experience and on other assumptionsthat it believes to be relevant under the circumstances, the results of whichform the basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. The Company’smanagement believes the following critical accounting estimates involvesignificant estimates and judgments inherent in the preparation of thecondensed consolidated financial statements. The Company bases these estimates on historical results and various otherassumptions believed to be reasonable at the time.  These critical accounting estimates arediscussed in detail in the Company’s 2006 Annual Report on Form 10-K. 

*Business Combination*

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 purchase accountingadjustments were “pushed down” and recorded in Linens ‘n Things, Inc. and itssubsidiaries’ financial statements and resulted in a new basis of accountingfor the “Successor” period beginning on the day the acquisition was 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 acquisition, and the excess of the total purchase price over the fair valueof the Company’s net assets was allocated to goodwill.  

33

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*Valuation of Inventory*

Merchandise inventory isa significant portion of the Company’s balance sheet, representingapproximately 45.4% of total assets at June 30, 2007.  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.

*Sales Returns*

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 condensed consolidatedfinancial statements as of June 30, 2007, December 30, 2006 and July 1, 2006,the Company’s sales returns reserve was approximately $4.1 million, $5.9million and $5.6 million, respectively. 

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

Long-lived assets, such asproperty and equipment and purchased intangible assets subject to amortization,are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of an asset may not be fully recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized for theamount that the carrying value of the asset exceeds the fair value of theasset, which is determined by discounting the future cash flows expected to begenerated by the asset.

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.  Futureevents could cause the Company to conclude that impairment indicators exist andthat the value of long-lived assets and goodwill is impaired.  At June 30, 2007, December 30, 2006 and July1, 2006, the Company’s net book value for property and equipment wasapproximately $487.5 million, $530.8 million and $590.8 million, respectively,goodwill was approximately $270.9 million, $267.8 million and $265.9 million,respectively, and identifiable intangible assets, net was $146.4 million,$150.0 million and $157.9 million, respectively. 

There was no impairmentloss recognized in the condensed consolidated statement of operations for anyof the periods presented.  

*Store Closure Cost*

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 certain under-performingstores.  As of June 30, 2007, December30, 2006

34

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and July 1, 2006, theCompany had $2.7 million, $3.6 million and $3.4 million, respectively,remaining related to this reserve.  

*Self-Insurance*

The Company purchasesthird-party insurance for workers’ 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.  Workers’compensation is recorded at its net present value.  In preparing the estimates, the Company alsoconsiders the nature and severity of the claims, analysis provided by thirdparty claims administrators, as well as current legal, economic and regulatoryfactors.  The ultimate cost of theseclaims may vary from the established accrual. While the Company believes that the recorded amounts are adequate, therecan be no assurance that changes to management’s estimates will not occur dueto limitations inherent in the estimate process.  The accrued obligation for theseself-insurance programs was approximately $15.7 million, $16.2 million and$14.7 million as of June 30, 2007, December 30, 2006 and July 1, 2006,respectively.

*Share-based Compensation*

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards No. 123(Revised 2004), “*Share-Based Payment*” (“SFASNo. 123 (Revised 2004)”), requiring the recognition of compensation costfor all equity classified awards granted, modified or settled after theeffective date and for the unvested portion of awards outstanding as of theeffective date using the fair-value measurement method.

Upon completion of theMerger and in accordance with the terms of the share-based plans existing atthe time, all of the outstanding stock options and restricted stock unitsbecame fully vested and immediately exercisable.  Accordingly, under SFAS No. 123 (Revised2004) the Company recorded share-based compensation expense for the entireportion of previously granted share-based awards that remained unvestedat the date of the adoption.

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

The Company uses theMonte Carlo simulation option-pricing model for estimating the fair value ofperformance-based employee stock option grants and the Black-Scholesoption-pricing model for time-based employee stock option grantsissued under the Plan.  Both modelsinclude various assumptions, including the expected life of stock options, theexpected volatility and the expected risk-free interest rate.  Theseassumptions reflect the Company’s best estimates, but they involve inherentuncertainties based on certain conditions generally outside the control of theCompany.  As a result, if otherassumptions had been used, total share-based compensation cost as determined inaccordance with SFAS No. 123 (Revised 2004) could have been materiallyimpacted.  Furthermore, if the Companyuses different assumptions for future grants, share-based compensation costcould be materially impacted in future periods.

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

35

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*Derivative Financial Instruments*

The Company hasdesignated certain derivative instruments entered into on July 7, 2006 as cashflow hedges and recognizes the fair value of the instruments on the condensedconsolidated balance sheet.  Gains andlosses related to a hedge and that result from changes in the fair value of thehedge are either recognized in income to offset the gain or loss on the hedgeditem, or deferred and reported as a component of accumulated othercomprehensive income (loss) in stockholders’ equity on the condensedconsolidated balance sheet and subsequently recognized in the condensedconsolidated statement of operations when the hedged item affects income.  The ineffective portion of the change in fairvalue of a hedge is recognized in income immediately.  There was no hedge ineffectiveness during thetwenty-six weeks ended June 30, 2007.

*Income Taxes*

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

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

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109*” (“FIN No. 48”) at the beginning of the current fiscal year.  FIN No. 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under FIN No. 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The Company’s estimates of the tax benefit from uncertain tax positions may change in the future due to new developments in each matter.

*Litigation*

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

**Impact of the Merger and RelatedTransactions**

On February 14, 2006, the Company acquired all of the outstandingcommon stock of Linens ‘n Things, Inc. for total cash consideration ofapproximately $1.3 billion. 

The acquisition of Linens ‘n Things, Inc. was accounted for as abusiness combination using the purchase method of accounting, whereby thepurchase price (including liabilities assumed) was 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 purchase accountingadjustments were “pushed down” and recorded in Linens ‘n Things, Inc. and itssubsidiaries’ financial statements and resulted in a new basis of accountingfor the “Successor” period beginning on the day the acquisition wascompleted.  As a result, the purchaseprice and related costs were allocated to the estimated fair values of theassets acquired and liabilities assumed at the time of the acquisition based onmanagement’s best estimates, which were based in part on the work ofthird-party appraisers engaged to perform valuations of certain of the tangibleand intangible assets acquired.  Inessence, the Company’s assets and

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liabilities were adjusted to fair value as of the closing date of theacquisition, and the excess of the total purchase price over the fair value ofthe Company’s net assets was allocated to goodwill.  

In connection with the acquisition, the Company incurred significantadditional indebtedness, including $650.0 million aggregate principalamount of Senior Secured Floating Rate Notes due 2014 issued by two of theCompany’s subsidiaries (the “Notes”), which increased the Company’s interestexpense.  Payments required to servicethis indebtedness substantially increased the Company’s liquidity requirementsin fiscal 2006 as compared to fiscal 2005, and will do so in fiscal 2007 andfuture years.  The Company’s depreciationand amortization expense increased significantly as well, primarily due todecreases in the depreciable lives of tangible assets and an increase in thefair values of the Company’s amortizable intangible assets.

The following discussion and analysis of the Company’s historicalfinancial condition and results of operation covers periods prior to and afterthe consummation of the acquisition.

**Results of Operations**

*ThirteenWeeks Ended June 30, 2007 Compared with Thirteen Weeks Ended July 1, 2006*

Net sales for the thirteen weeks ended June 30, 2007 decreasedapproximately 2.9% to $593.6 million compared to $611.6 million for the sameperiod last year.  The decrease in netsales is primarily due to the impact of a decline in comparable store salesoffset by the opening of new stores since July 1, 2006.  Comparable store sales decreased 7.3% for thethirteen weeks ended June 30, 2007 compared to an increase of 0.3% for the sameperiod last year, as restated for a change in late fiscal 2006 to the Company’spolicy for determining comparable store sales. The decline in comparable store sales is primarily due to a decline inguest transactions and significantly less clearance activity during thethirteen weeks ended June 30, 2007 compared to the same period last year.  At June 30, 2007, the Company operated 580stores, including 38 stores in Canada, as compared with 555 stores, including30 stores in Canada, at July 1, 2006. Store square footage increased approximately 3.9% to 19.2 million atJune 30, 2007 compared with 18.5 million at July 1, 2006.  During the thirteen weeks ended June 30,2007, the Company opened seven stores as compared with opening six storesduring the same period last year.  Therewere no stores closed in the current and prior year periods.

In addition to the cost of inventory sold, the Company includes itsbuying and distribution expenses in its cost of sales.  Buying expenses include all direct andindirect costs to procure merchandise. Distribution expenses include the cost of operating the Company’sdistribution centers and freight expense related to transporting merchandise.  For the thirteen weeks ended June 30, 2007gross profit was $246.9 million, or 41.6% of net sales, compared with $238.3million, or 39.0% of net sales, for the same period last year.  The increase in gross profit as a percentageof net sales for the second quarter was driven by lower net markdowns in thecurrent period reflecting less clearance activity than the same period lastyear as described above, and a more balanced performance across productcategories.

The Company’s selling, general and administrative expenses (“SG&A”)consist of store selling expenses, occupancy costs, advertising expenses andcorporate office expenses.  SG&A forthe thirteen weeks ended June 30, 2007 was $289.2 million, or 48.7% of netsales, compared with $283.2 million, or 46.3% of net sales, for the same periodlast year.  SG&A includesdepreciation and amortization of $32.4 million, or 5.5% of net sales, for thethirteen weeks ended June 30, 2007, compared with $31.8 million, or 5.2% of netsales, for the same period last year. The increase in SG&A as a percentage of net sales is primarily dueto higher occupancy costs and other costs in the face of negative comparablestore sales. 

Operating loss for the thirteen weeks ended June 30, 2007 wasapproximately $42.3 million, or (7.1%) of net sales, compared with an operatingloss of $44.9 million, or (7.3%) of net sales, for the same period lastyear.  

Interest expense, net for the thirteen weeksended June 30, 2007 increased to approximately $25.6 million from $21.8 millionduring the same period last year.  Higheraverage borrowings to fund working capital needs and an increase in averageborrowing interest rates contributed to the overall increase in interest expense,net.

Other income, net for the thirteen weeks ended June30, 2007 decreased to $1.4 million compared to $2.9 million for the same periodlast year due to declines in foreign exchange gain and income from gift cardsthat are not expected to be redeemed.

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The Company’s income tax benefit was approximately$24.5 million for the thirteen weeks ended June 30, 2007 compared with anincome tax benefit of $24.7 million for the same period last year.  TheCompany’s effective tax benefit rate for the thirteen weeks ended June 30, 2007decreased to 36.8% compared to 38.7% for the same period last year primarilydue to an increase in foreign tax expense.

The Company’s net loss for the thirteen weeks ended June 30, 2007 wasapproximately $42.0 million compared with a net loss of $39.1 million for thesame period last year.     

*Twenty-sixWeeks Ended June 30, 2007 Compared with Twenty-six Weeks Ended July 1, 2006*

As a result of the acquisition, the prior period’s financial resultsfor the twenty-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 and the “SuccessorEntity” covering the period February 14, 2006 through July 1, 2006.  For comparative purposes, the Companycombined the two periods from January 1, 2006 through July 1, 2006 in itsdiscussion below.  This combination isnot GAAP presentation.  However, the Companybelieves this presentation is useful to provide the reader a more accuratecomparison. 
|                                                         | ** ** | ** **                                              | ** **    | **Twenty-six Weeks Ended July 1, 2006**                  | ** ** | ** **                                                                       | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|---------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Twenty-  six Weeks  Ended  June 30,  2007** | ** **    | **January 1,  2006 to  February 13,  2006  (Predecessor  Entity)** | ** ** | **February 14,  2006 to July  1, 2006  (Successor  Entity)** | ** ** | **January 1,  2006 to July 1,  2006  (Combined)** | ** ** | **Increase  (Decrease)** | ** ** |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| **Net  sales**                                          | ** ** | **$**                                                   | **1,165,131** | ** **                                                                        | **$**      | **284,971**                                                                      | ** ** | **$** | **919,428** | ** ** | **$** | **1,204,399** | ** ** | **$** | **(39,268** | **)** |
| Cost of sales,  including buying and distribution costs |       | 704,730                                                 |          | 180,675                                                                           |       | 562,333                                                                          |       | 743,008 |   | (38,278 | ) |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| **Gross  profit**                                       | ** ** | **460,401**                                             | ** **    | **104,296**                                                                       | ** ** | **357,095**                                                                      | ** ** | **461,391** | ** ** | **(990** | **)** |
| Selling, general  and administrative expenses           |       | 572,115                                                 |          | 175,424                                                                           |       | 420,779                                                                          |       | 596,203 |   | (24,088 | ) |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| **Operating  loss**                                     | ** ** | **(111,714**                                            | **)**         | **(71,128**                                                                       | **)**      | **(63,684**                                                                      | **)**      | **(134,812** | **)** | **23,098** | ** ** |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| Interest income                                         |       | (264                                                    | )             | (668                                                                              | )          | (119                                                                             | )          | (787 | ) | 523 |   |
| Interest expense                                        |       | 49,887                                                  |          | —                                                                            |       | 31,832                                                                           |       | 31,832 |   | 18,055 |   |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| Interest expense  (income), net                         |       | 49,623                                                  |          | (668                                                                              | )          | 31,713                                                                           |       | 31,045 |   | 18,578 |   |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| Other income,  net                                      |       | (2,298                                                  | )             | (1,286                                                                            | )          | (2,731                                                                           | )          | (4,017 | ) | 1,719 |   |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| **Loss  before benefit for income taxes**               | ** ** | **(159,039**                                            | **)**         | **(69,174**                                                                       | **)**      | **(92,666**                                                                      | **)**      | **(161,840** | **)** | **2,801** | ** ** |
| Benefit for  income taxes                               |       | (58,879                                                 | )             | (21,270                                                                           | )          | (35,967                                                                          | )          | (57,237 | ) | (1,642 | ) |
|                                                    |       |                                                    |          |                                                                              |       |                                                                             |       |   |   |   |   |
| **Net loss**                                            | ** ** | **$**                                                   | **(100,160**  | **)**                                                                             | **$**      | **(47,904**                                                                      | **)**      | **$** | **(56,699** | **)** | **$** | **(104,603** | **)** | **$** | **4,443** | ** ** |

 

Net sales for the twenty-six weeks ended June 30, 2007 decreasedapproximately 3.3% to $1,165.1 million compared to $1,204.4 million for thesame period last year.  The decrease innet sales is primarily due to the impact of a decline in comparable store salesoffset by the opening of new stores since July 1, 2006.  Comparable store sales decreased 6.3% for thetwenty-six weeks ended June 30, 2007 compared to a decline of 1.7% for the sameperiod last year, as restated for a change in late fiscal 2006 to the Company’spolicy for determining comparable store sales. The decline in comparable store sales is primarily due to a decline inguest transactions.  During thetwenty-six weeks

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ended June 30, 2007, the Company opened nine stores as compared withopening 13 stores during the same period last year.  There were no stores closed in the currentand prior year periods.

In addition to the cost of inventory sold, the Company includes itsbuying and distribution expenses in its cost of sales.  Buying expenses include all direct andindirect costs to procure merchandise. Distribution expenses include the cost of operating the Company’sdistribution centers and freight expense related to transportingmerchandise.  For the twenty-six weeksended June 30, 2007 gross profit was $460.4 million, or 39.5% of net sales,compared with $461.4 million, or 38.3% of net sales, for the same period lastyear.  The increase in gross profit as apercentage of net sales is due to lower net markdowns.

The Company’s selling, general and administrative expenses (“SG&A”)consist of store selling expenses, occupancy costs, advertising expenses andcorporate office expenses.  SG&A forthe twenty-six weeks ended June 30, 2007 was $572.1 million, or 49.1% of netsales, compared with $596.2 million, or 49.5% of net sales, for the same periodlast year, which included approximately $46.3 million of costs related to theacquisition, or 3.8% of net sales.  Theincrease in SG&A as a percentage of net sales is primarily due to higheroccupancy costs and other costs in the face of negative comparable store sales**.**

Operating loss for the twenty-six weeks ended June 30, 2007 wasapproximately $111.7 million, or ( 9.6%) of net sales, compared with anoperating loss of $134.8 million, or (11.2%) of net sales, for the same periodlast year.  Operating loss for the priorperiod included approximately $46.3 million of costs related to theacquisition, or (3.8%) of net sales.

Interest expense, net for the twenty-sixweeks ended June 30, 2007 increased to approximately $49.6 million from $31.0million during the same period last year primarily due to the additionalinterest expense associated with the Notes issued on February 14, 2006.** **In addition, higheraverage borrowings required to fund working capital needs, an increase inaverage borrowing interest rates, and lower average investment balancesprimarily contributed to the overall increase in interest expense, net.

Other income, net for the twenty-six weeks ended June30, 2007 decreased to $2.3 million compared to $4.0 million for the same periodlast year.  The decrease is due todeclines in foreign exchange gain and income from gift cards that are notexpected to be redeemed.

The Company’s income tax benefit was approximately$58.9 million for the twenty-six weeks ended June 30, 2007 compared with anincome tax benefit of $57.2 million for the same period last year.  TheCompany’s effective tax benefit rate for the twenty-six weeks ended June 30,2007 increased to 37.0% compared to 35.4% for the same period last yearprimarily due to deductible transaction related costs not included inthe prior period.

The Company’s net loss for the twenty-six weeks ended June 30, 2007 wasapproximately $100.2 million compared with a net loss of $104.6 million for thesame period last year.  As noted above,the net loss for the current period is not necessarily comparable to the netloss for the prior period as the prior period includes significantly highercosts related to the acquisition partially offset by lower interest,depreciation and amortization recorded prior to the completion of the Merger onFebruary 14, 2006.

**Liquidity and Capital Resources**

The Company incurred $650.0 million aggregate principal amount ofSenior Secured Floating Rate Notes due 2014 of Linens ‘n Things, Inc. andLinens ‘n Things Center, Inc. in connection with the Merger.  The Notes bear interest at a per annum rateequal to LIBOR plus 5.625%, which is to be paid every three months on January15, April 15, July 15 and October 15. The interest rate on the Notes is reset quarterly.  The Notes mature on January 15,2014.  As of June 30, 2007 the interestrate on the Notes was 11.0%, based on a LIBOR rate of 5.4%.  On July 7, 2006 the Issuers entered into azero cost interest rate collar agreement to hedge the cash flows associatedwith the LIBOR component of the interest rate on the Notes.  On July 7, 2006 the Issuers also purchased aone-year forward-starting interest rate cap agreement which takes effect on January15, 2008.

The Notes are fully and unconditionally guaranteed jointly andseverally on a senior basis by the Company and by certain of the Company’sexisting and 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

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the Company’s, the Issuers’ and the subsidiary guarantors’ equipment,intellectual property rights and related general intangibles and the capitalstock of the Issuers and certain of the subsidiaries.  The Notes are also secured by second-priorityliens on the Issuers’ and the subsidiary guarantors’ inventory, accountsreceivable, cash, securities and other general intangibles.

The lien on capital stock may be released under certaincircumstances.  As a result of the filingand effectiveness of a registration statement on Form S-4 with the SEC withrespect to the Notes, the Issuers and the guarantors becamesubject to applicable SEC rules with respect to information required to be includedin the prospectus in the registration statement.  To the extent that thesecurities of any Issuer or guarantor constitute collateral for theNotes 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.

Concurrent with the closing of the Merger in February 2006, the Issuersalso entered into a new senior secured asset-based revolving credit facilityagreement (the “Original Credit Facility”) with third-party institutionallenders, which expires February 14, 2011. In May 2007, the Company entered into an amended and restated creditagreement (the “Credit Facility”).  Theprovisions of the Credit Facility are substantially the same as in the OriginalCredit Facility with several modifications that are generally favorable to theCompany.  The provisions of the CreditFacility were modified for: (i)  a $100.0million increase in the Credit Facility maximum availability from $600.0million to $700.0 million; (ii) a decrease in the “Excess Availability”threshold for purposes of mandatory compliance with certain financial ratiomaintenance covenants from $75.0 million to $70.0 million; and (iii) severalother modifications that are all favorable to the Company including permittingthe Company to make a one-time change in its fiscal year upon 45 days’ writtennotice to the administrative agents.  Acopy of the Credit Facility is attached as Exhibit 10.1 to Form 8-K filed withthe SEC on May 29, 2007.

The Credit Facility providessenior secured financing of up to $700.0 million, subject to a borrowing baseconsisting of certain eligible inventory and receivables, minus certainreserves.  A portion of the CreditFacility, not to exceed $40.0 million, is also available to a Canadiansubsidiary of the Company subject to the Canadian borrowing base.

The Credit Facility contains certain customary affirmative covenantsand events of default, but does not require the Company to comply with anyfinancial ratio maintenance covenants unless the excess availability under theCredit Facility does not exceed $70.0 million. During the twenty-six weeks ended June 30, 2007, the Company alwaysmaintained excess availability under the Credit Facility above $70.0 millionand, accordingly, is not subject to compliance with certain financial ratiomaintenance covenants as of June 30, 2007.  The Company is not obligated under any formalor informal compensating balance requirements

Borrowings under the Credit Facility bear interest at a rate equal to,at the Issuers’ option, either (a) an alternate base rate determined byreference to the higher of (1) the base rate in effect on such day and(2) the federal funds effective rate plus 0.50% or (b) a LIBOR rate,with respect to any Eurodollar borrowing, determined by reference to the costsof funds for U.S. dollar deposits for the interest period relevant to suchborrowing adjusted for certain additional costs, in each case plus anapplicable margin.  In addition to payinginterest on outstanding principal under the Credit Facility, the Company isrequired to pay a variable rate commitment fee in respect of the unutilizedcommitments thereunder.

As of June 30, 2007, the Issuers had (i) $265.1 million inborrowings outstanding under the Credit Facility at an average interest rate of6.9%; (ii) $17.0 million of cash on hand; (iii) $64.6 million of letters ofcredit outstanding issued under the Credit Facility, which includes standbyletters of credit and import letters of credit used for merchandise purchases;and (iv) $219.1 million of additional availability under the Credit Facility.

All obligations under the Credit Facility, and the guarantees of thoseobligations, are secured, subject to certain exceptions, by substantially allof the Company’s, the Issuers’ and the subsidiary guarantors’ assets,including: (1) a first-priority security interest in inventory, accountsreceivable, cash, securities and other general intangibles; and (2)

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a second-priority security interest in equipment, intellectual propertyrights and related general intangibles and all of the capital stock of theIssuers and the capital stock of certain subsidiaries.

The Company funds itsoperations through a combination of internally generated cash from operationsand from borrowings under the Credit Facility. The Company’s primary uses of cash are working capital requirements, newstore expenditures, new store inventory purchases and debt servicerequirements.  The Company anticipatesthat cash generated from operations together with amounts available under theCredit Facility will be sufficient to meet its future working capital requirements,new store expenditures, new store inventory purchases and debt serviceobligations as they become due.  However,the Company’s ability to fund future operating expenses and capitalexpenditures and its ability to make scheduled payments of interest on, to payprincipal on or refinance indebtedness and to satisfy any other present orfuture debt obligations will depend on future operating performance which willbe affected by general economic, financial and other factors beyond the Company’scontrol.

As a result of the acquisition, the cash flowresults for the twenty-six weeks ended July 1, 2006 have been separatelypresented in the condensed consolidated statements of cash flows split betweenthe “Predecessor Entity”, covering the period January 1 to February 13, 2006and the “Successor Entity” covering the period February 14 to July 1,2006.  The comparable period results forthe current year are presented under “Successor Entity.”  For comparative purposes, the Companycombined the two periods from January 1, 2006 through July 1, 2006 in itsdiscussion below.  This combination isnot a GAAP presentation.  However, theCompany believes this combination is useful to provide the reader a moreaccurate comparison and is provided to enhance the reader’s understanding ofcash flows for the periods presented.

Net cash used in operating activities for thetwenty-six weeks ended June 30, 2007 was $202.0 million, which is slightlylower when compared with $209.4 million used in operating activities for thesame period last year, determined by combining net cash used in operating activities of $147.4 million and $62.0 millionfor the periods February 14, 2006 to July 1, 2006 and January 1, 2006 toFebruary 13, 2006, respectively.  The useof cash for the twenty-six weeks ended June 30, 2007 reflects the Company’scustomary seasonal investment in working capital as it prepares for theupcoming back-to-school selling season as well as the payment of cash interestand income taxes**.** Net cash used inoperating activities for the thirteen weeks ended June 30, 2007 was $54.8million, which reflects seasonal working capital requirements as the Companyprepares for the back-to-school selling season.

Netcash used in investing activities for the twenty-six weeks ended June 30, 2007was $19.2 million compared with $1,246.1 million used in investing activitiesfor the same period last year, determined by combining net cash used in investing activities of$1,235.1 million and $11.0 million for the periods February 14, 2006 to July 1,2006 and January 1, 2006 to February 13, 2006, respectively.  Excluding the prior period cost inconnection with the acquisition, net cash used in investing activitiesdecreased $21.4 million from the prior year due to fewer new store openings andthe receipt of $3.3 million from the sale and subsequent leaseback of propertyrelated to one of its stores.  TheCompany currently estimates capital expenditures will be approximately $40million in fiscal 2007, primarily to open approximately 20 new stores, tomaintain existing stores, and for system enhancements and other capitaladditions.

Net cash provided by financing activities forthe twenty-six weeks ended June 30, 2007 was $225.2 million compared with$1,400.9 million provided by financing activities for the same periodlast year, determined by combining netcash provided by financing activities of $1,395.9 million and $5.0 million forthe periods February 14, 2006 to July 1, 2006 and January 1, 2006 to February13, 2006, respectively.  Excludingthe prior period cash flows resultingfrom the acquisition, net cash provided by financing activities increased $70.2million from the prior year.  Theincrease in net cash provided by financing activities is due to higherborrowings from the asset-based revolving credit facility.

Management regularly reviews and evaluates its liquidity and capitalneeds.  The Company experiences peakperiods for its liquidity needs generally during the third quarter and fourthquarter of the fiscal year.  As theCompany’s business continues to grow and its current store expansion plan isimplemented, such peak periods may require increases in the amounts availableunder the Credit Facility from those currently existing and/or other debt orequity funding.  Management currentlybelieves that the Company’s cash flows from operations and its availabilityunder the Credit Facility will be sufficient to fund its expected capitalexpenditures, working capital and non-acquisition business expansionrequirements as they become due; however, no assurance can be given that it

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will be able to obtain access to increases to the Credit Facility oradditional capacity from new credit facilities in the future should they becomenecessary.

**Off-Balance Sheet Arrangements**

The Company does not have any transactions or relationships that couldbe considered material off-balance sheet arrangements.

**Inflation**

The Company does not believe that its operating results have beenmaterially affected by inflation during the preceding three years.  There can be no assurance, however, that theCompany’s operating results will not be affected by inflation in the future.

**Seasonality**

The Company’s business is subject to substantial seasonalvariations.  Historically, the Companyhas realized a significant portion of its net sales and, prior to the Mergerbefore the Company became highly leveraged, substantially all of its net incomefor 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 continuously evaluates the market riskassociated with its financial instruments.  Market risks relating to theCompany’s operations result primarily from changes in interest rates.  TheCompany does not engage in financial transactions for trading or speculativepurposes.

Market risk exposure has significantly increased dueto the issuance of the Notes in connection with the Merger and Transactions.

**Interest Rate Risk**

The Company’s financial instruments include cash andcash equivalents and borrowings under the Credit Facility and the Notes. The asset-based revolving credit facility and the Notes carry floating rateinterest and, therefore, the Company’s condensed consolidated statement ofoperations and the condensed consolidated statement of cash flows for fiscal2007 will be exposed to changes in interest rates.  As of June 30, 2007,the Company had $265.1 million in borrowings under the Credit Facility at anaverage interest rate of 6.9% and $650.0 million aggregate principal amount inNotes at an interest rate of 11.0%, based on a LIBOR rate of 5.4%.  As ofJune 30, 2007 a one percentage point change in floating rate interest wouldcause an increase to interest expense of approximately $9.2 million.

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

The Company does not enter into other derivativefinancial instruments for trading or speculative purposes.  The Companyfaces credit risk if the counterparties to these transactions are unable toperform their obligations.  However, the Company seeks to minimize thisrisk by entering into transactions with counterparties that are major financialinstitutions with high credit ratings.

On July 7, 2006 the Issuers entered into a zero costinterest rate collar agreement to hedge the cash flows associated with theLIBOR component of the interest rate on the Notes.  The collar agreementprovides for payments to be made to or received from the counterparty where theLIBOR component of the rate in effect for the Notes is below 4.45% or above6.51% for a given reset period.  Such payments represent the differencebetween the rates stated above in the collar agreement and those in effect onthe Notes for the given reset period.  Payment and reset dates under thecollar agreement are matched exactly to those of the Notes.  The collaragreement has an ultimate maturity of January 15, 2008.  At the inceptionof the collar agreement, the Company determined that the hedging relationshipwould have no ineffectiveness, and the Company will continue to verify anddocument that the critical terms of the hedging instrument and the hedged itemare exactly matched.  At June 30, 2007, the notional amount of debt relatedto the collar agreement was $650.0 million and the fair value of the collaragreement was approximately a de minimis liability.

On July 7, 2006 the Issuers also purchased a one-yearforward-starting interest rate cap agreement which takes effect on January 15,2008.  The cap agreement provides for payments to be received from thecounterparty where the LIBOR component of the rate in effect on a LIBOR-basedborrowing arrangement is above 6.51% for a given reset period.  Paymentand reset dates under the cap agreement are matched exactly to those of theLIBOR-based borrowing arrangement.  The cap agreement has an ultimatematurity of January 15, 2009.  The Company paid a premium of $0.7 millionto purchase the cap agreement.  The cap agreement consists of two components,a forward contract and an interest rate cap agreement.  The Company’sintent is to hedge the cash flow associated with the LIBOR component of theinterest rate on a LIBOR-based borrowing arrangement beyond 6.51% for theperiod January 15, 2008 through January 15, 2009.  The forward contractenables the Company to achieve this objective.  The Company will assessthe effectiveness of the forward contract quarterly.  Once the forwardcontract becomes an interest rate cap agreement, effectiveness will be assessedand documented as a new relationship.  The interest rate cap agreement isexpected to be perfectly effective at such time, and the Company will continueto subsequently verify and document that the critical terms of the interestrate cap agreement and the hedged item continue to match exactly over theremaining life of the relationship.  At June 30, 2007, the notional amountof debt related to the cap agreement was $650.0 million and the fair value ofthe instrument was approximately a $0.04 million asset.

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The Company has determined that the collar agreementand the cap agreement have been appropriately designated and documented as cashflow hedges under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*”, as amended.  During the thirteen and twenty-six weeksended June 30, 2007, the Company recorded a gain of approximately $0.08 millionand $0.05 million in accumulated other comprehensive income (loss),respectively, related to these changes in fair value.  The collar agreement and the cap agreementhad no ineffectiveness and provided no amounts received or paid under thehedges that affected net loss during the period.  Both agreements are expected to have noineffectiveness during their contractual lives.

**Foreign Currency 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 38stores in Canada as of June 30, 2007.  The Company believes its foreigncurrency translation risk is not material, as a hypothetical 10% strengtheningor weakening of the U.S. dollar relative to the Canadian dollar would notmaterially affect the Company’s results from operations or cash flow.  Asof June 30, 2007 and for the twenty-six weeks then ended the Company did nothedge against foreign currency risks.

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**Item 4.            Controls and Procedures**

**Disclosure Controls andProcedures**

The Company’s management, including its Chief Executive Officer and itsChief Financial Officer, performed an evaluation of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (assuch term is defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of June 30, 2007.  Based upon that evaluation, the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, concluded that the Company’s disclosure controls and procedures areeffective as of the end of the period covered by this report.

**Changes in Internal Control OverFinancial Reporting**

The Company’s management determined that as of the endof fiscal 2006, the Company did not have adequate review over the completenessand accuracy of the income tax accounts to ensure compliance with generallyaccepted accounting principles.  TheCompany out-sources the preparation of the income tax provision to a thirdparty and did not apply a thorough review to detect misstatements.  This deficiency resulted in material errorsin the Company’s preliminary income tax provision in the 2006 consolidatedfinancial statements.  The Companycorrected the provision for income taxes and related balances prior to theissuance of the final audited consolidated financial statements.  Accordingly, management determined that thiscondition constituted a material weakness in internal control over financialreporting as of December 30, 2006.  TheCompany’s management implemented additional review controls and procedures toensure the propriety of its accounting for income tax accounts, whichmanagement believes renders the design and operation of the Company’sdisclosure controls and procedures effective subsequent to December 30, 2006.

A material weakness in internal control over financialreporting is a control deficiency (within the meaning of the Public CompanyAccounting Oversight Board (‘‘PCAOB’’) Auditing Standard No. 2), or combinationof control deficiencies, that adversely affects a company’s ability toinitiate, authorize, record, process or report external financial data reliablyin accordance with GAAP that results in there being more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected.

Beyond the remediation discussed above, there have been no significantchanges to the Company’s internal control over financial reporting during themost recent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

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

**Item1.            LegalProceedings**

The Company is subject to litigation in the normal course of business,but it does not believe that the resolution of any pending proceedings willhave a material impact on the Company’s financial position or results ofoperations.

**Item1A. Risk Factors**

There have been no material changes in the risk factors previouslydisclosed in the Company’s 2006 Annual Report on Form 10-K.

**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**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to besigned on its behalf by the undersigned thereunto duly authorized.
|                        | **LINENS HOLDING CO.**                 |
|------------------------|----------------------------------------|
| ** **             | **LINENS ‘N THINGS, INC.**        |
| ** **             | **LINENS ‘N THINGS CENTER, INC.** |
| ** **             |                                   |   |
| ** **             |                                   |   |
| Date: August 14,  2007 | By:                                    | /s/ Robert J. DiNicola |
|                   |                                   | Robert J.  DiNicola |
|                   |                                   | Chairman and  Chief Executive Officer |
|                   |                                   | (principal  executive officer) |
|                   |                                   |   |
|                   |                                   |   |
| Date: August 14,  2007 | By:                                    | /s/ Francis M. Rowan |
|                   |                                   | Francis M. Rowan |
|                   |                                   | Senior Vice  President and Chief Financial Officer |
|                   |                                   | (principal  financial and accounting officer) |

 

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