**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark) One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the Quarterly PeriodEnded September 30, 2006**

 

**or**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**Commission file numbers:      333-135646-12001-12381333-135646-11**

** **

**LINENS HOLDING CO.**

**LINENS ‘N THINGS, INC.**

**LINENS ‘N THINGS CENTER, INC.**

(Exact names of registrants as specified in theircharters)

 

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

 

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

(Address of principal executive offices) (Zip Code)

 

**(973) 778-1300**

(Registrants’ telephone number, including area code)

 

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 Accelerated Filer o     AcceleratedFiler o     Non-acceleratedfiler x

 

Indicate by check markwhether the registrants are a shell company (as defined in Rule 12b-2 ofthe Act):

Yes o     No x

 

As of October 31, 2006, there were 13,053,000 sharesof Linens Holding Co. common stock, $0.01 par value, outstanding; 1,000 sharesof Linens ‘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 September 30, 2006 (Successor  Entity) and October 1, 2005 (Predecessor Entity)                                                                                                | 4 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| ** **                                           | Condensed Consolidated Statements of Operations  (Unaudited) for the period February 14 to September 30, 2006 (Successor  Entity); the period January 1 to February 13, 2006 (Predecessor Entity); and  the Thirty-nine Weeks Ended October 1, 2005 (Predecessor Entity) | 5 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| ** **                                           | Condensed Consolidated Balance Sheets (Unaudited) as  of September 30, 2006 (Successor Entity); December 31, 2005 (Predecessor  Entity); and October 1, 2005 (Predecessor Entity)                                                                                        | 6 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| ** **                                           | Condensed Consolidated Statements of Cash Flows  (Unaudited) for the period February 14 to September 30, 2006 (Successor  Entity); the period January 1 to February 13, 2006 (Predecessor Entity); and  the Thirty-nine Weeks Ended October 1, 2005 (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**                                                                                                                                                                          | 39 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               |   |
| **Item 3.**                                          | **Quantitative and Qualitative Disclosures about Market  Risk**                                                                                                                                                                                                          | 51 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| **Item 4.**                                          | **Controls and Procedures**                                                                                                                                                                                                                                              | 51 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| **Part  II.**                                        | **Other  Information**                                                                                                                                                                                                                                                   |   |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| **Item  1.**                                         | **Legal  Proceedings**                                                                                                                                                                                                                                                   | 53 |
|                                                 | ** **                                                                                                                                                                                                                                                               |   |
| **Item  1A.**                                        | **Risk  Factors**                                                                                                                                                                                                                                                        | 53 |
|                                                 | ** **                                                                                                                                                                                                                                                               |   |
| **Item 2.**                                          | **Unregistered Sales of Equity Securities and Use of  Proceeds**                                                                                                                                                                                                         | 53 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| **Item 6.**                                          | **Exhibits**                                                                                                                                                                                                                                                             | 53 |
| ** **                                           | ** **                                                                                                                                                                                                                                                               | ** ** |
| ** **                                           | **Signatures**                                                                                                                                                                                                                                                           | 54 |

 

2

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**EXPLANATORY NOTE**

On November 7,2005, 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. in the merger described in Note 1to the Unaudited Condensed Consolidated Financial Statements included in thisreport (the “Merger”), and Linens ‘n Things, Inc., as the survivingcorporation, became a wholly-owned subsidiary of Linens Holding Co. (the “Company”).  The merger was financed in part by theissuance of $650 million aggregate principal amount of Senior Secured FloatingRate Notes (the “Notes”) due 2014 of Linens ‘n Things, Inc. and Linens ‘nThings Center, Inc., a wholly owned subsidiary of Linens ‘n Things, Inc.  The Notes are guaranteed by the Company andeach of its domestic subsidiaries (other than Linens ‘n Things, Inc. and Linens‘n Things Center, Inc.).  This reportalso contains the condensed consolidated financial statements of the Company’spredecessor entity, Linens ‘n Things, Inc. and Subsidiaries, as of October 1,2005 and December 31, 2005, and for the thirteen and thirty-nine weeks ended October1, 2005 and the period January 1 to February 13, 2006.  The accompanying Condensed ConsolidatedFinancial Statements are those of Linens Holding Co. and its subsidiaries.  The Company has not presented separatefinancial statements for Linens ‘n Things, Inc. and its subsidiaries or Linens ‘nThings Center, Inc. and its subsidiaries (collectively, the issuers asdescribed in Note 15) because management has determined that the differences insuch financial statements are minor.  Unless the context requires otherwise, “we,”“us,” “our,” or the “Company” refer to Linens Holding Co. and its subsidiariesand, for periods prior to February 14, 2006, our predecessor and itssubsidiaries.

**FORWARD-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 our financial condition,results of operations and business that is not historical information.  All statements, other than statements ofhistorical fact, included in this report are forward-looking statements.  In particular, statements that the Companymakes 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 our expectations and beliefs, but they are inherentlyuncertain, we may not realize our expectations and our beliefs may not provecorrect.  Any forward-looking statementsare not guarantees of the Company’s future performance and are subject to risksand uncertainties that could cause actual results, developments and businessdecisions to differ materially from those described or implied by any suchforward-looking statements.  The Companyundertakes no obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events or otherwise.Such factors include, without limitation: general economic conditions; changesin the retailing environment and consumer spending habits; inclement weatherand natural disasters; competition from existing and potential competitors; theamount of merchandise markdowns; loss or retirement of key members ofmanagement; increases in the costs of borrowings and unavailability ofadditional debt or equity capital; impact of our substantial indebtedness onour operating income and our ability to grow; the cost of labor; labordisputes; increased healthcare benefit costs; other costs and expenses; andother important factors that could cause actual results to differ materiallyfrom those described or implied by the forward-looking statements contained inthis report.

3

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**PART I – FINANCIAL INFORMATION**

**Item1.****                                   FinancialStatements**

**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands) (Unaudited)**
| ** **                                                     | ** ** | **Thirteen Weeks Ended** | ** **  |
|----------------------------------------------------------------|------------|------------------------------------|-------------|
| ** **                                                     | ** ** | **September 30, 2006**   | ** **  | ** ** | ** ** | **October 1, 2005** | ** ** |
| ** **                                                     | ** ** | **(Successor Entity)**        | ** **  | ** ** | ** ** | **(Predecessor Entity)** | ** ** |
| ** **                                                     | ** ** | ** **                         |        |   |   |   | ** ** |
| **Net  sales**                                                 | ** ** | **$**                              | **658,155** |   | ** ** | ** ** | **$** | **629,268** |   |
| Cost of sales,  including buying and distribution costs        |       | 388,579                            |        |   |   | 370,953 |   |
|                                                           |       |                               |        |   |   |   |   |
| **Gross  profit**                                              | ** ** | **269,576**                        |        | ** ** | ** ** | **258,315** |   |
| Selling, general  and administrative expenses                  |       | 287,752                            |        |   |   | 255,508 |   |
|                                                           |       |                               |        |   |   |   |   |
| **Operating  (loss) income**                                   | ** ** | **(18,176**                        | **)**       | ** ** | ** ** | **2,807** | ** ** |
| Interest income                                                |       | (18                                | )           |   |   | (54 | ) |
| Interest expense                                               |       | 23,572                             |        |   |   | 1,216 |   |
|                                                           |       |                               |        |   |   |   |   |
| Interest  expense, net                                         |       | 23,554                             |        |   |   | 1,162 |   |
|                                                           |       |                               |        |   |   |   |   |
| **(Loss)  income before (benefit) provision for income taxes** | ** ** | **(41,730**                        | **)**       | ** ** | ** ** | **1,645** | ** ** |
| (Benefit)  provision for income taxes                          |       | (14,355                            | )           |   |   | 621 |   |
|                                                           |       |                               |        |   |   |   |   |
| **Net  (loss) income**                                         | ** ** | **$**                              | **(27,375** | **)** | ** ** | ** ** | **$** | **1,024** | ** ** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

4

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands) (Unaudited)**
| ** **                                              | ** ** | **February 14 to  September 30,   2006** | ** **    | ** ** | ** ** | **January 1 to   February 13,   2006** | ** ** | **Thirty-nine Weeks  Ended October 1,  2005** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------|---------------|------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Successor Entity)**                                  | ** **    | ** ** | ** ** | **(Predecessor Entity)**                                   | ** ** | **(Predecessor Entity)**                                | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** **    |       |       | ** **                                                      |       |                                                         | ** ** |
| **Net  sales**                                          | ** ** | **$**                                                        | **1,577,583** | ** ** |       |                                                            | **$**      | **284,971**                                                  | ** ** | **$** | **1,773,531** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 951,007                                                      |          |       |       | 180,675                                                         |       | 1,041,880                                                    |       |
|                                                    |       |                                                         |          |       |       |                                                            |       |                                                         |       |
| **Gross  profit**                                       | ** ** | **626,576**                                                  | ** **    |       |       | **104,296**                                                     | ** ** | **731,651**                                                  | ** ** |
| Selling, general  and administrative expenses           |       | 705,705                                                      |          |       |       | 174,138                                                         |       | 743,364                                                      |       |
|                                                    |       |                                                         |          |       |       |                                                            |       |                                                         |       |
| **Operating  loss**                                     | ** ** | **(79,129**                                                  | **)**         |       |       | **(69,842**                                                     | **)**      | **(11,713**                                                  | **)**      |
| Interest income                                         |       | (137                                                         | )             |       |       | (668                                                            | )          | (678                                                         | )          |
| Interest expense                                        |       | 55,404                                                       |          |       |       | —                                                          |       | 3,301                                                        |       |
|                                                    |       |                                                         |          |       |       |                                                            |       |                                                         |       |
| Interest expense  (income), net                         |       | 55,267                                                       |          |       |       | (668                                                            | )          | 2,623                                                        |       |
|                                                    |       |                                                         |          |       |       |                                                            |       |                                                         |       |
| **Loss  before benefit for income taxes**               | ** ** | **(134,396**                                                 | **)**         |       |       | **(69,174**                                                     | **)**      | **(14,336**                                                  | **)**      |
| Benefit for  income taxes                               |       | (50,322                                                      | )             |       |       | (21,270                                                         | )          | (5,354                                                       | )          |
|                                                    |       |                                                         |          |       |       |                                                            |       |                                                         |       |
| **Net  loss**                                           | ** ** | **$**                                                        | **(84,074**   | **)**      |       |                                                            | **$**      | **(47,904**                                                  | **)**      | **$** | **(8,982** | **)** |

 

*See accompanying Notes to Unaudited Condensed ConsolidatedFinancial Statements*

5

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**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except share amounts)(Unaudited)**
| ** **                                                                                                                                                                                                                                                | ** ** | **Successor Entity**          | ** **    | ** ** | ** ** | **Predecessor Entity**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|---------------|------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **September 30,   2006** | ** **    | ** ** | ** ** | **December 31,   2005** | ** ** | **October 1,   2005** | ** ** |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Assets**                                                                                                                                                                                                                                                | ** ** | ** **                         | ** **    | ** ** | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                                                                                                           |       |                               |          |       |       |                              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                 |       | $                                  | 11,394        |       |       |                              | $          | 158,158 |   | $ | 37,608 |   |
| Accounts receivable                                                                                                                                                                                                                                       |       | 33,886                             |          |       |       | 43,561                            |       | 50,369 |   |
| Inventories                                                                                                                                                                                                                                               |       | 999,316                            |          |       |       | 787,283                           |       | 863,100 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                 |       | 66,788                             |          |       |       | 17,425                            |       | 41,587 |   |
| Current deferred taxes                                                                                                                                                                                                                                    |       | 11,146                             |          |       |       | 2,033                             |       | 834 |   |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Total current assets**                                                                                                                                                                                                                                  | ** ** | **1,122,530**                      | ** **    | ** ** | ** ** | **1,008,460**                     | ** ** | **993,498** | ** ** |
| Property and equipment, net of accumulated  depreciation of $74,339, $464,496 and $446,362 at September 30, 2006,  December 31, 2005 and October 1, 2005, respectively                                                                                    |       | 572,500                            |          |       |       | 612,247                           |       | 601,261 |   |
| Identifiable intangible assets, net                                                                                                                                                                                                                       |       | 155,361                            |          |       |       | 1,301                             |       | 1,352 |   |
| Goodwill                                                                                                                                                                                                                                                  |       | 277,152                            |          |       |       | 18,126                            |       | 18,126 |   |
| Deferred financing cost and other noncurrent assets,  net                                                                                                                                                                                                 |       | 35,218                             |          |       |       | 10,700                            |       | 11,799 |   |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Total  assets**                                                                                                                                                                                                                                         | ** ** | **$**                              | **2,162,761** | ** ** | ** ** | ** **                        | **$**      | **1,650,834** | ** ** | **$** | **1,626,036** | ** ** |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                                                                            |       |                               |          |       |       |                              |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| Accounts payable                                                                                                                                                                                                                                          |       | $                                  | 331,667       |       |       |                              | $          | 267,582 |   | $ | 279,411 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                            |       | 155,136                            |          |       |       | 199,024                           |       | 167,685 |   |
| Current deferred taxes                                                                                                                                                                                                                                    |       | —                             |          |       |       | 4,401                             |       | 3,917 |   |
| Short-term borrowings                                                                                                                                                                                                                                     |       | 225,934                            |          |       |       | —                            |       | 30,000 |   |
| **Total current liabilities**                                                                                                                                                                                                                             |       | **712,737**                        |          |       |       | **471,007**                       |       | **481,013** |   |
| Senior secured notes and other long-term debt, net  of current portion                                                                                                                                                                                    | ** ** | 652,028                            | ** **    | ** ** | ** ** | 2,076                             | ** ** | 2,094 | ** ** |
| Noncurrent deferred income taxes                                                                                                                                                                                                                          |       | 180,862                            |          |       |       | 54,416                            |       | 65,780 |   |
| Other long-term liabilities                                                                                                                                                                                                                               |       | 48,512                             |          |       |       | 273,472                           |       | 272,697 |   |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Total  liabilities**                                                                                                                                                                                                                                    | ** ** | **1,594,139**                      | ** **    | ** ** | ** ** | **800,971**                       | ** ** | **821,584** | ** ** |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Shareholders’  equity:**                                                                                                                                                                                                                           | ** ** | ** **                         | ** **    | ** ** | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Preferred stock of Predecessor Entity, $0.01 par  value; 1,000,000 shares authorized; none issued and outstanding                                                                                                                                         |       | —                             |          |       |       | —                            |       | — |   |
| Common stock of Predecessor Entity, $0.01 par value;  135,000,000 shares authorized; 45,653,954 shares issued and 45,389,975 shares  outstanding at December 31, 2005; and 45,628,964 shares issued and 45,369,460  shares outstanding at October 1, 2005 |       | —                             |          |       |       | 457                               |       | 456 |   |
| Common stock of Successor Entity, $0.01 par value;  15,000,000 shares authorized; 13,053,000 shares issued and outstanding at  September 30, 2006                                                                                                         |       | 131                                |          |       |       | —                            |       | — |   |
| Additional paid-in capital                                                                                                                                                                                                                                |       | 651,636                            |          |       |       | 376,730                           |       | 376,156 |   |
| Retained (deficit) earnings                                                                                                                                                                                                                               |       | (84,074                            | )             |       |       | 476,896                           |       | 431,932 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                    |       | 929                                |          |       |       | 3,287                             |       | 3,300 |   |
| Treasury stock of Predecessor Entity, at cost;  263,979 shares at December 31, 2005; and 259,504 shares at October 1, 2005                                                                                                                                |       | —                             |          |       |       | (7,507                            | )          | (7,392 | ) |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Total shareholders’ equity**                                                                                                                                                                                                                       | ** ** | **568,622**                        | ** **    | ** ** | ** ** | **849,863**                       | ** ** | **804,452** | ** ** |
|                                                                                                                                                                                                                                                      |       |                               |          |       |       |                              |       |   |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                                                                                                      | ** ** | **$**                              | **2,162,761** | ** ** | ** ** | ** **                        | **$**      | **1,650,834** | ** ** | **$** | **1,626,036** | ** ** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

6

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**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) (Unaudited)**
| ** **                                                                                                                 | ** ** | **Successor Entity**                              | ** ** | ** ** | ** ** | **Predecessor Entity**                         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **February 14 to  September 30,  2006** | ** ** | ** ** | ** ** | **January 1 to  February 13,  2006** | ** ** | **Thirty-nine  Weeks Ended  October 1,  2005** | ** ** |
| **Cash  flows from operating activities:**                                                                                 | ** ** | ** **                                             | ** ** |       |       | ** **                                          | ** ** | ** ** | ** ** |
| Net loss                                                                                                                   |       | $                                                      | (84,074    | )          |       |                                                | $          | (47,904 | ) | $ | (8,982 | ) |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                               |       |                                                   |       |       |       |                                                |       |   |   |
| Depreciation and amortization                                                                                              |       | 80,215                                                 |       |       |       | 12,642                                              |       | 66,216 |   |
| Deferred income taxes                                                                                                      |       | (33,546                                                | )          |       |       | (6,646                                              | )          | 782 |   |
| Share-based compensation                                                                                                   |       | 3,363                                                  |       |       |       | 12,484                                              |       | 818 |   |
| Amortization of deferred financing charges                                                                                 |       | 2,725                                                  |       |       |       | 43                                                  |       | 559 |   |
| Loss on sale and disposals of property and equipment                                                                       |       | 416                                                    |       |       |       | —                                              |       | 625 |   |
| Loss on fixed asset impairment writedown                                                                                   |       | —                                                 |       |       |       | —                                              |       | 1,452 |   |
| Changes in assets and liabilities, net of effect of  acquisition:                                                          |       |                                                   |       |       |       |                                                |       |   |   |
| Decrease (increase) in accounts receivable                                                                                 |       | 12,047                                                 |       |       |       | (2,240                                              | )          | (24,476 | ) |
| Increase in inventories                                                                                                    |       | (177,910                                               | )          |       |       | (31,886                                             | )          | (145,922 | ) |
| Increase in prepaid expenses and other current  assets                                                                     |       | (37,579                                                | )          |       |       | (12,153                                             | )          | (4,204 | ) |
| Decrease (increase) in identifiable intangible  assets, goodwill, deferred financing cost and other noncurrent assets, net |       | 398                                                    |       |       |       | 9,580                                               |       | (2,886 | ) |
| Increase in accounts payable                                                                                               |       | 56,077                                                 |       |       |       | 7,244                                               |       | 32,815 |   |
| Decrease in accrued expenses and other liabilities,  net                                                                   |       | (33,878                                                | )          |       |       | (6,310                                              | )          | (28,123 | ) |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Net  cash used in operating activities**                                                                                 | ** ** | **(211,746**                                           | **)**      |       |       | **(65,146**                                         | **)**      | **(111,326** | **)** |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                                                                 | ** ** | ** **                                             | ** ** |       |       | ** **                                          | ** ** | ** ** | ** ** |
| Acquisition of the Company, net of cash acquired(1)                                                                        |       | (1,205,502                                             | )          |       |       | —                                              |       | — |   |
| Additions to property and equipment                                                                                        |       | (41,138                                                | )          |       |       | (7,776                                              | )          | (88,994 | ) |
| Proceeds from sale of property and equipment                                                                               |       | 3,100                                                  |       |       |       | —                                              |       | — |   |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Net  cash used in investing activities**                                                                                 | ** ** | **(1,243,540**                                         | **)**      |       |       | **(7,776**                                          | **)**      | **(88,994** | **)** |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                                                                 | ** ** | ** **                                             | ** ** |       |       | ** **                                          | ** ** | ** ** | ** ** |
| Issuance of common stock to Linens Investors LLC and  others                                                               |       | 650,650                                                |       |       |       | —                                              |       | — |   |
| Issuance of floating rate notes                                                                                            |       | 650,000                                                |       |       |       | —                                              |       | — |   |
| Financing and direct acquisition costs                                                                                     |       | (59,254                                                | )          |       |       | —                                              |       | — |   |
| Premium paid for derivative financial instrument                                                                           |       | (700                                                   | )          |       |       | —                                              |       | — |   |
| Issuance of common stock under stock incentive plans                                                                       |       |                                                   |       |       |       | —                                              |       | 3,081 |   |
| Federal tax benefit from common stock issued under  stock incentive plans                                                  |       | —                                                 |       |       |       | 4,298                                               |       | 447 |   |
| Increase in short-term borrowings                                                                                          |       | 225,934                                                |       |       |       | —                                              |       | 30,000 |   |
| Decrease (increase) in treasury stock                                                                                      |       | —                                                 |       |       |       | 674                                                 |       | (130 | ) |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Net  cash provided by financing activities**                                                                             | ** ** | **1,466,630**                                          | ** ** |       |       | **4,972**                                           | ** ** | **33,398** | ** ** |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                              |       | 50                                                     |       |       |       | 125                                                 |       | 521 |   |
| Net increase  (decrease) in cash and cash equivalents                                                                      |       | 11,394                                                 |       |       |       | (67,825                                             | )          | (166,401 | ) |
| **Cash  and cash equivalents at beginning of period**                                                                      | ** ** | **—**                                             | ** ** |       |       | **158,158**                                         | ** ** | **204,009** | ** ** |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Cash  and cash equivalents at end of period**                                                                            | ** ** | **$**                                                  | **11,394** | ** ** |       |                                                | **$**      | **90,333** | ** ** | **$** | **37,608** | ** ** |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Cash  paid during the year for:**                                                                                        | ** ** | ** **                                             | ** ** |       |       | ** **                                          | ** ** | ** ** | ** ** |
| Interest (net of amounts capitalized)(2)                                                                                   |       | $                                                      | 35,397     |       |       |                                                | $          | 135 |   | $ | 3,249 |   |
| Income taxes                                                                                                               |       | $                                                      | 38,629     |       |       |                                                | $          | 57 |   | $ | 32,062 |   |
|                                                                                                                       |       |                                                   |       |       |       |                                                |       |   |   |
| **Non-cash transaction:**                                                                                                  |       |                                                   |       |       |       |                                                |       |   |   |
| Unrealized loss  on hedge arrangements                                                                                     |       | $                                                      | 898        |       |       |                                                | $          | — |   | $ | — |   |

 

----

*(1)*

In connection with the Merger, net cash settlements ofapproximately $20.0 million and $4.4 million for stock options andrestricted stock units, respectively, are included in “Acquisition of theCompany, net of cash acquired.”

*(2)*

Excludes $37,106 of deferred financing costs incurredin connection with the Merger.  Suchcosts are being charged-off to interest expense over the life of the relatedfinancing commitments.

*See accompanying Notes to Unaudited Condensed ConsolidatedFinancial Statement*

7

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**LINENS HOLDING CO. AND SUBSIDIARIES(AND PREDECESSOR)NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

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

OnNovember 8, 2005, Linens Merger Sub Co. and its parent company, Linens HoldingCo. (the “Company”), entered into an Agreement and Plan of Merger withLinens ’n Things, Inc. governing a merger (the “Merger”)pursuant to which each share of common stock of Linens ’n Things, Inc.(other than shares held in treasury or owned by Linens Merger Sub Co., itsparent company or any affiliate of Linens Merger Sub Co. and other than sharesheld by stockholders who properly demanded and perfected appraisal rights)would be converted into the right to receive $28.00 in cash, without interest,for aggregate consideration of approximately $1.3 billion. The Merger wasstructured as a reverse subsidiary merger, and on February 14, 2006 LinensMerger Sub Co. was merged with and into Linens ’n Things, Inc.,with Linens ’n Things, Inc. as the surviving corporation.  As the surviving corporation in the Merger,Linens ’n Things, Inc. assumed by operation of law all of therights and obligations of Linens Merger Sub Co., including $650 millionaggregate principal amount of Senior Secured Floating Rate Notes (the “Notes”)due 2014 of Linens ’n Things, Inc. and Linens ’n ThingsCenter, Inc. (collectively, the “Issuers”) and the related indenture.Linens ’n Things Center, Inc., a direct wholly owned subsidiaryof Linens ’n Things, Inc., is a co-issuer of the Notes.

Affiliates of ApolloManagement, L.P., National Realty & Development Corp. and Silver PointCapital Fund Investments LLC (the “Sponsors”) collectively contributedapproximately $648 million as equity to Linens Merger Sub Co. immediatelyprior to the Merger.

The Sponsors financed thepurchase of Linens ’n Things, Inc. and paid related fees andexpenses through the offering of the Notes, the equity investment describedabove and excess cash on hand at Linens ’n Things, Inc.  Linens ’n Things, Inc. did notdraw on its new asset-based revolving credit facility at closing.

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

Immediately following theMerger, Linens ’n Things, Inc. became a wholly owned subsidiaryof Linens Holding Co.  Linens Holding Co.is an entity that was formed in connection with the Transactions and has noassets or liabilities other than the shares of Linens Merger Sub Co. and itsrights and obligations under and in connection with the merger agreement withLinens ’n Things, Inc. and the equity commitment letters anddebt financing commitment letters provided in connection with the Transactions.

The closing of the Mergeroccurred simultaneously with:

·      the closing ofthe Note offering;

·      the closing ofLinens ’n Things, Inc.’s new $600 million asset-basedrevolving credit facility;

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

·      the equity investmentsdescribed above.

The consummation of theNotes offering was conditioned upon the consummation of the Merger, the closingof Linens ’n Things, Inc.’s new asset-based revolving creditfacility and the equity investments described above, all of which werecompleted on February 14, 2006.

The Notes bear interestat a per annum rate equal to LIBOR plus 5.625%, which is paid every threemonths on January 15, April 15, July 15 and October 15,commencing April 15, 2006.  Theinterest rate on the Notes is reset quarterly. The Notes mature on January 15, 2014.

On July 7, 2006 the Issuers entered into a zero cost interest ratecollar agreement (the “Collar Agreement”) to hedge the cash flows associated withthe 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 (the “Cap Agreement”)which takes effect on

8

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

January 15, 2008 (see Note 12 to the Unaudited Condensed ConsolidatedFinancial Statements for disclosures regarding these derivatives).

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

All obligations under the Notes, and the guarantees of thoseobligations, are secured, by first-priority liens, subject to permitted liens,on all of the Company’s, the Issuers’ and the Note Guarantors’ equipment,intellectual property rights and related general intangibles and the capitalstock of the Issuers and certain of the subsidiaries.

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 Note Guarantors becamesubject to applicable SEC rules with respect to information required to beincluded in the prospectus in the registration statement.  To the extentthat the securities of any Issuer or Guarantor constitute collateralfor the Notes and the value of the securities equals or exceeds 20% of theprincipal amount, or $130 million of the Notes, separate financialstatements of the Issuer or Guarantor would be required under theseSEC rules to be included in the Company’s SEC filings. The indenture that governs the Notes provides, however, with respect toany direct or indirect subsidiary of Linens ‘n Things, Inc., that thesecurities of the subsidiary are released from the lien on capital stockon the date that the lien triggers this separate financial statementrequirement.  Accordingly, for any subsidiary with securities thatequal or exceed the 20% threshold, the lien on the capital stock securing theNotes has been released with respect to those securities.  The lien on thecapital stock of Linens ‘n Things, Inc. remains in place.

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

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

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

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

Borrowings under 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

9

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

additional costs, in eachcase plus an applicable margin.  Theinitial applicable margin for borrowings under the Credit Facility is 0% withrespect to alternate base rate borrowings and 1.50% with respect to LIBOR borrowings.  After the delivery of the financialstatements for the first full fiscal quarter after the closing date, theapplicable margin for borrowings under the Credit Facility will be subject toadjustment based on the excess availability under the Credit Facility.  In addition to paying interest on outstandingprincipal under the Credit Facility, the Borrowers are required to pay acommitment fee, initially 0.375% per annum, in respect of the unutilizedcommitments thereunder.  After the deliveryof financial statements for the first full fiscal quarter after the closingdate, the commitment fee will be subject to adjustment based on the excessavailability under the Credit Facility. The Borrowers must also pay customary letter of credit fees and agencyfees.  The Borrowers initiated borrowingsunder its Credit Facility on February 23, 2006 to meet its operationalworking capital needs.  As of September30, 2006 the applicable margin for borrowings under the Credit Facility and thecommitment fee in respect of the unutilized commitments thereunder remained atthe initial levels established.

As a result of theMerger, all of Linens ’n Things, Inc.’s issued and outstandingcapital stock was acquired by Linens Holding Co.  At such time, investment funds associatedwith or designated by the Sponsors acquired approximately 99.7% of the commonstock of Linens Holding Co. through an investment vehicle controlled by ApolloManagement V, L.P., or one of its affiliates, and Robert J. DiNicola, the newChairman and Chief Executive Officer of Linens ’n Things, Inc.,acquired the remaining 0.3% at the same price paid by the sponsors.

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

Total fees and expensesrelated to the Transactions were approximately $108 million, consisting ofapproximately $48 million of pre-merger transaction cost incurred by theCompany’s predecessor entity, Linens ‘n Things, Inc., $23 million ofdirect acquisition costs of the Company and $37 million of deferredfinancing costs.  Such fees includecommitment, placement, financial advisory and other transaction fees as well aslegal, accounting and other professional fees. The direct acquisition costs were included in the purchase price and isa component of goodwill.  Deferredfinancing costs of approximately $11 million relates to the creditfacility, which are amortized over five years on a straight-line basis, and $26 millionrelates to the Notes, which are amortized over eight years using the effectiveinterest method.

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

The Company has allocatedthe purchase price based on the appraisal associated with the valuation ofcertain assets and liabilities.  The Companydoes not believe that the appraisal or its estimate of certain contingencieswill materially modify the preliminary purchase price allocation.

As a result of theconsummation of the Transactions, a new entity (“successor entity”) was formedwith an effective date of February 14, 2006, consisting of Linens HoldingCo. and Subsidiaries.  The condensedconsolidated financial statements for the successor entity as of September 30,2006, and for the 13-week period ended September 30, 2006 and for the periodFebruary 14 to September 30, 2006 show the operations of the successorentity, Linens Holding Co. and Subsidiaries. The condensed consolidated financial statements presented as of October1, 2005 and December 31, 2005, and for the thirteen-week and thirty-nine-weekperiods ended October 1, 2005 and for the period January 1 toFebruary 13, 2006 are shown under the “predecessor entity” caption,consisting of Linens ’n Things, Inc. and Subsidiaries.

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

10

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

A reconciliation of thepreliminary purchase price adjustments recorded in connection with theTransactions is presented below (in thousands):
| ** **                                                             | ** ** | **Predecessor Entity** | ** **    | ** **                   | ** ** | **Successor Entity** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|---------------|------------------------------|------------|---------------------------|------------|
| ** **                                                             | ** ** | **February 13,  2006** | ** **    | **Transaction  Adjustments** | ** ** | ** **                | ** ** | **February 14,  2006** | ** ** |
|                                                                   |       |                        |          |                         |       |                      |       |   |   |
| **Assets**                                                             | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| Current assets:                                                        |       |                        |          |                         |       |                      |       |   |   |
| Cash and cash equivalents                                              |       | $                           | 90,333        |                         | $          | (15,701                   | )          |   |   | $ | 74,632 |   |
| Accounts receivable                                                    |       | 45,833                      |          | —                       |       |                      |       | 45,833 |   |
| Inventories                                                            |       | 819,600                     |          | —                       |       |                      |       | 819,600 |   |
| Prepaid expenses and other current assets                              |       | 29,499                      |          | —                       |       |                      |       | 29,499 |   |
| Current deferred taxes                                                 |       | 132                         |          | —                       |       |                      |       | 132 |   |
| **Total current assets**                                               | ** ** | **985,397**                 | ** **    | **(15,701**                  | **)**      | ** **                | ** ** | **969,696** | ** ** |
| Property and equipment, net                                            |       | 607,787                     |          | (57                          | )          |                      |       | 607,730 |   |
| Identifiable intangible assets, net                                    |       | 1,276                       |          | 159,742                      |       |                      |       | 161,018 |   |
| Goodwill                                                               |       | 18,126                      |          | 259,309                      |       |                      |       | 277,435 |   |
| Deferred financing cost and other noncurrent assets,  net              |       | 1,079                       |          | 36,172                       |       |                      |       | 37,251 |   |
|                                                                   |       |                        |          |                         |       |                      |       |   |   |
| **Total  assets**                                                      | ** ** | **$**                       | **1,613,665** | ** **                   | **$**      | **439,465**               | ** ** | ** ** | ** ** | **$** | **2,053,130** | ** ** |
| ** **                                                             | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| **Liabilities  and Shareholders’ Equity**                         | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| Current liabilities:                                                   |       |                        |          |                         |       |                      |       |   |   |
| Accounts payable                                                       |       | $                           | 274,997       |                         | $          | —                    |       |   |   | $ | 274,997 |   |
| Accrued expenses and other current liabilities                         |       | 195,467                     |          | 39,388                       | (1)        |                      |       | 234,855 |   |
| Current deferred taxes                                                 |       | 8,176                       |          | —                       |       |                      |       | 8,176 |   |
| **Total current liabilities**                                          | ** ** | **478,640**                 | ** **    | **39,388**                   | ** ** | ** **                | ** ** | **518,028** | ** ** |
| Senior secured notes and other long-term debt, net  of current portion |       | 2,068                       |          | 650,000                      |       |                      |       | 652,068 |   |
| Noncurrent deferred income taxes                                       |       | 42,094                      |          | 152,892                      |       |                      |       | 194,986 |   |
| Other long-term liabilities                                            |       | 270,455                     |          | (230,020)                    | (2)        |                      |       | 40,435 |   |
| **Total  liabilities**                                                 | ** ** | **793,257**                 | ** **    | **612,260**                  | ** ** | ** **                | ** ** | **1,405,517** | ** ** |
| **Shareholders’  equity**                                         | ** ** | **820,408**                 | ** **    | **(172,795**                 | **)**      | ** **                | ** ** | **647,613** | ** ** |
| ** **                                                             | ** ** | ** **                  | ** **    | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** |
| **Total liabilities and  shareholders’ equity**                   | ** ** | **$**                       | **1,613,665** | ** **                   | **$**      | **439,465**               | ** ** | ** ** | ** ** | **$** | **2,053,130** | ** ** |

----

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

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

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

 

As presented in the abovetable, the Company’s assets and liabilities were adjusted to fair value as ofthe closing date of the Transactions, and the excess of the total purchaseprice over the fair value of the Company’s net assets was allocated togoodwill.  The following table presentsan analysis of the change in goodwill.
| **(in thousands)**                                                | ** ** | **Amount** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
|                                                                   |       |       |       |
| Balance at  October 1, 2005 and December 31, 2005 (predecessor entity) |       | $          | 18,126     | (1) |
| Purchase  accounting adjustments from preliminary allocation           |       | 259,309    |       |
| Balance at  February 14, 2006 (successor entity)                       |       | 277,435    |       |
| Pre-existing tax  adjustments                                          |       | (250       | )          |
| Pre-existing  book adjustments, net                                    |       | (618       | )          |
| Other – foreign  currency translation                             |       | 585        |       |
| Balance at September  30, 2006 (successor entity)                      |       | $          | 277,152    |   |

----

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

11

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

The unaudited pro formaresults of operations provided below for the thirteen weeks and thirty-nineweeks ended September 30, 2006 and October 1, 2005 are presented as though theTransactions had occurred at the beginning of the periods presented, aftergiving effect to purchase accounting adjustments relating to depreciation andamortization of the revalued assets, interest expense associated with the Notesand the Credit Facility and other acquisition-related adjustments in connectionwith the Transactions.  The pro formaresults of operations are not necessarily indicative of the combined resultsthat would have occurred had the Transactions been consummated at the beginningof the periods presented, nor are they necessarily indicative of futureoperating results.
| ** **                            | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(In Thousands)**               | ** ** | **September 30, 2006**   | ** ** | **October 1, 2005**         | ** ** | **September 30, 2006** | ** ** | **October 1, 2005** | ** ** |
|                                  |       |                               |       |                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                             |       | $                                  | 658,155    |                                  | $          | 629,268 |   | $ | 1,862,554 |   | $ | 1,773,531 |   |
| Loss before  benefit for income taxes |       | $                                  | (41,730    | )                                     | $          | (31,739 | ) | $ | (174,907 | ) | $ | (110,964 | ) |
| Net loss                              |       | $                                  | (27,375    | )                                     | $          | (19,861 | ) | $ | (108,404 | ) | $ | (69,432 | ) |

 

**2. Basisof Presentation**

The accompanyingCondensed Consolidated Financial Statements are unaudited.  In the opinion of management, theaccompanying Condensed Consolidated Financial Statements contain alladjustments to present fairly the financial position of successor entity LinensHolding Co. and Subsidiaries and predecessor entity Linens ’n Things, Inc.and Subsidiaries, as of September 30, 2006 and October 1, 2005 and the resultsof operations and cash flows for the respective periods then ended as presentedin the unaudited statements.  Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.  Because of theseasonality of the specialty retailing business, operating results of theCompany on a quarterly or interim basis may not be indicative of operatingresults for the full year.

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

Certain prior periodamounts have been reclassified to conform to the current period’s presentation.

The accompanyingCondensed Consolidated Financial Statements are those of Linens Holding Co. andits subsidiaries.  The Company has notpresented separate financial statements for Linens ‘n Things, Inc. and itssubsidiaries or Linens ‘n Things Center, Inc. and its subsidiaries(collectively, the issuers as described in Note 15) because management hasdetermined that the differences in such financial statements are minor.

**3.Stock-based Compensation**

On January 1, 2006,the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123 (Revised2004)”), requiring the recognition of compensation cost for all equityclassified awards granted, modified or settled after the effective date and forthe unvested portion of awards outstanding as of the effective date using thefair-value measurement method.  SFAS No. 123(Revised 2004) revises SFAS No. 123, “Accounting for Stock-BasedCompensation,” and supersedes Accounting Principles Board (“APB”) OpinionNo. 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 Stock Appreciation Rights and OtherVariable Stock Option or Award Plans” over their respective vesting periods,net of estimated forfeitures.  TheCompany has selected the modified prospective method of transition;accordingly, prior periods have not been restated.  Prior to

12

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

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

**Share-basedCompensation Plans—Predecessor Entity**

Prior to 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.  The exercise pricesof the stock options were equal to the fair market value of the underlyingshares at the date of grant. Compensation expense for restricted stock awards was measured at fair valueon the date of grant based on the number of shares granted and the quotedmarket price of the Company’s common stock. Such value was recognized as expense over the vesting period of theaward adjusted for actual forfeitures.

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

The following is asummary of activity under the stock option plans that were in effect uponadoption of SFAS 123 (Revised 2004) through the effective date of theMerger, when all of the stock options and restricted stock units wereexercised:
| ** **                                                    | ** ** | **Predecessor Entity**                          | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Plan**                                                      | ** ** | **Outstanding  at January 1,   2006** | ** ** | **Exercised** | ** ** | **Outstanding at  February 14,  2006** | ** ** |
| **Stock  options**                                            | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1996 Plan                                                     |       | 1,151,673                                            |       | 1,151,673 |   | — |   |
| Directors’ Plan                                          |       | 48,800                                               |       | 48,800 |   | — |   |
| 2000 Plan                                                     |       | 1,463,796                                            |       | 1,463,796 |   | — |   |
| Broad-based Equity Plan                                       |       | 1,470,638                                            |       | 1,470,638 |   | — |   |
| 2004 Plan                                                     |       | 1,246,690                                            |       | 1,246,690 |   | — |   |
| New Hire Authorization                                        |       | 450,000                                              |       | 450,000 |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| Total options  outstanding                                    |       | 5,831,597                                            |       | 5,831,597 |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| Weighted average  exercise price per option                   |       | $                                                    | 25.20      |   | $ | 25.20 |   | — |   |
| Weighted average  remaining contractual term per option       |       | 4.6 years                                            |       | — |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| **Options  exercisable at period end:**                       | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** |   |
| ** **                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** |   |
| Number of options                                             |       |                                                 |       |   |   | — |   |
| Weighted average exercise price                               |       |                                                 |       |   |   | — |   |
| Weighted average remaining contractual term                   |       |                                                 |       |   |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| **Restricted  stock units**                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** |   |
| 2000 Plan                                                     |       | 7,500                                                |       | 7,500 |   | — |   |
| Broad-based Equity Plan                                       |       | 9,850                                                |       | 9,850 |   | — |   |
| 2004 Plan                                                     |       | 118,066                                              |       | 118,066 |   | — |   |
| New Hire Authorization                                        |       | 20,000                                               |       | 20,000 |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| Total units  outstanding                                      |       | 155,416                                              |       | 155,416 |   | — |   |
|                                                          |       |                                                 |       |   |   |   |   |
| Weighted average  fair market value per unit at date of award |       | $                                                    | 25.71      |   | $ | 25.71 |   | — |   |
| Weighted average  remaining contractual term for restrictions |       | 2.9 years                                            |       |   |   | — |   |

 

13

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

The 2004 Stock Award andIncentive Plan (the “2004 Plan”) provided for the granting of options,restricted stock unit grants and other stock-based awards (collectively, “awards”)to key employees and non-employee directors. The 2004 Plan replaced both the Company’s 2000 Stock Award and IncentivePlan (the “2000 Plan”) and the Broad-Based Equity Plan.  The 2000 Plan replaced both the Company’s1996 Incentive Compensation Plan (the “1996 Plan”) and the 1996 Non-EmployeeDirectors’ Stock Plan (the “Directors’ Plan”). Therefore, no future awards were made under the 2000 Plan, theBroad-Based Equity Plan, the 1996 Plan or the Directors’ Plan (collectively,the “Prior Plans”), although outstanding awards under the Prior Plans continuedto be in effect.  The New HireAuthorization provided for the granting of awards as an inducement to a personbeing retained for employment by the Company.

Under the 2004 Plan, anaggregate of 4,000,000 shares (plus any shares under outstanding awards underthe Prior Plans which become available for further grants) was authorized forissuance of awards.  Under the New HireAuthorization, an aggregate of 500,000 shares was authorized.

Stock options under the2004 Plan and the New Hire Authorization were granted with exercise prices atthe fair market value of the underlying shares at the date of grant.  The right to exercise options generallycommenced one to five years after the grant date, and the options expiredbetween five to ten years after the grant date. Restrictions on restrictedstock unit grants lapsed over vesting periods of up to five years.

Therewere no share-based grants during the period January 1, 2006 toFebruary 14, 2006 (predecessor entity). The weighted-average grant date fair value of options and restrictedstock units granted during the thirteen weeks ended October 1, 2005 was $8.12and $25.73, respectively.  Theweighted-average grant date fair value of options and restricted stock unitsgranted during the thirty-nine weeks ended October 1, 2005 was $8.44 and $25.37,respectively.

The total intrinsic valueof each stock option and restricted stock unit exercised due to the Merger wasapproximately $20.0 million and $4.4 million, respectively, for theperiod January 1, 2006 to February 14, 2006 (predecessorentity).  The total intrinsic value ofstock options exercised during the thirteen and thirty-nine weeks ended October1, 2005 was approximately $0.8 million and $1.2 million, respectively.  The total intrinsic value of restricted stockunits converted into common stock during the thirteen and thirty-nine weeksended October 1, 2005 was approximately $6,000 and $358,000, respectively.

The following is asummary of the activity for nonvested stock option grants and restricted stockunit awards as of February 14, 2006 and the changes for the periodJanuary 1, 2006 to February 14, 2006:
| ** **                      | ** ** | **Predecessor Entity** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Stock Options**      | ** ** | **Restricted Stock Units** | ** ** |
| ** **                      | ** ** | **Options**                 | ** ** | **Fair  Value(1)** | ** ** | **Units** | ** ** | **Fair  Value(1)** | ** ** |
| Nonvested at  January 1, 2006   |       | 1,064,620                   |       | $ | 10.59 |   | 155,416 |   | $ | 25.71 |   |
| Grants                          |       | —                      |       | $ | — |   | — |   | $ | — |   |
| Vested(2)                       |       | (1,060,940                  | )          | $ | 10.59 |   | (155,416 | ) | $ | 25.71 |   |
| Cancelled                       |       | (3,680                      | )          | $ | 11.12 |   | — |   | $ | — |   |
|                            |       |                        |       |   |   |   |   |   |   |
| Nonvested at  February 14, 2006 |       | —                      |       | $ | — |   | — |   | $ | — |   |

 

----

*(1)**      *Representsthe weighted-average grant date fair value per share-based unit, using theBlack-Scholes option-pricing model for stock options and the average high/lowmarket price of the Company’s common stock for restricted stock units.

*(2) *All of the share-based units becameimmediately vested on the date of the Merger.

The total fair value ofstock options and restricted stock units vested during the period fromJanuary 1, 2006 to February 14, 2006 (predecessor entity) wasapproximately $11.2 million and $4.0 million, respectively.  The total fair value of stock options vestedduring the thirteen and thirty-nine weeks ended October 1, 2005 wasapproximately $0.4 million and $1.5 million, respectively.  The total fair value of restricted stockunits vested during the thirteen and thirty-nine weeks ended October 1, 2005was approximately $6,000 and $358,000, respectively.

14

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

 

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

The compensationcost that has been charged against income for restricted stock unit grants wasapproximately $0.3 million and $0.8 million for the thirteen weeks and thirty-nineweeks ended October 1, 2005.  Nocompensation cost was recognized for stock option grants for the thirteen weeksand thirty-nine weeks ended October 1, 2005.

**Share-basedCompensation Plans—Successor Entity**

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

As of September 30, 2006,839,446 stock options were outstanding as detailed below:
| ** **                                                                                                         | ** ** | **Number of Stock  Options Granted** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Grants under the Linens  Holding Co. Stock Option Plan*(1)*                                                        |       | 741,446                                             |       |
| Grants approved by the  Board and not included in the Plan*(2)(3)(4)*                                              |       | 53,000                                              |       |
| Grants not included in  the Plan to members of the Board in accordance with the Director Compensation  Policy*(5)* |       | 45,000                                              |       |
|                                                                                                               |       |                                                |       |
|                                                                                                               |       | 839,446                                             |       |

 

----

*(1)*       The stock options granted under the Plan to each optionee areequally divided between a “Time Option” and a “Performance Option,” as thoseterms are defined in the standard form of option grant letter.  The stock options have an exercise price of$50.00 per share, the estimated fair market value of the underlying shares atthe date of grant, 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 697,446 options initially granted March 27, 2006 or (2) on each ofthe first four anniversaries of the date of grant for subsequently-issuedoptions.  With respect to PerformanceOptions and as provided for and defined in the standard form of grant letter,the stock options become vested and exercisable in two equal installments froma measurement date if, on such measurement date, the value per share equals orexceeds a target stock price.

*(2)*       OnMarch 23, 2006, the Board approved a grant to Robert J. DiNicola, theChairman and Chief Executive Officer of Linens ‘n Things, Inc., of anon-qualified stock option to purchase 40,000 shares of Common Stock outside ofthe Plan.  These stock options have anexercise price of $50.00 per share and are fully vested and immediatelyexercisable on the date of grant.

*(3)*       On May11, 2006, the Board approved a grant to F. David Coder, the Executive VicePresident, Store Operations of Linens ‘n Things, Inc., of a non-qualifiedstock option to purchase 3,000 shares of Common Stock outside of the Plan.  These stock options have an exercise price of$50.00 per share and are fully vested and immediately exercisable on the dateof grant.

*(4)*       On August16, 2006, the Board approved a grant to George G. Golleher, a non-employeedirector of the Company and Linens ‘n Things, Inc., of a non-qualifiedstock option to purchase 10,000 shares of Common Stock outside of thePlan.  These stock options have anexercise price of $50.00 per share and are fully vested and immediatelyexercisable on the date of grant.

*(5)*       On June13, 2006, the Board adopted a policy for director compensation (the “DirectorCompensation Policy”) effective April 1, 2006. Pursuant to the Director Compensation Policy, the Board Chairman andeach non-employee director, upon first election or appointment to the Board,will receive a grant of non-qualified stock options to purchase a minimum of5,000 shares of Common Stock outside of the Plan.  On June 13, 2006, in accordance with theDirector Compensation Policy, the Board also approved a grant of anon-qualified stock option to purchase 5,000 shares of Common Stock to each ofeight Board members appointed to the Board in March 2006.  These stock options have an exercise price of$50.00 per share and are fully vested and immediately exercisable on the dateof grant.  On June 15, 2006 an additionalgrant of a non-qualified stock option to purchase 5,000 shares of Common Stockwas approved upon the appointment of the Company’s ninth and final Boardmember.  These stock options have anexercise price of $50.00 per share and are fully vested and immediatelyexercisable on the date of grant.

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

15

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

 
| **Successor Entity**                   | ** ** |
|----------------------------------------|------------|
| Options                                | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (years)** | ** ** |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at February 14, 2006**  | ** ** | **—** | ** ** | **$                      —** | ** ** | ** ** | ** ** |
| Options granted                        |       | 737,446 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | — |   | — |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at April 1, 2006**      | ** ** | **737,446** | ** ** | **$                50.00** | ** ** | ** ** | ** ** |
| Options granted                        |       | 156,500 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | (88,500 | ) | 50.00 |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at July 1, 2006**       | ** ** | **805,446** | ** ** | **$                50.00** | ** ** | ** ** | ** ** |
| Options granted                        |       | 45,000 |   | 50.00 |   |   |   |
| Exercised                              |       | — |   | — |   |   |   |
| Canceled                               |       | (11,000 | ) | 50.00 |   |   |   |
|                                   |       |   |   |   |   |   |   |
| **Outstanding  at September 30, 2006** | ** ** | **839,446** | ** ** | **$                50.00** | ** ** | **6.52** | ** ** |
|                                   |       |   |   |   |   |   |   |
| **Exercisable  at September 30, 2006** | ** ** | **98,000** | ** ** | **$                50.00** | ** ** | **6.54** | ** ** |

 

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

Theweighted-average grant date fair value of options granted during the thirteenweek period ended September 30, 2006 was $16.43.  The weighted-average grant date fair value ofoptions granted during the period February 14, 2006 to September 30, 2006(successor entity) was $17.34.

There were nostock option exercises during the period February 14, 2006 to September30, 2006 (successor entity).

The following is asummary of the activity for nonvested stock option grants as of September 30, 2006and the changes for the period February 14, 2006 to September 30, 2006:
|                                      | ** ** | **Successor Entity  Stock Options** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **Options**                                   | ** ** | **Fair  Value(1)** | ** ** |
| **Nonvested  at February 14, 2006**  | ** ** | **—**                                    | ** ** | **$       —** | ** ** |
| Grants                               |       | 737,446                                       |       | 17.43 |   |
| Vested                               |       | (40,000                                       | )          | 16.67 |   |
|                                 |       |                                          |       |   |   |
| **Nonvested  at April 1, 2006**      | ** ** | **697,446**                                   | ** ** | **$ 17.47** | ** ** |
| Grants                               |       | 156,500                                       |       | 17.21 |   |
| Vested                               |       | (48,000                                       | )          | 16.79 |   |
| Canceled                             |       | (88,500                                       | )          | 17.47 |   |
|                                 |       |                                          |       |   |   |
| **Nonvested  at July1, 2006**        | ** ** | **717,446**                                   | ** ** | **$ 17.46** | ** ** |
| Grants                               |       | 45,000                                        |       | 16.43 |   |
| Vested                               |       | (10,000                                       | )          | 15.99 |   |
| Canceled                             |       | (11,000                                       | )          | 17.47 |   |
|                                 |       |                                          |       |   |   |
| **Nonvested  at September 30, 2006** | ** ** | **741,446**                                   | ** ** | **$ 17.42** | ** ** |

 

----

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

16

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

 

The total fairvalue of stock options vested during the thirteen-week period ended September30, 2006 was approximately $0.2 million. The total fair value of stock options vested during the period February14, 2006 to September 30, 2006 (successor entity) was approximately $1.6million.

As of September30, 2006, there was approximately $10.7 million of total unrecognizedcompensation cost related to stock option grants both under and outside thePlan.  This cost is expected to berecognized over a remaining weighted-average period of 3.1 years.  The compensation cost that has been chargedagainst income for stock option grants was approximately $1.0 million and$3.4 million for the thirteen weeks ended September 30, 2006 and for the periodFebruary 14, 2006 to September 30, 2006 (successor entity), respectively, andwas included in selling, general and administrative expense in the CondensedConsolidated Statements of Operations.

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

Presented below isa comparative summary of valuation assumptions for the indicated periods:
| **Valuation Assumptions:**                       | ** ** | **Thirteen Weeks Ended  September 30, 2006  (Monte Carlo  Simulation and  Black-Scholes)  (Successor Entity)**                                                      | ** ** | ** ** | ** ** | **Thirteen Weeks   Ended   October 1, 2005  (Black-Scholes)  (Predecessor   Entity)**                                                                                                    | ** ** | **February 14 to  September 30, 2006  (Monte Carlo  Simulation and  Black-Scholes)   (Successor Entity)**                                                                              | ** ** | ** ** | ** ** | **January 1 to  February 13, 2006  (Black-Scholes)  (Predecessor Entity)** | ** ** | **Thirty-nine Weeks   Ended  October 1, 2005  (Black-Scholes)  (Predecessor Entity)**                                                                                                    | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Weighted-average  fair value of options granted       |       | N/A                                                                                                                                                                                                    |       |       |       | $                                  8.12 |       | N/A                                                                                                                                                                                                                            |       |       |       | No  Grants                                                                                          |       | $                                  8.44 |       |
| Weighted-average  calculated value of options granted |       | $                                16.43 |       |       |       | N/A                                                                                                                                                                                                               |       | $                                    17.34 |       |       |       | No  Grants                                                                                          |       | N/A                                                                                                                                                                                                               |       |
| Expected  volatility                                  |       | N/A                                                                                                                                                                                                    | (1)        |       |       | 28.4% - 39.0                                                                                                                                                                                                      | %          | N/A                                                                                                                                                                                                                            | (1)        |       |       | No  Grants                                                                                          |       | 28.4%- 41.1                                                                                                                                                                                                       | %          |
| Weighted-average  volatility                          |       | 36.2                                                                                                                                                                                                   | %(1)       |       |       | 34.7                                                                                                                                                                                                              | %          | 37.9                                                                                                                                                                                                                           | %(1)       |       |       | No  Grants                                                                                          |       | 35.6                                                                                                                                                                                                              | %          |
| Weighted-average  expected term (in years)            |       | 3.6                                                                                                                                                                                                    |       |       |       | 3.8                                                                                                                                                                                                               |       | 3.7                                                                                                                                                                                                                            |       |       |       | No  Grants                                                                                          |       | 4.0                                                                                                                                                                                                               |       |
| Dividend yield                                        |       | —                                                                                                                                                                                                 |       |       |       | —                                                                                                                                                                                                            |       | —                                                                                                                                                                                                                         |       |       |       | No  Grants                                                                                          |       | —                                                                                                                                                                                                            |       |
| Risk-free  interest rate                              |       | 4.6% - 5.0                                                                                                                                                                                             | %          |       |       | 3.9% - 4.2                                                                                                                                                                                                        | %          | 4.6% - 5.2                                                                                                                                                                                                                     | %          |       |       | No  Grants                                                                                          |       | 3.8% - 4.2                                                                                                                                                                                                        | %          |
| Weighted-average  risk-free interest rate             |       | 4.8                                                                                                                                                                                                    | %          |       |       | 4.0                                                                                                                                                                                                               | %          | 4.8                                                                                                                                                                                                                            | %          |       |       | No  Grants                                                                                          |       | 4.0                                                                                                                                                                                                               | %          |
| Weighted average  expected annual forfeiture          |       | 1.6                                                                                                                                                                                                    | %          |       |       | 0.8                                                                                                                                                                                                               | %          | 3.8                                                                                                                                                                                                                            | %          |       |       | No Grants                                                                                           |       | 1.1                                                                                                                                                                                                               | %          |

 

----

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

The Companyutilized historical optionee behavioral data to estimate the option exerciseand termination rates used in the Black-Scholes option-pricing model prior tothe adoption of SFAS 123 (Revised 2004). The expected term of the options represents the period of time theoptions were expected to be outstanding based on historical trends.  Expected volatility was based on thehistorical volatility of the common stock of Linens ‘n Things, Inc. for aperiod approximating the expected life. The Company has never paid dividends,and, accordingly, the dividend yield is zero. The risk-free interest rate within the expected term was based on theU.S. Treasury yield curve in effect at the time of grant.

For the periodsubsequent to the adoption of SFAS 123 (Revised 2004), it is not possiblefor the Company, a non-public entity, to use Company-specific volatility indetermining a reasonable estimate of fair value of options granted.  Accordingly, the Company is required to usean alternative measurement method.  Underthe alternative measurement method, a nonpublic entity uses a calculatedvolatility, determined by applying the historical volatility 

17

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

 

of an appropriateindex of public entities, as an input to the valuation models.  The Company used the Standard &Poors Specialty Retail Index for a period approximating the expected term asthis index most closely approximates the Company’s applicable operatingindustry.  Expected term of share optionsgranted represents the period of time that the option grants are expected to beoutstanding.  The Company is not expectedto pay dividends, and, accordingly, the dividend yield is zero.  The risk-free interest rate within the expectedterm was based on the U.S. Treasury yield curve in effect at the time of grant.

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

Set forth belowfor the indicated periods is the Company’s net (loss) income presented “asreported” and as if the Company had applied the fair value method to itsstock-based compensation under the disclosure provisions of SFAS No. 123 andamended disclosure provisions of SFAS No. 148:
| ** **                                                                                                                                                      | ** ** | **Successor Entity**                                                                                                                                                  | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                                                                                                                 | ** ** | **Successor Entity**                                                                                                                                                  | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                                                                                | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **(In thousands)**                                                                                                                                         | ** ** | **Thirteen Weeks  Ended September 30,  2006**                                                                                                               | ** ** | ** ** | ** ** | **Thirteen Weeks  Ended October 1,   2005**                                                                                                                                             | ** ** | **February 14 to  September 30,  2006**                                                                                                                     | ** ** | ** ** | ** ** | **January 1 to   February 13,   2006**                                                                                                            | ** ** | **Thirty-nine Weeks  Ended October 1, 2005** | ** ** |
| **Net  (loss) income:**                                                                                                                                         | ** ** | ** **                                                                                                                                                                 | ** ** |       |       | ** **                                                                                                                                                                                                  | ** ** | ** **                                                                                                                                                                 | ** ** |       |       | ** **                                                                                                                                                                 | ** ** | ** ** | ** ** |
| As reported                                                                                                                                                     |       | $                           (27,375 | )          |       |       | $                               1,024            |       | $                           (84,074 | )          |       |       | $                           (47,904 | )          | $                              (8,982 | ) |
| Add: stock-based  employee compensation expense included in net (loss) income as reported, net  of related tax  effects(1)                                 |       | 679                                                                                                                                                                        |       |       |       | 206                                                                                                                                                                                                         |       | 2,105                                                                                                                                                                      |       |       |       | 8,651                                                                                                                                                                      |       | 512 |   |
|                                                                                                                                                            |       |                                                                                                                                                                       |       |       |       |                                                                                                                                                                                                        |       |                                                                                                                                                                       |       |       |       |                                                                                                                                                                       |       |   |   |
|                                                                                                                                                            |       | (26,696                                                                                                                                                                    | )          |       |       | 1,230                                                                                                                                                                                                       |       | (81,969                                                                                                                                                                    | )          |       |       | (39,253                                                                                                                                                                    | )          | (8,470 | ) |
| Deduct: total  stock-based employee compensation expense determined under the fair value  based method of accounting for all awards, net of related tax effects |       | 679                                                                                                                                                                        |       |       |       | 1,999                                                                                                                                                                                                       |       | 2,105                                                                                                                                                                      |       |       |       | 8,651                                                                                                                                                                      |       | 5,247 |   |
|                                                                                                                                                            |       |                                                                                                                                                                       |       |       |       |                                                                                                                                                                                                        |       |                                                                                                                                                                       |       |       |       |                                                                                                                                                                       |       |   |   |
| Pro forma loss                                                                                                                                                  |       | $                           (27,375 | )          |       |       | $                                 (769 | )          | $                           (84,074 | )          |       |       | $                           (47,904 | )          | $                           (13,717 | ) |

 

18

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

----

*(1) *Stock-based employee compensation expenseincluded in net (loss) income as reported, net of related tax effects, isdetailed as follows:
| ** **                                                             | ** ** | **Successor Entity**                                                                                                                                                                                              | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                                                                                                                                                 | ** ** | **Successor Entity**                                                                                                                                                                        | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                                                                                                      | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **(In thousands)**                                                | ** ** | **Thirteen Weeks  Ended September 30,  2006**                                                                                                                                                           | ** ** | ** ** | ** ** | **Thirteen Weeks  Ended October 1,   2005**                                                                                                                                                                             | ** ** | **February 14 to  September 30,  2006**                                                                                                                                           | ** ** | ** ** | ** ** | **January 1 to   February 13,   2006**                                                                                                                                  | ** ** | **Thirty-nine Weeks  Ended October 1, 2005** | ** ** |
| Compensation  expense:                                                 | ** ** | ** **                                                                                                                                                                                                             | ** ** |       |       | ** **                                                                                                                                                                                                                                  | ** ** | ** **                                                                                                                                                                                       | ** ** |       |       | ** **                                                                                                                                                                                       | ** ** | ** ** | ** ** |
| Stock option  grants                                                   |       | $                               1,035                       |       |       |       | $                                      — |       | $                               3,363 |       |       |       | $                               9,305 |       | $                                      — |   |
| Restricted stock  units                                                |       | —                                                                                                                                                                                                                 |       |       |       | 329                                                                                                                                                                                                                                         |       | —                                                                                                                                                                                           |       |       |       | 3,179                                                                                                                                                                                            |       | 818 |   |
|                                                                   |       |                                                                                                                                                                                                                   |       |       |       |                                                                                                                                                                                                                                        |       |                                                                                                                                                                                             |       |       |       |                                                                                                                                                                                             |       |   |   |
|                                                                   |       | 1,035                                                                                                                                                                                                                  |       |       |       | 329                                                                                                                                                                                                                                         |       | 3,363                                                                                                                                                                                            |       |       |       | 12,484                                                                                                                                                                                           |       | 818 |   |
|                                                                   |       |                                                                                                                                                                                                                   |       |       |       |                                                                                                                                                                                                                                        |       |                                                                                                                                                                                             |       |       |       |                                                                                                                                                                                             |       |   |   |
| Benefit for  income taxes:                                             |       |                                                                                                                                                                                                                   |       |       |       |                                                                                                                                                                                                                                        |       |                                                                                                                                                                                             |       |       |       |                                                                                                                                                                                             |       |   |   |
| Stock option  grants                                                   |       | (356                                                                                                                                                                                                                   | )          |       |       | —                                                                                                                                                                                                                                      |       | (1,258                                                                                                                                                                                           | )          |       |       | (2,857                                                                                                                                                                                           | )          | — |   |
| Restricted stock  units                                                |       | —                                                                                                                                                                                                                 |       |       |       | (123                                                                                                                                                                                                                                        | )          | —                                                                                                                                                                                           |       |       |       | (976                                                                                                                                                                                             | )          | (306 | ) |
|                                                                   |       |                                                                                                                                                                                                                   |       |       |       |                                                                                                                                                                                                                                        |       |                                                                                                                                                                                             |       |       |       |                                                                                                                                                                                             |       |   |   |
|                                                                   |       | (356                                                                                                                                                                                                                   | )          |       |       | (123                                                                                                                                                                                                                                        | )          | (1,258                                                                                                                                                                                           | )          |       |       | (3,833                                                                                                                                                                                           | )          | (306 | ) |
|                                                                   |       |                                                                                                                                                                                                                   |       |       |       |                                                                                                                                                                                                                                        |       |                                                                                                                                                                                             |       |       |       |                                                                                                                                                                                             |       |   |   |
| Stock-based  employee compensation expense, net of related tax effects |       | $                                   679 |       |       |       | $                                   206                      |       | $                               2,105 |       |       |       | $                               8,651 |       | $                                   512 |   |

 

**4.Short-Term Borrowing Arrangements**

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

Under the CreditFacility, interest on all borrowings is determined, at the Company’s option, oneither of two alternative rates, specifically (1) a variable margin aboveLIBOR or (2) a variable margin above the federal funds effective rate plus0.50%.  In addition to paying interest onoutstanding principal under the Credit Facility, the Company is required to paya variable rate commitment fee in respect of the unutilized commitmentsthereunder.  The Credit Facility requiresthe Company to comply with financial ratio maintenance covenants if the excessavailability under the Credit Facility, at any time, does not exceed $75 millionand also contains certain restrictive covenants including the Company’s abilityto pay dividends and certain customary affirmative covenants and events ofdefault.  During the periodFebruary 14 to September 30, 2006, the Company always maintained excessavailability above $75 million.  Asof September 30, 2006, the Company had $225.9 million in borrowings underthe Credit Facility at an average interest rate of 7.0%.  The Company also had $193.7 million ofletters of credit outstanding as of September 30, 2006 issued under the CreditFacility, which includes standby letters of credit and import letters of creditused for merchandise purchases.  Borrowingsunder the Credit Facility have been classified as short-term as of September30, 2006 in accordance with the Company’s representation that it expects tohave the ability and intent to repay these borrowings from existing currentassets within one year.  At various timesduring the thirty-nine weeks ended September 30, 2006, the Company borrowedagainst its Credit Facility and the 2004 Credit Agreement during the successorand predecessor periods, respectively, for working capital needs.  The Company is not obligated under any formalor informal compensating balance requirements.

19

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

 

**5.Comprehensive (Loss) Income**

Comprehensive (loss) incomefor the thirteen weeks ended September 30, 2006 and October 1, 2005 is asfollows (in thousands):

|                                                                                       | ** ** | **Successor Entity**                                                              | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                            | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **Thirteen Weeks  Ended  September 30,  2006**                               | ** ** | ** ** | ** ** | **Thirteen Weeks  Ended  October 1,  2005**                                                  | ** ** |
| Net (loss)  income                                                                    |       | $             (27,375 | )          |       |       | $                1,024 |       |
|                                                                                  |       |                                                                                   |       |       |       |                                                                                                   |       |
| Other  comprehensive (loss) income:                                                   |       |                                                                                   |       |       |       |                                                                                                   |       |
|                                                                                  |       |                                                                                   |       |       |       |                                                                                                   |       |
| Foreign currency translation adjustment                                               |       | (127                                                                                   | )          |       |       | 1,253                                                                                                  |       |
| Derivative instruments designated and qualifying as  cash flow hedging instruments(1) |       | (898                                                                                   | )          |       |       | —                                                                                                 |       |
|                                                                                  |       |                                                                                   |       |       |       |                                                                                                   |       |
| **Comprehensive (loss) income**                                                       |       | $             (28,400 | )          |       |       | $                2,277 |       |

 

Comprehensive loss forthe period February 14 to September 30, 2006, January 1 to February 13, 2006and the thirty-nine weeks ended October 1, 2005 is as follows (in thousands):
| ** **                                                                            | ** ** | **Successor Entity**                                                                                                  | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                                | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **February 14 to  September 30, 2006**                                                                 | ** ** | ** ** | ** ** | **January 1 to  February 13,  2006**                                                                        | ** ** | **Thirty-nine Weeks  Ended October 1, 2005** | ** ** |
| Net loss                                                                              |       | $                   (84,074 | )          |       |       | $                   (47,904 | )          | $                     (8,982 | ) |
| Other  comprehensive income (loss):                                                   |       |                                                                                                                       |       |       |       |                                                                                                                       |       |   |   |
|                                                                                  |       |                                                                                                                       |       |       |       |                                                                                                                       |       |   |   |
| Foreign currency translation adjustment                                               |       | 1,827                                                                                                                      |       |       |       | 253                                                                                                                        |       | 681 |   |
| Derivative instruments designated and qualifying as  cash flow hedging instruments(1) |       | (898                                                                                                                       | )          |       |       | —                                                                                                                     |       | — |   |
|                                                                                  |       |                                                                                                                       |       |       |       |                                                                                                                       |       |   |   |
| **Comprehensive loss**                                                                |       | $                   (83,145 | )          |       |       | $                   (47,651 | )          | $                     (8,301 | ) |

 

----

*(1)**         *On July 7, 2006 theIssuers entered into a zero cost interest rate collar agreement to hedge thecash flows associated with the LIBOR component of the interest rate on theNotes.  On July 7, 2006 the Issuers alsopurchased a one-year forward-starting interest rate cap agreement which takeseffect on January 15, 2008 (see Note 12 to the Unaudited Condensed ConsolidatedFinancial Statements for disclosures regarding these derivatives).

**6.  Restructuring and Asset Impairment Charge**

In fiscal 2001,the Company developed and committed to a strategic initiative designed toimprove store performance and profitability. This initiative called for the closing of certain under-performing stores,which did not meet the Company’s profit objectives.  In connection with this initiative, theCompany recorded a pre-tax restructuring and asset impairment charge of$37.8 million ($23.7 million after-tax) in the fourth quarter offiscal 2001.  A pre-tax reserve of$20.5 million was established for estimated lease commitments through 2012for stores to be closed.  The reserveconsiders estimated sublease income. Because all of the stores were leased, the Company is not responsiblefor the disposal of property other than fixtures.  A pre-tax writedown of $9.5 million wasrecorded as a reduction in property and equipment for fixed asset impairmentsfor these stores.  The fixed assetimpairments represent fixtures and leasehold improvements.  A pre-tax reserve of $4.0 million wasestablished for other 

20

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

 

estimatedmiscellaneous store closing costs. Additionally, a pre-tax charge of $3.8 million was recorded in costof sales for estimated inventory markdowns below cost for the stores to beclosed.  Certain components of therestructuring charge were based on estimates and may be subject to change inthe future.  The Company has closed allof the initially identified stores other than one store, which the Companydecided to keep open and whose reserve was reversed.  In addition, the Company reopened one of thepreviously closed stores during the second quarter of 2006 and plans to reopena second previously closed store during the first quarter of 2007.

The followingtable displays a roll forward of the activity and significant components sinceDecember 31, 2005, and the reserve remaining as of September 30, 2006:
|                        | ** ** | **Predecessor  Entity**                                                                                    | ** ** | ** **                                                                                            | ** ** | **Successor Entity**                                                                                  | ** ** |
|------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| **(in millions)** | ** ** | **Remaining at  December 31,  2005**                                                             | ** ** | **Net Usage  2006**                                                                              | ** ** | **Remaining  at September 30,  2006**                                                            | ** ** |
|                   |       |                                                                                                       |       |                                                                                                  |       |                                                                                                       |       |
| **Cash  components:**  | ** ** | ** **                                                                                                 | ** ** | ** **                                                                                            | ** ** | ** **                                                                                                 | ** ** |
| Lease  commitments     |       | $                 5.4 |       | $                (1.8 | )          | $                 3.6 |       |
|                   |       |                                                                                                       |       |                                                                                                  |       |                                                                                                       |       |
| **Total**              |       | $                 5.4 |       | $                (1.8 | )          | $                 3.6 |       |

 

The restructuringreserve balance is included in accrued expenses and other current liabilitiesin the Condensed Consolidated Balance Sheet. The 2006 usage primarily consists of payments for lease commitments.  The 2006 activity also includes the reversalof estimated lease commitment costs of approximately $0.3 million which werenot needed, offset by an increase to lease commitment costs of approximately $1.4million due to changes in estimates based on current negotiations.  The net change in the restructuring reserveis recorded in selling, general and administrative expense in the CondensedConsolidated Statements of Operations.

**7.Identifiable Intangible Assets**

In connection withthe Transactions, the Company’s intangible assets were revalued with theassistance of an independent third party. The carrying amount and accumulated amortization of identifiableintangible assets consisted of the following:

21

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

 
|                                                  | ** ** | **Successor Entity**                                                 | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                         | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**                          | ** ** | **September 30,  2006**                                              | ** ** | ** ** | ** ** | **December 31,  2005**                                                                                         | ** ** | **October 1,  2005** | ** ** |
|                                             |       |                                                                      |       |       |       |                                                                                                                |       |   |   |
| Intangible  assets subject to amortization:      |       |                                                                      |       |       |       |                                                                                                                |       |   |   |
| Credit card customer  relationships              |       | $           10,163 |       |       |       | $                  — |       | $                  — |   |
| Customer list                                    |       | 406                                                                       |       |       |       | —                                                                                                              |       | — |   |
| Favorable leases                                 |       | 27,373                                                                    |       |       |       | 2,900                                                                                                               |       | 2,900 |   |
|                                             |       |                                                                      |       |       |       |                                                                                                                |       |   |   |
|                                             |       | 37,942                                                                    |       |       |       | 2,900                                                                                                               |       | 2,900 |   |
| Less:  accumulated amortization                  |       | (5,269                                                                    | )          |       |       | (1,599                                                                                                              | )          | (1,548 | ) |
|                                             |       |                                                                      |       |       |       |                                                                                                                |       |   |   |
| Total intangible  assets subject to amortization |       | 32,673                                                                    |       |       |       | 1,301                                                                                                               |       | 1,352 |   |
| Total  indefinite-lived trademarks               |       | 122,688                                                                   |       |       |       | —                                                                                                              |       | — |   |
|                                             |       |                                                                      |       |       |       |                                                                                                                |       |   |   |
| Total identifiable  intangible assets            |       | $         155,361            |       |       |       | $             1,301                                |       | $             1,352 |   |

 

Customer list hasan estimated life of 5 years, credit card customer relationships have anestimated life of 3 years and favorable leases have an average estimatedlife of 5 years.  For the thirteenweeks ended September 30, 2006 and October 1, 2005 amortization expense of $2.5million and $47,000, respectively, was recorded by the Company and is includedin selling, general and administrative expenses in the Condensed ConsolidatedStatement of Operations.  For the periodFebruary 14 to September 30, 2006, January 1 to February 13,2006, and the thirty-nine weeks ended October 1, 2005, amortization expense of$5.7 million, $25,000 and $141,000, respectively, was recorded by the Company.

The following is asummary table representing the remaining amortization of identifiableintangible assets, net, with definitive lives, by year (in thousands):
| Fiscal Year     | ** ** | **Amortization**                                       | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| 2006                 |       | $        2,138 |       |
| 2007                 |       | 7,836                                                  |       |
| 2008                 |       | 6,893                                                  |       |
| 2009                 |       | 3,526                                                  |       |
| 2010                 |       | 2,805                                                  |       |
| 2011 and  thereafter |       | 9,475                                                  |       |
|                 |       |                                                   |       |
| Total                |       | $      32,673            |       |

 

**8.Guarantees**

The Company hasassigned property at a retail location in which the Company guarantees thepayment of rent over the specified lease term in the event of non-performance.  As of September 30, 2006, the maximumpotential amount of future payments the Company could be required to make undersuch guarantee is approximately $0.6 million.

**9.Accounts Payable**

Accounts payableincludes amounts for gift card liabilities of $31.9 million,$35.8 million and $26.4 million as of September 30, 2006,December 31, 2005 and October 1, 2005, respectively.  Gift cards that are not expected to beredeemed are recorded as a reduction to selling, general and administrativeexpense in the Condensed Consolidated Statements of Operations.  Such amounts recognized for the thirteenweeks ended September 30, 2006 and October 1, 2005 were approximately $1.0million and $0.9 million, respectively.

22

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

 

For the periodFebruary 14 to September 30, 2006, the period January 1 toFebruary 13, 2006 and the thirty-nine weeks ended October 1, 2005, suchamounts recognized were approximately $2.6 million, $0.5 million and$2.1 million, respectively.

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

Senior secured notes andother long-term debt consists of the following (in thousands):
|                                                 | ** ** | **Successor Entity**                                      | ** ** | ** ** | ** ** | **Predecessor Entity**                                                                                         | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| **(in thousands)**                         | ** ** | **September 30,   2006**                             | ** ** | ** ** | ** ** | **December 31,   2005**                                                                                   | ** ** | **October 1,   2005** | ** ** |
|                                            |       |                                                           |       |       |       |                                                                                                                |       |   |   |
| Senior secured  floating rate notes due 2014    |       | $         650,000 |       |       |       | $                  — |       | $                  — |   |
| Mortgage note  payable                          |       | 2,092                                                          |       |       |       | 2,139                                                                                                               |       | 2,154 |   |
|                                            |       |                                                           |       |       |       |                                                                                                                |       |   |   |
|                                            |       | 652,092                                                        |       |       |       | 2,139                                                                                                               |       | 2,154 |   |
| Less: current  portion of mortgage note payable |       | (64                                                            | )          |       |       | (63                                                                                                                 | )          | (60 | ) |
|                                            |       |                                                           |       |       |       |                                                                                                                |       |   |   |
| Total                                           |       | $         652,028 |       |       |       | $             2,076                                |       | $             2,094 |   |

 

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

The Notes bearinterest at a per annum rate equal to LIBOR plus 5.625%, which is paid everythree months on January 15, April 15, July 15 andOctober 15, commencing April 15, 2006.  The interest rate on the Notes is resetquarterly.  The Notes mature onJanuary 15, 2014.  As of September30, 2006 the interest rate on the Notes was 11.1%, based on a LIBOR rate of5.5%.

On July 7, 2006 theIssuers entered into a zero cost interest rate collar agreement to hedge thecash flows associated with the LIBOR component of the interest rate on theNotes.  On July 7, 2006 the Issuers alsopurchased a one-year forward-starting interest rate cap agreement which takeseffect on January 15, 2008 (see Note 12 to the Unaudited Condensed ConsolidatedFinancial Statements for disclosures regarding these derivatives).

Deferred financing costsof approximately $26 million relating to the Notes are being amortizedover eight years using the effective interest method.

The Notes are guaranteedon a senior basis by the Company and by certain of the Company’s domesticsubsidiaries other than the Issuers (collectively, the “Note Guarantors”), andare secured by first-priority liens on all of the Company’s and Note Guarantors’equipment, intellectual property rights and related general intangibles and thecapital stock of the Issuers and certain subsidiaries and by second-priorityliens on the Issuers’ and the Note Guarantors’ inventory, accounts receivable,cash, securities and other general intangibles. The lien on capital stock may be released under certaincircumstances.  As a result of the filingand effectiveness of a registration statement on Form S-4 with the SEC withrespect to the Notes, the Issuers and the Note Guarantors becamesubject to applicable SEC rules with respect to information required to beincluded in the prospectus in the registration statement.  To the extentthat the securities of any Issuer or guarantor constitute collateralfor the Notes and the value of the securities equals or exceeds 20% of theprincipal amount, or $130 million of the Notes, separate financialstatements of the Issuer or Note Guarantor would be required underthese SEC 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 the securitiesof the subsidiary are released from the lien on capital stock on the datethat the lien triggers this separate financial statement requirement. Accordingly, for any subsidiary with securities that equal or exceed the20% threshold, the lien on the capital stock securing the Notes has beenreleased with respect to those securities.  The lien on the capital stockof Linens ‘n Things, Inc. remains in place.

23

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

 

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

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

**11.Income Taxes**

For thePredecessor Entity period January 1 to February 13, 2006, theeffective tax benefit rate of 30.7% is lower than the statutory federal rate of35.0% primarily due to non-deductible transaction costs.  The Successor Entity estimated effective tax benefitrate for the period February 14 to September 30, 2006 was 37.4%.  This exceeds the statutory federal tax rateof 35.0% primarily due to expected deferred state tax benefits.  Purchase accounting adjustments resulted inan initial increase to net deferred tax liabilities of $152,892, which wassubsequently adjusted to $154,061, as indicated in the table below (inthousands):
| Component                                                                                              | ** ** | **Pretax  Purchasing  Accounting  Adjustment** | ** ** | **Tax Rate** | ** ** | **Deferred Tax  (Asset)  Liability** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------|------------|-------------------------------------------|------------|
| **Trademarks**                                                                                         | ** ** | **$122,688**                                   | ** ** | **39.2**          | **%(1)**   | **$48,094**                               | ** ** |
| Deferred rent  and deferred rent credits                                                               |       | 233,016                                        |       | 39.2              | %          | 91,342                                    |       |
| Other  intangibles                                                                                     |       | 16,847                                         |       | 39.2              | %          | 6,604                                     |       |
| Valuation  allowance for state tax loss carryovers, net of federal benefit                             |       | 8,214                                          |       | N/A               |       | 8,214                                     |       |
| Deferred rent  and deferred rent credits—Canada                                                   |       | 17,002                                         |       | 35.5              | %(2)       | 6,035                                     |       |
|                                                                                                   |       |                                           |       |              |       |                                      |       |
| Preliminary  estimate of deductible portion of certain capitalized transaction costs                   |       | (17,855                                        | )          | 39.2              | %          | (7,000                                    | )          |
| Other                                                                                                  |       |                                           |       |              |       | (397                                      | )          |
|                                                                                                   |       |                                           |       |              |       |                                      |       |
|                                                                                                   |       |                                           |       |              |       | 152,892                                   |       |
| Subsequent  purchase accounting adjustment identified during the quarterly period ending  July 1, 2006 |       |                                           |       |              |       | 1,169                                     |       |
|                                                                                                   |       |                                           |       |              |       |                                      |       |
| As adjusted through  September 30, 2006                                                                |       |                                           |       |              |       | $    154,061          |       |

 

----

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

*(2) *Includes Canadian federal and provincialtaxes.

Income tax assetsof $50.8 million and $2.2 million are reflected within prepaid expenses andother current assets and current deferred taxes (asset), respectively, in theCondensed Consolidated Balance Sheet at September 30, 2006.

24

----

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

The Companypresently expects that it will realize the federal tax benefit for lossesincurred in the thirty-nine week period ending September 30, 2006 by (inmillions):

| Tax receivable due to  Predecessor carryback                                                              |   | $      | 20.1   |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Absorption against  taxable income currently projected to be generated in the fourth quarter of 2006 |   | 30.7   |   |
|                                                                                                      |   |   |   |
|                                                                                                      |   | 50.8   |   |
| Net operating loss  carryforward to 2007                                                                  |   | 2.2    |   |
|                                                                                                      |   |   |   |
|                                                                                                      |   | $      | 53.0   |   |

 

During October2006, the Company collected the Predecessor carryback tax receivable of $20.1million.

In assessing therealizability of the above tax assets, management considers whether it is morelikely than not that some portion or all of the tax assets will not berealized.  The ultimate realization oftax assets 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 the periods in which the deferred tax assets aredeductible, management believes it is more likely than not that the Companywill realize the benefits of these deductible differences.  The amount of the tax asset considered realizable,however, could be reduced in the near term if estimates of future taxableincome during the carryforward period are reduced.

**12.****Derivative Financial Instruments**

The Company accounts forderivative instruments in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS No. 133”), asamended.  In accordance with SFASNo. 133, the Company reports all derivative financial instruments on itsbalance sheet at fair value and has established criteria for designation andevaluation of effectiveness of transactions entered into for hedging purposes.

The Company employsderivative financial instruments to effectively manage its exposure to interestrate changes 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 their obligations.  However, the Company seeks to minimize thisrisk by entering into transactions with counterparties that are major financialinstitutions with high credit ratings.

The Company records gainsand losses on derivative financial instruments qualifying as cash flow hedgesin other comprehensive income, to the extent that hedges are effective.  For derivative financial instruments which donot qualify as cash flow hedges, any changes in fair value would be recorded inthe Condensed Consolidated Statement of Operations.

The Company may at itsdiscretion terminate or redesignate any such hedging instrument agreementsprior to maturity.  At that time, anygains or losses previously reported in other comprehensive income ontermination would continue to amortize into interest expense or interest incometo correspond to the recognition of interest expense or interest income on thehedged debt.  If such debt instrument wasalso terminated, the gain or loss associated with the terminated derivativeincluded in other comprehensive income at the time of termination of the debtwould be recognized in the Condensed Consolidated Statement of Operations atthat time.

On July 7, 2006 theIssuers entered into a zero cost interest rate collar agreement (the “CollarAgreement”) to hedge the cash flows associated with the LIBOR component of theinterest rate on the Notes.  The CollarAgreement provides for payments to be made to or received from the counterpartywhere the rate in effect for the Notes is below 4.45% or above 6.51% for agiven reset period.  Such paymentsrepresent the difference between the rates stated above in the Collar Agreementand those in effect on the Notes for the given reset period.  Payment and reset dates under the CollarAgreement are matched exactly to those of the Notes.  The Collar Agreement has an ultimate maturityof January 15, 2008.  To the extent thatthe three-month LIBOR rate is below the Collar Agreement floor, payment is duefrom the Company to the counterparty for the difference.  To the extent the three-month LIBOR rate isabove the Collar Agreement cap, the Company is entitled to receive thedifference from the counterparty.  At theinception of the Collar Agreement, the Company determined that the hedgingrelationship would have no ineffectiveness, and the Company will continue toverify and document that the critical terms of the hedging instrument and thehedged item are exactly matched.  AtSeptember 30, 2006, the notional amount of debt related to the Collar Agreementwas $650 million and the fair value of the Collar Agreement was approximately a$0.4 million 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 rate in effect on a LIBOR-basedborrowing arrangement is above 6.51% for a given reset period.  Such payments represent the differencebetween the rate stated above in the Cap Agreement and those in effect on a LIBOR-basedborrowing arrangement for the given reset period.  Payment and reset dates under the CapAgreement are matched exactly to those of the LIBOR-based borrowingarrangement.  The Cap Agreement has anultimate maturity of January 15, 2009. The Issuers paid a premium of $700,000 to purchase the Cap 

25

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

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 September 30, 2006, the notional amount ofdebt related to the Cap Agreement was $650 million and the fair value of theinstrument was approximately a $0.2 million asset.

The Company hasdetermined that the Collar Agreement and the Cap Agreement have beenappropriately designated and documented as cash flow hedges under SFAS No.133.  As such, changes in the fair valueof the Collar Agreement and the Cap Agreement have been recorded in othercomprehensive income.  During thethirteen weeks ended September 30, 2006, the Company has recorded a loss of$0.9 million in other comprehensive income related to these changes in fairvalue.  The Collar Agreement and the CapAgreement had no ineffectiveness and provided no amounts received or paid underthe hedges that affected net income during the period.  Both agreements are expected to have noineffectiveness during their contractual lives.

**13. Recent AccountingPronouncements**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 158, “**Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106, and 132(R)”**(“SFAS158”). SFAS 158 requires, among other items, recognition of the overfunded orunderfunded status of an entity’s defined benefit postretirement plan as anasset 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 158 is effective for fiscal years ending after June 15, 2007 andearly application is encouraged.  Theadoption of SFAS 158 is not expected to have a material effect on the Company’sfinancial position or results of operations.

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” 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 157 will have on its financial statements.

In September 2006,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 108 (“SAB 108”).  Due to diversity inpractice among registrants, SAB 108 expresses SEC staff views regarding theprocess by which misstatements in financial statements are evaluated for purposesof determining whether financial statement restatement is necessary.  SAB 108 is effective for fiscal years endingafter November 15, 2006, and early application is permitted.  The adoption of SAB 108 is not expected tohave a material effect on the Company’s financial position or results ofoperations.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes – an interpretation ofFASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement processfor recording in the financial statements uncertain tax positions taken orexpected to be taken in a tax return in accordance with SFAS No. 109, “Accountingfor Income Taxes.”  Tax positions mustmeet a more-likely-than-not recognition threshold at theeffective date to be recognized upon the adoption of FIN 48 and insubsequent periods.  Additionally,FIN 48 provides guidance on derecognition, classification, accounting ininterim periods, interest and penalties and disclosure requirements foruncertain tax positions.  The accountingprovisions of FIN 48 will be effective for the Company beginning in fiscalyear 2007.  The Company is in the processof determining the effect, if any, that the adoption of FIN 48 will haveon its financial statements.

In June 2006, theFASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities Shouldbe Presented in the Income Statement (That Is, Gross versus Net Presentation)”(“EITF 06-3”).  EITF 06-3 includes sales,use, value-added and some excise taxes that are assessed by a governmentalauthority on specific revenue-producing transactions between a seller anda customer.  EITF 06-3 requiresdisclosure of the method of accounting for the applicable assessed taxes andthe amount of assessed taxes included in revenues if such taxes are accountedfor under the gross method.  EITF 06-3 iseffective for both interim and annual periods beginning in fiscal year 2007.  EITF 06-3 will not impact the Company’smethod for recording these applicable assessed taxes because the Company hashistorically presented sales excluding such taxes.

26

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

**14.Related Party Transactions**

**ManagementServices Agreement**

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

**Stockholders’Agreement**

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

**15.Supplemental Condensed Consolidating Financial Information**

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

The followingtables present the supplemental condensed consolidating financial informationfor the Company (Parent), the Co-Issuers, the Guarantors (excluding the Companywhich is also a Guarantor but is separately presented) and the Non-Guarantors,together with eliminations, as of and for the periods indicated.  The Company has not presented separatefinancial statements and other disclosures concerning the Co-Issuers,Guarantors and Non-Guarantors because management has determined that suchinformation is not meaningful to investors. The accounting policies for Parent, Co-Issuers, Guarantors, and Non-Guarantorsare the same as those described for the Company’s predecessor entity,Linens ’n Things, Inc. and Subsidiaries in its Annual Report onForm 10-K Equivalent under “Summary of Significant Accounting Policies.”  The financial information may not necessarilybe indicative of the financial position, results of operations or cash flowshad the Parent, Co-Issuers, Guarantors and Non-Guarantors operated asindependent entities.

The information as of September 30, 2006, and for thethirteen weeks ended September 30, 2006 and the period February 14 toSeptember 30, 2006, presents the financial position and results of operationsand cash flows, respectively, of the Successor Entity.  The information as of December 31, 2005and October 1, 2005, and for the thirteen weeks and thirty-nine weeks endedOctober 1, 2005 and the period January 1 to February 13, 2006,presents the financial position and results of operations and cash flows,respectively, of the Predecessor Entity.

27

----

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Successor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSFor the Thirteen Week Period Ended September 30, 2006(In Thousands) (Unaudited)**
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|-------------|------------------|------------|------------------|------------|
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **16,195**     | ** ** | **$**                | **590,722** | ** **       | **$**      | **51,238**       | ** ** | **$** | **—** | ** ** | **$** | **658,155** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 0          |       | 9,396          |       | 353,872        |       | 25,311               |        | 0                |       | 388,579          |       |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Gross profit**                                        | ** ** | **0**      | ** ** | **6,799**      | ** ** | **236,850**    | ** ** | **25,927**           | ** **  | **0**            | ** ** | **269,576**      | ** ** |
| Selling, general and  administrative expenses           |       | 0          |       | 5,354          |       | 262,425        |       | 19,973               |        | 0                |       | 287,752          |       |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Operating profit (loss)**                             | ** ** | **0**      | ** ** | **1,445**      | ** ** | **(25,575**    | **)**      | **5,954**            | ** **  | **0**            | ** ** | **(18,176**      | **)**      |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| Interest income                                         |       | 0          |       | (26,754        | )          | (34            | )          | (15                  | )           | 26,785           |       | (18              | )          |
| Interest expense                                        |       | 0          |       | 23,273         |       | 26,732         |       | 352                  |        | (26,785          | )          | 23,572           |       |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Interest (income)  expense, net                         |       | 0          |       | (3,481         | )          | 26,698         |       | 337                  |        | 0                |       | 23,554           |       |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Income  (loss) before income taxes**                  | ** ** | **0**      | ** ** | **4,926**      | ** ** | **(52,273**    | **)**      | **5,617**            | ** **  | **0**            | ** ** | **(41,730**      | **)**      |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| Provision (benefit) for  income taxes                   |       | 0          |       | 1,736          |       | (18,423        | )          | 2,332                |        | 0                |       | (14,355          | )          |
|                                                    |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **3,190**      | ** ** | **$**                | **(33,850** | **)**            | **$**      | **3,285**        | ** ** | **$** | **—** | ** ** | **$** | **(27,375** | **)** |

 

28

----

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Predecessor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSFor the Thirteen Week Period Ended October 1, 2005(In Thousands) (Unaudited)**
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|------------------|------------|
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net sales**                                           | ** ** | **$**          | **17,197** | ** **     | **$**      | **572,628**        | ** ** | **$**            | **39,443** | ** **       | **$**      | **—** | ** ** | **$** | **629,268** | ** ** |
| Cost of sales, including  buying and distribution costs |       | 9,505          |       | 340,386        |       | 21,062             |       | 0                |       | 370,953          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Gross profit**                                        | ** ** | **7,692**      | ** ** | **232,242**    | ** ** | **18,381**         | ** ** | **0**            | ** ** | **258,315**      | ** ** |
| Selling, general and  administrative expenses           |       | 4,913          |       | 230,621        |       | 19,974             |       | 0                |       | 255,508          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **2,779**      | ** ** | **1,621**      | ** ** | **(1,593**         | **)**      | **0**            | ** ** | **2,807**        | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest income                                         |       | (249           | )          | (78            | )          | (36                | )          | 309              |       | (54              | )          |
| Interest expense                                        |       | 564            |       | 723            |       | 238                |       | (309             | )          | 1,216            |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest expense, net                                   |       | 315            |       | 645            |       | 202                |       | 0                |       | 1,162            |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Income (loss) before income taxes**                   | ** ** | **2,464**      | ** ** | **976**        | ** ** | **(1,795**         | **)**      | **0**            | ** ** | **1,645**        | ** ** |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Provision (benefit) for  income taxes                   |       | 889            |       | 309            |       | (577               | )          | 0                |       | 621              |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**          | **1,575**  | ** **     | **$**      | **667**            | ** ** | **$**            | **(1,218** | **)**            | **$**      | **—** | ** ** | **$** | **1,024** | ** ** |

 

29

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Successor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSFor the Period February 14 - September 30, 2006(In Thousands) (Unaudited)**
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **40,129**     | ** ** | **$**                | **1,424,163** | ** **       | **$**      | **113,291**      | ** ** | **$** | **—** | ** ** | **$** | **1,577,583** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 0          |       | 23,596         |       | 870,081        |       | 57,330               |          | 0                |       | 951,007          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Gross profit**                                        | ** ** | **0**      | ** ** | **16,533**     | ** ** | **554,082**    | ** ** | **55,961**           | ** **    | **0**            | ** ** | **626,576**      | ** ** |
| Selling, general and  administrative expenses           |       | 0          |       | 12,285         |       | 644,712        |       | 48,708               |          | 0                |       | 705,705          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **0**      | ** ** | **4,248**      | ** ** | **(90,630**    | **)**      | **7,253**            | ** **    | **0**            | ** ** | **(79,129**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest income                                         |       | 0          |       | (72,157        | )          | (115           | )          | (63                  | )             | 72,198           |       | (137             | )          |
| Interest expense                                        |       | 0          |       | 55,628         |       | 71,000         |       | 974                  |          | (72,198          | )          | 55,404           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest (income)  expense, net                         |       | 0          |       | (16,529        | )          | 70,885         |       | 911                  |          | 0                |       | 55,267           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Income (loss) before income taxes**                   | ** ** | **0**      | ** ** | **20,777**     | ** ** | **(161,515**   | **)**      | **6,342**            | ** **    | **0**            | ** ** | **(134,396**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Provision (benefit) for  income taxes                   |       | 0          |       | 7,844          |       | (60,196        | )          | 2,030                |          | 0                |       | (50,322          | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **12,933**     | ** ** | **$**                | **(101,319**  | **)**            | **$**      | **4,312**        | ** ** | **$** | **—** | ** ** | **$** | **(84,074** | **)** |

 

30

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Predecessor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSFor the Period January 1 - February 13, 2006(In Thousands) (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              |       | 0                |       | 180,675          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Gross profit**                                        | ** ** | **2,935**      | ** ** | **93,899**     | ** ** | **7,462**          | ** ** | **0**            | ** ** | **104,296**      | ** ** |
| Selling, general and  administrative expenses           |       | 2,119          |       | 163,511        |       | 8,508              |       | 0                |       | 174,138          |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **816**        | ** ** | **(69,612**    | **)**      | **(1,046**         | **)**      | **0**            | ** ** | **(69,842**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest income                                         |       | (2,374         | )          | (139           | )          | (14                | )          | 1,859            |       | (668             | )          |
| Interest expense                                        |       | 0              |       | 1,730          |       | 129                |       | (1,859           | )          | 0                |       |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Interest (income)  expense, net                         |       | (2,374         | )          | 1,591          |       | 115                |       | 0                |       | (668             | )          |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Income (loss) before income taxes**                   | ** ** | **3,190**      | ** ** | **(71,203**    | **)**      | **(1,161**         | **)**      | **0**            | ** ** | **(69,174**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| Provision (benefit) for  income taxes                   |       | 976            |       | (21,822        | )          | (424               | )          | 0                |       | (21,270          | )          |
|                                                    |       |           |       |           |       |               |       |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**          | **2,214**  | ** **     | **$**      | **(49,381**        | **)**      | **$**            | **(737**   | **)**            | **$**      | **—** | ** ** | **$** | **(47,904** | **)** |

 

31

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)(Predecessor Entity)SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONSFor the Thirty-Nine Week Period Ended October 1, 2005(In Thousands) (Unaudited)**
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Net sales**                                           | ** ** | **$**          | **49,940** | ** **     | **$**      | **1,623,501**      | ** ** | **$**            | **100,090** | ** **       | **$**      | **—** | ** ** | **$** | **1,773,531** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 28,203         |       | 959,564        |       | 54,113             |       | 0                |        | 1,041,880        |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Gross profit**                                        | ** ** | **21,737**     | ** ** | **663,937**    | ** ** | **45,977**         | ** ** | **0**            | ** **  | **731,651**      | ** ** |
| Selling, general and  administrative expenses           |       | 13,884         |       | 682,280        |       | 47,200             |       | 0                |        | 743,364          |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Operating profit (loss)**                             | ** ** | **7,853**      | ** ** | **(18,343**    | **)**      | **(1,223**         | **)**      | **0**            | ** **  | **(11,713**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| Interest income                                         |       | (1,421         | )          | (194           | )          | (117               | )          | 1,054            |        | (678             | )          |
| Interest expense                                        |       | 718            |       | 2,675          |       | 962                |       | (1,054           | )           | 3,301            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| Interest (income)  expense, net                         |       | (703           | )          | 2,481          |       | 845                |       | 0                |        | 2,623            |       |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Income (loss) before income taxes**                   | ** ** | **8,556**      | ** ** | **(20,824**    | **)**      | **(2,068**         | **)**      | **0**            | ** **  | **(14,336**      | **)**      |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| Provision (benefit) for  income taxes                   |       | 3,183          |       | (7,872         | )          | (665               | )          | 0                |        | (5,354           | )          |
|                                                    |       |           |       |           |       |               |       |             |        |             |       |
| **Net income (loss)**                                   | ** ** | **$**          | **5,373**  | ** **     | **$**      | **(12,952**        | **)**      | **$**            | **(1,403**  | **)**            | **$**      | **—** | ** ** | **$** | **(8,982** | **)** |

 

32

----

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

**(Successor Entity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**September 30, 2006**

**(In Thousands) (Unaudited)**
| ** **                                                             | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | **Non-**       | ** **    | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------|---------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                             | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **     | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                                        |       |        |        |           |       |           |       |           |          |             |       |             |       |
| Cash and cash  equivalents                                             |       | $           | —      |           | $          | 2,882          |       | $              | 6,618         |             | $          | 1,894            |       | $ | — |   | $ | 11,394 |   |
| Accounts receivable                                                    |       | 0           |        | 454            |       | 30,598         |       | 2,834          |          | 0                |       | 33,886           |       |
| Inventories                                                            |       | 0           |        | 17,849         |       | 923,980        |       | 57,487         |          | 0                |       | 999,316          |       |
| Prepaid expenses and  other current assets                             |       | 0           |        | 50,908         |       | 14,622         |       | 1,258          |          | 0                |       | 66,788           |       |
| Current deferred taxes                                                 |       | 0           |        | 2,224          |       | 8,698          |       | 224            |          | 0                |       | 11,146           |       |
| **Total current assets**                                               | ** ** | **0**       | ** **  | **74,317**     | ** ** | **984,516**    | ** ** | **63,697**     | ** **    | **0**            | ** ** | **1,122,530**    | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| Property and equipment,  net                                           |       | 0           |        | 7,821          |       | 520,398        |       | 44,281         |          | 0                |       | 572,500          |       |
| Identifiable intangible  assets, net                                   |       | 0           |        | 767            |       | 152,751        |       | 1,843          |          | 0                |       | 155,361          |       |
| Goodwill                                                               |       | 0           |        | 7,600          |       | 252,586        |       | 16,966         |          | 0                |       | 277,152          |       |
| Intercompany  receivables                                              |       | 0           |        | 0              |       | 617,352        |       | 0              |          | (617,352         | )          | 0                |       |
| Intercompany notes  receivable                                         |       | 0           |        | 1,178,039      |       | 0              |       | 24,362         |          | (1,202,401       | )          | 0                |       |
| Investment in  subsidiaries                                            |       | 568,624     |        | 824,803        |       | 0              |       | 0              |          | (1,393,427       | )          | 0                |       |
| Deferred financing cost  and other noncurrent assets, net              |       | 0           |        | 34,625         |       | 575            |       | 18             |          | 0                |       | 35,218           |       |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| **Total assets**                                                       | ** ** | **$**       | **568,624** | ** **     | **$**      | **2,127,972**  | ** ** | **$**          | **2,528,178** | ** **       | **$**      | **151,167**      | ** ** | **$** | **(3,213,180** | **)** | **$** | **2,162,761** | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| **Liabilities and Shareholders’  Equity**                         | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **     | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| Current liabilities:                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| Accounts payable                                                       |       | $           | —      |           | $          | 12             |       | $              | 315,637       |             | $          | 16,018           |       | $ | — |   | $ | 331,667 |   |
| Accrued expenses and  other current liabilities                        |       | 0           |        | 40,241         |       | 106,525        |       | 8,370          |          | 0                |       | 155,136          |       |
| Short-term borrowings                                                  |       | 0           |        | 225,870        |       | 64             |       | 0              |          | 0                |       | 225,934          |       |
| **Total current liabilities**                                          | ** ** | **0**       | ** **  | **266,123**    | ** ** | **422,226**    | ** ** | **24,388**     | ** **    | **0**            | ** ** | **712,737**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| Intercompany payable                                                   |       | 0           |        | 609,020        |       | 0              |       | 8,332          |          | (617,352         | )          | 0                |       |
| Intercompany notes  payable                                            |       | 0           |        | 0              |       | 1,153,800      |       | 48,602         |          | (1,202,402       | )          | 0                |       |
| Senior secured notes  and other long-term debt, net of current portion |       | 0           |        | 650,000        |       | 2,028          |       | 0              |          | 0                |       | 652,028          |       |
| Noncurrent deferred  income taxes                                      |       | 0           |        | 33,080         |       | 142,294        |       | 5,488          |          | 0                |       | 180,862          |       |
| Other long-term  liabilities                                           |       | 0           |        | 1,128          |       | 44,655         |       | 2,729          |          | 0                |       | 48,512           |       |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| **Total liabilities**                                                  | ** ** | **0**       | ** **  | **1,559,351**  | ** ** | **1,765,003**  | ** ** | **89,539**     | ** **    | **(1,819,754**   | **)**      | **1,594,139**    | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| **Total shareholders’ equity**                                    | ** ** | **568,624** | ** **  | **568,621**    | ** ** | **763,175**    | ** ** | **61,628**     | ** **    | **(1,393,426**   | **)**      | **568,622**      | ** ** |
|                                                                   |       |        |        |           |       |           |       |           |          |             |       |             |       |
| **Total liabilities and shareholders’ equity**                    | ** ** | **$**       | **568,624** | ** **     | **$**      | **2,127,972**  | ** ** | **$**          | **2,528,178** | ** **       | **$**      | **151,167**      | ** ** | **$** | **(3,213,180** | **)** | **$** | **2,162,761** | ** ** |

 

33

----

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**December 31, 2005**

**(In Thousands) (Unaudited)**

 
| ** **                                                             | ** ** | **Co-Issuers** | ** **    | **Guarantors** | ** ** | **Non-Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|----------------|---------------|----------------|------------|--------------------|------------|------------------|-------------|------------------|------------|
| **Assets**                                                             | ** ** | ** **     | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
| Current assets:                                                        |       |           |          |           |       |               |       |             |        |             |       |
| Cash and cash  equivalents                                             |       | $              | 136,569       |           | $          | 8,718              |       | $                | 12,871      |             | $          | — |   | $ | 158,158 |   |
| Accounts  receivable                                                   |       | 361            |          | 39,757         |       | 3,443              |       | 0                |        | 43,561           |       |
| Inventories                                                            |       | 15,105         |          | 725,856        |       | 46,322             |       | 0                |        | 787,283          |       |
| Prepaid expenses  and other current assets                             |       | 84             |          | 15,368         |       | 1,973              |       | 0                |        | 17,425           |       |
| Current deferred  taxes                                                |       | 0              |          | 1,789          |       | 244                |       | 0                |        | 2,033            |       |
| **Total  current assets**                                              | ** ** | **152,119**    | ** **    | **791,488**    | ** ** | **64,853**         | ** ** | **0**            | ** **  | **1,008,460**    | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| Property and  equipment, net                                           |       | 9,974          |          | 561,271        |       | 41,002             |       | 0                |        | 612,247          |       |
| Identifiable  intangible assets, net                                   |       | 331            |          | 861            |       | 109                |       | 0                |        | 1,301            |       |
| Goodwill                                                               |       | 0              |          | 18,126         |       | 0                  |       | 0                |        | 18,126           |       |
| Intercompany  receivables                                              |       | 0              |          | 856,999        |       | 0                  |       | (856,999         | )           | 0                |       |
| Intercompany  notes receivable                                         |       | 1,096,991      |          | 0              |       | 23,306             |       | (1,120,297       | )           | 0                |       |
| Investment in  subsidiaries                                            |       | 490,933        |          | 0              |       | 0                  |       | (490,933         | )           | 0                |       |
| Deferred  financing cost and other noncurrent assets, net              |       | 1              |          | 10,605         |       | 94                 |       | 0                |        | 10,700           |       |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| **Total  assets**                                                      | ** ** | **$**          | **1,750,349** | ** **     | **$**      | **2,239,350**      | ** ** | **$**            | **129,364** | ** **       | **$**      | **(2,468,229** | **)** | **$** | **1,650,834** | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| **Liabilities  and Shareholders’ Equity**                         | ** ** | ** **     | ** **    | ** **     | ** ** | ** **         | ** ** | ** **       | ** **  | ** **       | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| Current  liabilities:                                                  |       |           |          |           |       |               |       |             |        |             |       |
| Accounts payable                                                       |       | $              | (16           | )              | $          | 249,399            |       | $                | 18,199      |             | $          | — |   | $ | 267,582 |   |
| Accrued expenses  and other current liabilities                        |       | 43,824         |          | 144,840        |       | 10,360             |       | 0                |        | 199,024          |       |
| Current deferred  taxes                                                |       | 222            |          | 4,179          |       | 0                  |       | 0                |        | 4,401            |       |
| **Total  current liabilities**                                         | ** ** | **44,030**     | ** **    | **398,418**    | ** ** | **28,559**         | ** ** | **0**            | ** **  | **471,007**      | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| Intercompany  payable                                                  |       | 848,054        |          | 0              |       | 8,945              |       | (856,999         | )           | 0                |       |
| Intercompany  notes payable                                            |       | 0              |          | 1,073,800      |       | 46,497             |       | (1,120,297       | )           | 0                |       |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| Senior secured  notes and other long-term debt, net of current portion |       | 0              |          | 2,076          |       | 0                  |       | 0                |        | 2,076            |       |
| Noncurrent  deferred income taxes                                      |       | 2,732          |          | 51,566         |       | 118                |       | 0                |        | 54,416           |       |
| Other long-term  liabilities                                           |       | 5,670          |          | 249,071        |       | 18,731             |       | 0                |        | 273,472          |       |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| **Total  liabilities**                                                 | ** ** | **900,486**    | ** **    | **1,774,931**  | ** ** | **102,850**        | ** ** | **(1,977,296**   | **)**       | **800,971**      | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| **Total  shareholders’ equity**                                   | ** ** | **849,863**    | ** **    | **464,419**    | ** ** | **26,514**         | ** ** | **(490,933**     | **)**       | **849,863**      | ** ** |
|                                                                   |       |           |          |           |       |               |       |             |        |             |       |
| **Total liabilities and  shareholders’ equity**                   | ** ** | **$**          | **1,750,349** | ** **     | **$**      | **2,239,350**      | ** ** | **$**            | **129,364** | ** **       | **$**      | **(2,468,229** | **)** | **$** | **1,650,834** | ** ** |

 

34

----

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET**

**October 1, 2005**

**(In Thousands) (Unaudited)**

 
| ** **                                                             | ** ** | **Co-Issuers** | ** **  | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|----------------------|------------|------------------|-------------|------------------|------------|
| **Assets**                                                             | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** **  | ** **       | ** ** |
| Current assets:                                                        |       |           |        |           |       |                 |       |             |        |             |       |
| Cash and cash  equivalents                                             |       | $              | 11,269      |           | $          | 9,411                |       | $                | 16,928      |             | $          | — |   | $ | 37,608 |   |
| Accounts  receivable                                                   |       | 348            |        | 47,002         |       | 3,019                |       | 0                |        | 50,369           |       |
| Inventories                                                            |       | 16,288         |        | 793,717        |       | 53,095               |       | 0                |        | 863,100          |       |
| Prepaid expenses  and other current assets                             |       | 20             |        | 39,401         |       | 2,166                |       | 0                |        | 41,587           |       |
| Current deferred  taxes                                                |       | 0              |        | 0              |       | 834                  |       | 0                |        | 834              |       |
| **Total  current assets**                                              | ** ** | **27,925**     | ** **  | **889,531**    | ** ** | **76,042**           | ** ** | **0**            | ** **  | **993,498**      | ** ** |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| Property and  equipment, net                                           |       | 10,355         |        | 550,524        |       | 40,382               |       | 0                |        | 601,261          |       |
| Identifiable  intangible assets, net                                   |       | 353            |        | 882            |       | 117                  |       | 0                |        | 1,352            |       |
| Goodwill                                                               |       | 0              |        | 18,126         |       | 0                    |       | 0                |        | 18,126           |       |
| Intercompany  receivables                                              |       | 146,029        |        | 0              |       | 0                    |       | (146,029         | )           | 0                |       |
| Intercompany  notes receivable                                         |       | 202,353        |        | 0              |       | 23,405               |       | (225,758         | )           | 0                |       |
| Investment in  subsidiaries                                            |       | 454,503        |        | 0              |       | 0                    |       | (454,503         | )           | 0                |       |
| Deferred  financing cost and other noncurrent assets, net              |       | 1              |        | 11,699         |       | 99                   |       | 0                |        | 11,799           |       |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| **Total  assets**                                                      | ** ** | **$**          | **841,519** | ** **     | **$**      | **1,470,762**        | ** ** | **$**            | **140,045** | ** **       | **$**      | **(826,290** | **)** | **$** | **1,626,036** | ** ** |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| **Liabilities  and Shareholders’ Equity**                         | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** **  | ** **       | ** ** |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| Current  liabilities:                                                  |       |           |        |           |       |                 |       |             |        |             |       |
| Accounts payable                                                       |       | $              | (27         | )              | $          | 255,980              |       | $                | 23,458      |             | $          | — |   | $ | 279,411 |   |
| Accrued expenses  and other current liabilities                        |       | (1,217         | )           | 164,125        |       | 4,777                |       | 0                |        | 167,685          |       |
| Current deferred  taxes                                                |       | 148            |        | 3,769          |       | 0                    |       | 0                |        | 3,917            |       |
| Short-term  borrowings                                                 |       | 30,000         |        | 0              |       | 0                    |       | 0                |        | 30,000           |       |
| **Total  current liabilities**                                         | ** ** | **28,904**     | ** **  | **423,874**    | ** ** | **28,235**           | ** ** | **0**            | ** **  | **481,013**      | ** ** |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| Intercompany  payable                                                  |       | 0              |        | 118,081        |       | 27,949               |       | (146,030         | )           | 0                |       |
| Intercompany  notes payable                                            |       | 0              |        | 179,064        |       | 46,693               |       | (225,757         | )           | 0                |       |
| Senior secured  notes and other long-term debt, net of current portion |       | 0              |        | 2,094          |       | 0                    |       | 0                |        | 2,094            |       |
| Noncurrent  deferred income taxes                                      |       | 2,426          |        | 61,729         |       | 1,625                |       | 0                |        | 65,780           |       |
| Other long-term  liabilities                                           |       | 5,737          |        | 249,312        |       | 17,648               |       | 0                |        | 272,697          |       |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| **Total  liabilities**                                                 | ** ** | **37,067**     | ** **  | **1,034,154**  | ** ** | **122,150**          | ** ** | **(371,787**     | **)**       | **821,584**      | ** ** |
|                                                                   |       |           |        |           |       |                 |       |             |        |             |       |
| **Total  shareholders’ equity**                                   | ** ** | **804,452**    | ** **  | **436,608**    | ** ** | **17,895**           | ** ** | **(454,503**     | **)**       | **804,452**      | ** ** |
| ** **                                                             | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** **  | ** **       | ** ** |
| **Total liabilities and shareholders’ equity**                    | ** ** | **$**          | **841,519** | ** **     | **$**      | **1,470,762**        | ** ** | **$**            | **140,045** | ** **       | **$**      | **(826,290** | **)** | **$** | **1,626,036** | ** ** |

 

35

----

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

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS**

**For the Period February 14 - September 30, 2006**

**(In Thousands) (Unaudited)**
| ** **                                                                                                                 | ** ** | **Parent**   | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash flows from operating activities:**                                                                                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                                                          |       | $            | —     |           | $          | 12,933         |       | $                    | (101,319   | )                | $          | 4,312            |       | $ | — |   | $ | (84,074 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in) provided by operating activities:                        |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and amortization                                                                                              |       | 0            |       | 1,370          |       | 73,923         |       | 4,922                |       | 0                |       | 80,215           |       |
| Deferred income taxes                                                                                                      |       | 0            |       | 28,072         |       | (59,540        | )          | (2,078               | )          | 0                |       | (33,546          | )          |
| Share-based compensation                                                                                                   |       | 0            |       | 3,363          |       | 0              |       | 0                    |       | 0                |       | 3,363            |       |
| Amortization of deferred financing charges                                                                                 |       | 0            |       | 2,725          |       | 0              |       | 0                    |       | 0                |       | 2,725            |       |
| Loss on sale and disposals of property and equipment                                                                       |       | 0            |       | 0              |       | 416            |       | 0                    |       | 0                |       | 416              |       |
| Changes in assets and liabilities, net of effect of  acquisition:                                                          |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease in accounts receivable                                                                                            |       | 0            |       | 195            |       | 11,741         |       | 111                  |       | 0                |       | 12,047           |       |
| Increase in inventories                                                                                                    |       | 0            |       | (3,430         | )          | (167,646       | )          | (6,834               | )          | 0                |       | (177,910         | )          |
| (Increase) decrease in prepaid expenses and other  current assets                                                          |       | 0            |       | (50,574        | )          | 13,343         |       | (348                 | )          | 0                |       | (37,579          | )          |
| (Increase) decrease in identifiable intangible  assets, goodwill, deferred financing cost and other noncurrent assets, net |       | 0            |       | (691           | )          | 1,063          |       | 26                   |       | 0                |       | 398              |       |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Increase (decrease) in accounts payable                                                                                    |       | 0            |       | 29             |       | 57,774         |       | (1,726               | )          | 0                |       | 56,077           |       |
| (Decrease) increase in accrued expenses and other  liabilities, net                                                        |       | 0            |       | (59,644        | )          | 23,317         |       | 2,449                |       | 0                |       | (33,878          | )          |
| **Net cash (used in) provided by operating  activities**                                                                   | ** ** | **0**        | ** ** | **(65,652**    | **)**      | **(146,928**   | **)**      | **834**              | ** ** | **0**            | ** ** | **(211,746**     | **)**      |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash flows from investing activities:**                                                                                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Acquisition of the Company, net of cash acquired                                                                           |       | 0            |       | (1,220,465     | )          | 7,632          |       | 7,331                |       | 0                |       | (1,205,502       | )          |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Investment in Linens ‘n Things, Inc.                                                                                  |       | (741,675     | )          | 0              |       | 0              |       | 0                    |       | 741,675          |       | 0                |       |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Additions to property and equipment                                                                                        |       | 0            |       | (381           | )          | (36,065        | )          | (4,692               | )          | 0                |       | (41,138          | )          |
| Proceeds from sale of property and equipment                                                                               |       | 0            |       | 0              |       | 3,100          |       | 0                    |       | 0                |       | 3,100            |       |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Additions to investment in subsidiary                                                                                      |       | 91,025       |       | (257           | )          | 0              |       | 0                    |       | (90,768          | )          | 0                |       |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash (used in) provided by investing  activities**                                                                   | ** ** | **(650,650** | **)**      | **(1,221,103** | **)**      | **(25,333**    | **)**      | **2,639**            | ** ** | **650,907**      | ** ** | **(1,243,540**   | **)**      |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash flows from financing activities:**                                                                                  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of common stock to Linens                                                                                         |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Investors LLC and others                                                                                                   |       | 650,650      |       | 0              |       | 0              |       | 257                  |       | (257             | )          | 650,650          |       |
| Investment from Parent                                                                                                     |       | 0            |       | 650,650        |       | 0              |       | 0                    |       | (650,650         | )          | 0                |       |
| Issuance of floating rate notes                                                                                            |       | 0            |       | 650,000        |       | 0              |       | 0                    |       | 0                |       | 650,000          |       |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Financing and direct acquisition costs                                                                                     |       | 0            |       | (59,254        | )          | 0              |       | 0                    |       | 0                |       | (59,254          | )          |
| Premium paid for derivative financial instrument                                                                           |       | 0            |       | (700           | )          | 0              |       | 0                    |       | 0                |       | (700             | )          |
| Intercompany movements                                                                                                     |       | 0            |       | (176,929       | )          | 178,815        |       | (1,886               | )          | 0                |       | 0                |       |
| Increase in short-term borrowings                                                                                          |       | 0            |       | 225,870        |       | 64             |       | 0                    |       | 0                |       | 225,934          |       |
| **Net cash provided by (used in) financing  activities**                                                                   | ** ** | **650,650**  | ** ** | **1,289,637**  | ** ** | **178,879**    | ** ** | **(1,629**           | **)**      | **(650,907**     | **)**      | **1,466,630**    | ** ** |
| **Effect of exchange rate changes on cash and cash  equivalents**                                                          | ** ** | **0**        | ** ** | **0**          | ** ** | **0**          | ** ** | **50**               | ** ** | **0**            | ** ** | **50**           | ** ** |
|                                                                                                                       |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Net increase in cash and cash equivalents                                                                                  |       | 0            |       | 2,882          |       | 6,618          |       | 1,894                |       | 0                |       | 11,394           |       |
| Cash and cash equivalents at beginning of period                                                                           |       | 0            |       | 0              |       | 0              |       | 0                    |       | 0                |       | 0                |       |
| **Cash and cash equivalents at end of period**                                                                             | ** ** | **$**        | **—** | ** **     | **$**      | **2,882**      | ** ** | **$**                | **6,618**  | ** **       | **$**      | **1,894**        | ** ** | **$** | **—** | ** ** | **$** | **11,394** | ** ** |

 

36

----

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Period January 1 - February 13, 2006**

**(In Thousands) (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                  |       | 0                |       | 12,642           |       |
| Deferred income  taxes                                                                                                      |       | (730           | )          | (6,029         | )          | 113                  |       | 0                |       | (6,646           | )          |
| Share-based  compensation                                                                                                   |       | 12,484         |       | 0              |       | 0                    |       | 0                |       | 12,484           |       |
| Amortization of  deferred financing charges                                                                                 |       | 43             |       | 0              |       | 0                    |       | 0                |       | 43               |       |
| Changes in  assets and liabilities, net of effect of acquisition:                                                           |       |           |       |           |       |                 |       |             |       |             |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| (Increase)  decrease in accounts receivable                                                                                 |       | (288           | )          | (2,582         | )          | 630                  |       | 0                |       | (2,240           | )          |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease  (increase) in inventories                                                                                         |       | 687            |       | (30,481        | )          | (2,092               | )          | 0                |       | (31,886          | )          |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| (Increase)  decrease in prepaid expenses and other current assets                                                           |       | (250           | )          | (12,595        | )          | 692                  |       | 0                |       | (12,153          | )          |
| (Increase)  decrease in identifiable intangible assets, goodwill, deferred financing cost  and other noncurrent assets, net |       | (32            | )          | 9,558          |       | 54                   |       | 0                |       | 9,580            |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| (Decrease)  increase in accounts payable                                                                                    |       | (1             | )          | 8,465          |       | (1,220               | )          | 0                |       | 7,244            |       |
| (Decrease)  increase in accrued expenses and other liabilities, net                                                         |       | (27,640        | )          | 25,490         |       | (4,160               | )          | 0                |       | (6,310           | )          |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in operating activities**                                                                                  | ** ** | **(13,310**    | **)**      | **(45,893**    | **)**      | **(5,943**           | **)**      | **0**            | ** ** | **(65,146**      | **)**      |
| ** **                                                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| Additions to  property and equipment                                                                                        |       | (30            | )          | (5,430         | )          | (2,316               | )          | 0                |       | (7,776           | )          |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                                                                  | ** ** | **(30**        | **)**      | **(5,430**     | **)**      | **(2,316**           | **)**      | **0**            | ** ** | **(7,776**       | **)**      |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| Intercompany  movements                                                                                                     |       | (52,158        | )          | 49,564         |       | 2,594                |       | 0                |       | 0                |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| Federal tax  benefit from common stock issued under stock incentive plans                                                   |       | 4,298          |       | 0              |       | 0                    |       | 0                |       | 4,298            |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease in  treasury stock                                                                                                 |       | 0              |       | 674            |       | 0                    |       | 0                |       | 674              |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                                                                    | ** ** | **(47,860**    | **)**      | **50,238**     | ** ** | **2,594**            | ** ** | **0**            | ** ** | **4,972**        | ** ** |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect  of exchange rate changes on cash and cash equivalents**                                                           |       | **0**          |       | **0**          |       | **125**              |       | **0**            |       | **125**          |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| Net decrease in  cash and cash equivalents                                                                                  |       | (61,200        | )          | (1,085         | )          | (5,540               | )          | 0                |       | (67,825          | )          |
| Cash and cash  equivalents at beginning of period                                                                           |       | 136,569        |       | 8,718          |       | 12,871               |       | 0                |       | 158,158          |       |
|                                                                                                                        |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash and cash equivalents at  end of period**                                                                             |       | **$**          | **75,369** |           | **$**      | **7,633**            |       | **$**            | **7,331**  |             | **$**      | **—** |   | **$** | **90,333** |   |

 

37

----

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the Thirty-Nine Week Period Ended October 1, 2005**

**(In Thousands) (Unaudited)**
| ** **                                                                                                       | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from operating activities:**                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                                               |       | $              | 5,373      |           | $          | (12,952              | )          | $                | (1,403     | )                | $          | — |   | $ | (8,982 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:                            |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and  amortization                                                                                   |       | 996            |       | 61,590         |       | 3,630                |       | 0                |       | 66,216           |       |
| Deferred income  taxes                                                                                           |       | 1,781          |       | (1,267         | )          | 268                  |       | 0                |       | 782              |       |
| Share-based  compensation                                                                                        |       | 818            |       | 0              |       | 0                    |       | 0                |       | 818              |       |
| Amortization of  deferred financing charges                                                                      |       | 559            |       | 0              |       | 0                    |       | 0                |       | 559              |       |
| Loss on sale and  disposals of property and equipment                                                            |       | 0              |       | 625            |       | 0                    |       | 0                |       | 625              |       |
| Loss on fixed  asset impairment writedown                                                                        |       | 0              |       | 1,452          |       | 0                    |       | 0                |       | 1,452            |       |
| Changes in  assets and liabilities, net of effect of acquisition:                                                |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease  (increase) in accounts receivable                                                                      |       | 410            |       | (23,514        | )          | (1,372               | )          | 0                |       | (24,476          | )          |
| Increase in  inventories                                                                                         |       | (1,787         | )          | (136,714       | )          | (7,421               | )          | 0                |       | (145,922         | )          |
| Decrease  (increase) in prepaid expenses and other current assets                                                |       | 65             |       | (2,546         | )          | (1,723               | )          | 0                |       | (4,204           | )          |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Increase in  identifiable intangible assets, goodwill, deferred financing cost and other  noncurrent assets, net |       | (556           | )          | (2,244         | )          | (86                  | )          | 0                |       | (2,886           | )          |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| (Decrease)  increase in accounts payable                                                                         |       | (14            | )          | 24,143         |       | 8,686                |       | 0                |       | 32,815           |       |
| (Decrease)  increase in accrued expenses and other liabilities, net                                              |       | (33,643        | )          | 8,169          |       | (2,649               | )          | 0                |       | (28,123          | )          |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in operating activities**                                                                       | ** ** | **(25,998**    | **)**      | **(83,258**    | **)**      | **(2,070**           | **)**      | **0**            | ** ** | **(111,326**     | **)**      |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from investing activities:**                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Additions to  property and equipment                                                                             |       | (2,969         | )          | (77,595        | )          | (8,430               | )          | 0                |       | (88,994          | )          |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Additions to  investment in subsidiary                                                                           |       | (126           | )          | 0              |       | 0                    |       | 126              |       | 0                |       |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                                                       | ** ** | **(3,095**     | **)**      | **(77,595**    | **)**      | **(8,430**           | **)**      | **126**          | ** ** | **(88,994**      | **)**      |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  flows from financing activities:**                                                                       | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of  common stock under stock incentive plans                                                            |       | 3,081          |       | 0              |       | 126                  |       | (126             | )          | 3,081            |       |
| Intercompany  movements                                                                                          |       | (168,069       | )          | 157,202        |       | 10,867               |       | 0                |       | 0                |       |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Federal tax  benefit from common stock issued under stock incentive plans                                        |       | 447            |       | 0              |       | 0                    |       | 0                |       | 447              |       |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Increase in  short-term borrowings                                                                               |       | 30,000         |       | 0              |       | 0                    |       | 0                |       | 30,000           |       |
| Increase in  treasury stock                                                                                      |       | (70            | )          | (60            | )          | 0                    |       | 0                |       | (130             | )          |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                                                         | ** ** | **(134,611**   | **)**      | **157,142**    | ** ** | **10,993**           | ** ** | **(126**         | **)**      | **33,398**       | ** ** |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect  of exchange rate changes on cash and cash equivalents**                                                | ** ** | **0**          | ** ** | **0**          | ** ** | **521**              | ** ** | **0**            | ** ** | **521**          | ** ** |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| Net (decrease)  increase in cash and cash equivalents                                                            |       | (163,704       | )          | (3,711         | )          | 1,014                |       | 0                |       | (166,401         | )          |
| Cash and cash  equivalents at beginning of period                                                                |       | 174,973        |       | 13,122         |       | 15,914               |       | 0                |       | 204,009          |       |
|                                                                                                             |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  and cash equivalents at end of period**                                                                  | ** ** | **$**          | **11,269** | ** **     | **$**      | **9,411**            | ** ** | **$**            | **16,928** | ** **       | **$**      | **—** | ** ** | **$** | **37,608** | ** ** |

 

38

----

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

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

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

**General**

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

The Company, under thename “Linens ‘n Things,” is one of the leading national large format specialtyretailers of home textiles, housewares and home accessories, carrying bothnational brands and private label goods. As of September 30, 2006, the Company operated 561 stores in 47 statesand in six provinces across Canada.

**Critical Accounting Policies**

The following includes discussion and analysis aboutthe Condensed Consolidated Financial Statements of Linens Holding Co. and itssubsidiaries and predecessor.  TheCompany has not presented separate financial statements for Linens ‘n Things,Inc. and its subsidiaries or Linens ‘n Things Center, Inc. and its subsidiaries(collectively, the issuers as described in Note 15 to the CondensedConsolidated Financial Statements) because management has determined that thedifferences in such financial statements are minor.  

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts and timing of revenues and of expenses during the reportingperiods.  The Company bases its estimateson historical experience and on other assumptions that it believes to berelevant under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. The Company’s management believes thefollowing critical accounting estimates involve significant estimates andjudgments inherent in the preparation of the Condensed Consolidated FinancialStatements.  The Company bases theseestimates on historical results and various other assumptions believed to bereasonable at the time.  These criticalaccounting estimates are discussed in detail in the Company’s predecessorentity Annual Report on Form 10-K Equivalent for Linens ‘n Things, Inc. andSubsidiaries. 

*BusinessCombination*

On February 14, 2006, theCompany acquired all of the outstanding common stock of the Company’s predecessorentity, Linens ‘n Things, Inc., for total cash consideration of approximately$1.3 billion.  The acquisition of Linens ‘nThings, Inc. was accounted for as a business combination using the purchasemethod of accounting, whereby the purchase price (including liabilitiesassumed) was preliminarily allocated to the assets acquired based on theirestimated fair market values at the date of acquisition.  The purchase price paid by Linens Holding Co.to acquire the Company and related preliminary purchase accounting adjustmentswere “pushed down” and recorded in Linens ‘n Things, Inc. and its subsidiaries’financial statements and resulted in a new basis of accounting for the “successor”period beginning on the day the acquisition was completed.  As a result, the purchase price and relatedcosts were preliminarily allocated to the estimated fair values of the assetsacquired and liabilities assumed at the time of the acquisition based onmanagement’s best estimates, which were based in part on the work of third-partyappraisers engaged to perform valuations of certain of the tangible andintangible assets acquired.  In essence,the Company’s assets and liabilities were adjusted to fair value as of theclosing date of the Transactions, and the excess of the total purchase priceover the fair value of the Company’s net assets was allocated to goodwill.  

39

----

 

*Valuationof Inventory*

Merchandiseinventory is a significant portion of the Company’s balance sheet, representingapproximately 46.2% of total assets at September 30, 2006.  Inventories are valued using the lower ofcost or market value, determined by the retail inventory method (“RIM”).  Under RIM, the valuation of inventories atcost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio to the retail value of inventories.  RIM is an averaging method that is used inthe retail industry due to its practicality. Inherent in RIM calculations are certain significant managementjudgments and estimates including, among others, merchandise mark-on, mark-up,markdowns and shrinkage based on historical experience between the dates ofphysical inventories, all of which significantly impact the ending inventoryvaluation at cost.  The methodologiesutilized by the Company in its application of RIM are consistent for allperiods presented.  Such methodologiesinclude the development of the cost-to-retail ratios, the development ofshrinkage reserves and the accounting for price changes.  At any one time, inventories include itemsthat have been written down to the Company’s best estimate of their realizablevalue.  Factors considered in estimating realizable value include the ageof merchandise and anticipated demand.  Actual realizable value coulddiffer materially from this estimate based upon future customer demand oreconomic conditions.

*SalesReturns*

The Company estimatesfuture sales returns and records a provision in the period that the relatedsales are recorded based on historical return rates.  Should actual returns differ from the Company’sestimates, the Company may be required to revise estimated sales returns.  Although these estimates have not variedmaterially from historical provisions, estimating sales returns requiresmanagement judgment as to changes in preferences and quality of products beingsold, among other things; therefore, these estimates may vary materially in thefuture.  The sales returns calculationsare regularly compared with actual return experience.  In preparing its financial statements as of September30, 2006, December 31, 2005 and October 1, 2005, the Company’s sales returnsreserve was approximately $5.7 million, $7.1 million and $5.3 million,respectively. 

*Impairmentof Long-Lived Assets (including Goodwill)*

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

In accordance with SFASNo. 142, “Goodwill and Other Intangible Assets,” goodwill and intangibleassets that have indefinite useful lives are tested annually forimpairment.  These assets are tested forimpairment more frequently if events and circumstances indicate that the assetmight be impaired.  An impairment loss isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.  

The Company’s judgmentsregarding the existence of impairment indicators are based on market conditionsand operational performance.  As of September30, 2006, December 31, 2005 and October 1, 2005, the Company’s net book valuefor property and equipment was approximately $572.5 million, $612.2 million and$601.3 million, respectively, goodwill was approximately $277.2 million, $18.1million and $18.1 million, respectively, and identifiable intangible assets,net was $155.4 million, $1.3 million and $1.4 million, respectively.  The increase in goodwill and identifiableintangible assets, net was primarily due to the acquisition.  

There was no impairmentloss recognized for any of the periods presented for fiscal 2006.  During the third quarter of 2005, the Companydetermined that the carrying value of certain assets exceeded their relatedestimated future undiscounted cash flows. As a result, the Company reduced the carrying value of these fixedassets by approximately $1.5 million with the related impairment lossrecognized in selling, general and administrative expenses on the Company’sCondensed Consolidated Statement of Operations for the thirteen week andthirty-nine week periods ended October 1, 2005.

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*StoreClosure Costs*

In fiscal 2001, theCompany recorded a pre-tax restructuring and asset impairment charge of $37.8million ($23.7 million after-tax) related to the closing of certainunder-performing stores.  As of September30, 2006, December 31, 2005 and October 1, 2005, the Company had $3.6 million,$5.4 million and $5.1 million, respectively, remaining related to thisreserve.  The Company has closed all ofthe initially identified stores other than one store, which the Company decidedto keep open and whose reserve was reversed. The Company continues to negotiate and/or explore lease buyouts orsublease agreements for certain of these stores as well as evaluate reopeningstores previously closed.  The activity inthe thirty-nine week period ended September 30, 2006 includes the reversal ofestimated lease commitment costs of approximately $0.3 million which were notneeded, offset by an increase to lease commitment costs of approximately $1.4million due to changes in estimates based on current negotiations.  Final settlement of these reserves ispredominantly a function of negotiations with unrelated third parties, and, assuch, these estimates may be subject to change in the future.

*Self-Insurance*

The Company purchasesthird party insurance for worker’s compensation, medical and general liabilitycosts that exceed certain limits for each type of insurance program.  The Company is responsible for the payment ofclaims under these insured excess limits. The Company establishes accruals for its insurance programs based onavailable claims data and historical trend and experience, as well as lossdevelopment factors for its medical insurance prepared with the assistance ofthird party actuaries.  The ultimate costof these claims may vary from the established accrual.  The accrued obligation for theseself-insurance programs was approximately $14.7 million as of September 30,2006, $15.3 million as of December 31, 2005 and $12.3 million as of October 1,2005.

*Share-basedCompensation*

Prior to adopting SFASNo. 123 (Revised 2004) in fiscal 2006, the Company accounted for itsshare-based compensation plans under the provisions of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” as permittedunder SFAS No. 148, “Accounting for Stock-Based Compensation - Transition andDisclosure - an amendment of FASB Statement No. 123.”  During fiscal 2005 theCompany recognized compensation expense for restricted stock unit awards overthe related service period, but did not recognize compensation expense forstock options, since the Company has historically treated its stock options ashaving been granted at fair market value on the date of grant.  

In fiscal 2006 theCompany adopted SFAS No. 123 (Revised 2004).  The Company has elected the modifiedprospective method of transition; accordingly, prior periods have not beenrestated.  Under SFAS No. 123 (Revised2004), during the period January 1, 2006 to February 13, 2006, the Company didnot grant any stock options and recorded, in connection with the Merger,share-based compensation expense for the portion of previously granted share-basedawards that remained unvested at the date of the adoption.  Upon completion of the Merger and inaccordance with the terms of the stock plans, all of the outstanding stockoptions and restricted stock units became fully vested and immediatelyexercisable.  Each option was exercised,equal to the excess of $28.00 over the underlying stock option exercise price,less applicable withholding taxes.  Eachrestricted stock unit award was exercised at $28.00 in cash, without interest,less applicable withholding taxes.

On February 14,2006, the board of directors and stockholders of Linens Holding Co. adopted theLinens Holding Co. Stock Option Plan. Under the Plan, the Company recognizes the cost of all time-basedemployee stock option grants on a straight-line attribution basis and the costof all performance-based employee stock options on an accelerated basis inaccordance with Financial Accounting Standards Board Interpretation No. 28, “Accountingfor Stock Appreciation Rights and Other Variable Stock Option or Award Plans”over their respective vesting periods, net of estimated forfeitures.  There are no restricted stock units under thePlan.

Sincethe first quarter of 2006, the Company, with the assistance of an independentthird party, uses the Monte Carlo simulation option-pricing model forestimating the fair value of Performance Options and the Black-Scholesoption-pricing model for Time Options. Both models include various assumptions, including the expected life ofstock options, the expected volatility and the expected risk free interestrate.  These assumptions reflect the Company’s best estimates, but they involveinherent uncertainties based on certain conditions generally 

41

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outside the control of the Company.  As a result, if other assumptions had beenused, total share-based compensation cost, as determined in accordance with SFASNo. 123 (Revised 2004) could have been materially impacted.  Furthermore, if the Company uses differentassumptions for future grants, share-based compensation cost could bematerially impacted in future periods.

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

*DerivativeFinancial Instruments*

Inaccordance with SFAS No. 133, as amended, the Company had designatedcertain derivative arrangements entered into on July 7, 2006 as cash flowhedges and recognizes the fair value of the instruments on the consolidatedbalance sheet.  Gains and losses relatedto a hedge and that result from changes in the fair value of the hedge areeither recognized in income immediately to offset the gain or loss on thehedged item, or deferred and reported as a component of other comprehensiveincome (loss) in stockholders’ equity and subsequently recognized in incomewhen the hedged item affects net income. The ineffective portion of the change in fair value of a hedge isrecognized in income immediately.  Therewas no hedge ineffectiveness for the thirteen-week period ended September 30,2006. 

*Income Taxes*

TheCompany uses the asset and liability method to account for its incometaxes.  Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to the differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measuredusing enacted tax rates expected to be applied to the taxable income in theyear in which temporary differences are expected to be recovered orsettled.  The effect of a change in tax rates on deferred tax assetsand liabilities is recognized in the statement of operations in the period thatincludes the enactment date.

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

*Litigation*

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

**Impact of the Merger andTransactions**

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

The acquisition of Linens‘n Things, Inc. is being accounted for as a business combination using thepurchase method of accounting, whereby the purchase price (includingliabilities assumed) was preliminarily allocated to the assets acquired basedon their estimated fair market values at the date of acquisition.  The purchase price paid by Linens Holding Co.to acquire the Company and related preliminary purchase accounting adjustmentswere “pushed down” and recorded in Linens ‘n Things, Inc. and its subsidiaries’financial statements and resulted in a new basis of accounting for the “successor”period beginning on the day the Transactions were completed.  As a result, the purchase price and relatedcosts were allocated to the estimated fair values of the assets acquired andliabilities assumed at the time of the acquisition based on management’s bestestimates, which were based in part on 

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the work of third-partyappraisers engaged to perform valuations of certain of the tangible andintangible assets acquired.  In essence,the Company’s assets and liabilities were adjusted to fair value as of theclosing date of the Transactions, and the excess of the total purchase priceover the fair value of the Company’s net assets was allocated to goodwill.  
| *Cost of Acquisition*                                            | * * | * * | * *  | * *  | * *  |
|------------------------------------------------------------------|----------|----------|-----------|-----------|-----------|
| Cash paid                                                        |     | $        | 1,295,834 |      |      |   |
| Transaction  costs                                               |     | 22,824   |      |      |      |
|                                                             |     |     |      |      |      |
| Cost of  acquisition                                             |     |     |      | $         | 1,318,658 |   |
| * *                                                         | * * | * * | * *  | * *  | * *  |
| *Net  Assets Acquired:*                                          | * * | * * | * *  | * *  | * *  |
| Historical net  assets                                           |     | 820,408  |      |      |      |
| Add: deferred  rent reversed                                     |     | 252,236  |      |      |      |
| Less: new basis  of accounting for previous ownership percentage |     | (1,112   | )         |      |      |
| Less: historical  goodwill                                       |     | (18,126  | )         |      |      |
| Write-off  Southern Linens                                       |     | (252     | )         |      |      |
|                                                             |     |     |      |      |      |
| Net assets  acquired                                             |     |     |      | 1,053,154 |      |
|                                                             |     |     |      |      |      |
| Excess of cost  of acquisition over net assets acquired          |     |     |      | $         | 265,504   |   |
|                                                             |     |     |      |      |      |
| *Allocated  to:*                                                 | * * | * * | * *  | * *  | * *  |
| Property and  equipment                                          |     |     |      | $         | (57       | ) |
| Definite-lived  intangible assets                                |     |     |      | 38,330    |      |
| Indefinite-lived  intangible assets                              |     |     |      | 122,688   |      |
| Unfavorable  lease liability                                     |     |     |      | (20,000   | )         |
| Goodwill                                                         |     |     |      | 277,435   |      |
| Deferred Income  taxes                                           |     |     |      | (152,892  | )         |
|                                                             |     |     |      |      |      |
|                                                             |     |     |      | $         | 265,504   |   |
|                                                                  |          |          |           |           |           |  |  |

 

43

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Intangibleassets identified in the preliminary purchase price allocation above includedthe following

| *Definite-lived intangible assets (liabilities)*                                    | * * | * * | * * |
|-------------------------------------------------------------------------------------|----------|----------|----------|
| Credit card  customer relationships and customer list (estimated life 3 to 5 years) |     | $        | 10,542   |   |
| Favorable leases (average life 5 years)                                             |     | 27,788   |     |
| Unfavorable  leases (average life 8 years)                                          |     | (20,000  | )        |
| *Indefinite-lived  intangible assets*                                               | * * | * * | * * |
| Trademark and  trade names                                                          |     | $        | 122,688  |   |

 

In connection with theTransactions, the Company incurred significant additional indebtedness,including $650 million aggregate principal amount on the Senior SecuredFloating Rate Notes due 2014 issued by two of the Company’s subsidiaries (the “Notes”),which will increase the Company’s interest expense.  The Company’s depreciation and amortizationexpense will increase significantly, primarily due to increases in the fairvalues of its tangible assets and amortizable intangible assets as a directresult of these adjustments.  

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

**Results of Operations**

*Impactof Adoption of SFAS 123 (Revised 2004)*

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

The Company recognizesthe cost of all time-based employee stock options on a straight-lineattribution basis and the cost of all performance-based employee stock optionson an accelerated basis in accordance with Financial Accounting Standards BoardInterpretation No. 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans” over their respective vesting periods,net of estimated forfeitures.  TheCompany has selected the modified prospective method of transition;accordingly, prior periods have not been restated.  Prior to adopting SFAS No. 123 (Revised2004), the Company applied the recognition and measurement principles of APBOpinion No. 25 and related interpretations. All employee stock options were granted at or above the grant datemarket price.  Accordingly, for thethirteen and thirty-nine weeks ended October 1, 2005, the Company did notrecognize compensation expense for stock option grants and amortized restrictedstock unit grants at fair market value at the date of grant over specifiedvesting periods.  For the period January1 to February 13, 2006, the Company recognized approximately $9.3 million and$3.2 million of total unrecognized compensation cost as of December 31, 2005related to stock option grants and restricted stock unit awards, respectively,under the Company’s stock option plans. The consummation of the Merger accelerated the recognition ofcompensation cost, and, accordingly, all of this cost was included in selling,general and administrative expense in the Condensed Consolidated Statements ofOperations in the period from January 1, 2006 to February 13, 2006 (predecessorentity).  In connection with the Merger,the Company adopted the Linens Holding Co. Stock Option Plan.  The compensation cost that has been chargedagainst income for stock option grants from the Company to eligible employeesof the Company and its subsidiaries was $1.0 million for the thirteen weeksended September 30, 2006 and $3.4 million for the period February 14, 2006 to September30, 2006 (successor entity) and is included in selling, general andadministrative expense in the Condensed Consolidated Statements of Operations.

As a result of theTransactions, the current year’s financial results for the thirteen and thirty-nineweeks ended September 30, 2006 have been separately presented in the CondensedConsolidated Statements of Operations split between the “Predecessor Entity”,covering the period January 1, 2006 through February 13, 2006, the date of theconsummation of the Transactions, and the “Successor Entity” covering theperiod February 14, 2006 through September 30, 2006.  The results for the comparable period in theprior year are presented under “Predecessor Entity.”  For comparative purposes, the Companycombined the two periods from January 1, 2006 through 

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September 30, 2006 in itsdiscussion below.  This combination isnot GAAP presentation.  However, theCompany believes this presentation is useful to provide the reader a moreaccurate comparison. 

*ThirteenWeeks Ended September 30, 2006 Compared with Thirteen Weeks Ended October 1,2005*

Net sales for thethirteen weeks ended September 30, 2006 increased approximately 4.6% to $658.2million compared to $629.3 million for the same period last year.  The increase in net sales is primarily due tothe opening of new stores.  Comparablestore sales increased 0.2% for the thirteen weeks ended September 30, 2006compared to a decline of 10.5% for the same period last year.  The improvement in comparable store sales isdue to higher guest traffic, which was positively impacted by the repositioningof the Company’s marketing program, offset by a decrease in average transactionvalue due to markdowns associated with the Company’s efforts to clearnonproductive and aged inventory.  At September30, 2006, the Company operated 561 stores, including 33 stores in Canada, ascompared with 527 stores, including 29 stores in Canada, at October 1, 2005.  Store square footage increased approximately 5.7%to 18.6 million at September 30, 2006 compared with 17.6 million at October 1,2005.  During the thirteen weeks ended September30, 2006, the Company opened eight stores and closed two stores as comparedwith opening 14 stores and closing three stores during the same period lastyear. 

In addition to the costof inventory sold, the Company includes its buying and distribution expenses inits cost of sales.  Buying expensesinclude all direct and indirect costs to procure merchandise.  Distribution expenses include the cost ofoperating the Company’s distribution centers and freight expense related totransporting merchandise.  Gross profit asa percentage of net sales was flat compared to the same period last year.  For the thirteen weeks ended September 30,2006 gross profit was $269.6 million, or 41.0% of net sales, compared with $258.3million, or 41.1% of net sales, for the same period last year.  

The Company’s selling,general and administrative expenses (“SG&A”) consist of store sellingexpenses, occupancy costs, advertising expenses and corporate officeexpenses.  SG&A for the thirteenweeks ended September 30, 2006 was $287.8 million, or 43.8% of net sales,compared with $255.5 million, or 40.6% of net sales, for the same period lastyear.  The increase in SG&A as apercent of net sales is primarily due to an increase in occupancy costs as aresult of new store additions and costs associated with the purchase of theCompany.  Fixed costs, such as occupancy,increased as a percentage of net sales as a result of faster growth than theCompany’s net sales.  In response to itssales performance, the Company reduced certain variable corporate overheadexpenses, but maintained overall store payroll as a percentage of net sales tosupport sales.  Marketing as a percentageof net sales was 3.9% for the thirteen weeks ended September 30, 2006 versus 4.5%for the thirteen weeks ended October 1, 2005. Marketing as a percentage of net sales declined due to a repositioningof the Company’s marketing program to less expensive newspaper inserts fromdirect mail compared to the prior period. In addition, the prior year included a cost for TV media placement.

Operating loss for thethirteen weeks ended September 30, 2006 was approximately $18.2 million, or (2.8%)of net sales, compared with operating income of $2.8 million, or 0.5% of netsales, for the same period last year.

Netinterest expense for the thirteen weeks ended September 30, 2006 increased toapproximately $23.6 million from $1.2 million during the same period last yearprimarily due to the additional interest expense associated with the Notesissued on February 14, 2006.  Inaddition, higher average borrowings required to fund working capital needs andan increase in average borrowing interest rates offset by lower averageinvestment balances also contributed to the overall increase in net interestexpense.

The Company’s income taxbenefit was approximately $14.4 million for the thirteen weeks ended September30, 2006 compared with income tax expense of $0.6 million for the same periodlast year.  This increase in tax benefitis due to additional pretax losses caused in part by additional occupancy costand merger-related interest.  The Companypresently expects that it will realize a portion of the federal tax benefit forlosses incurred in the thirteen week period ending September 30, 2006 againsttaxable income currently projected to be generated in the fourth quarter of2006 with the remainder utilized as a carryover to 2007.  The Company’s effective tax benefit rate forthe thirteen weeks ended September 30, 2006 decreased to 34.4% compared to 37.7%for the same period last year due to a reduction in state tax benefits incertain jurisdictions caused by greater non-deductible interestexpense and increased valuation allowances for certain deferredstate tax benefits.

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As a result of thefactors described above, net loss for the thirteen weeks ended September 30,2006 was approximately $27.4 million compared with net income of $1.0 millionfor the same period last year.  

*Thirty-nineWeeks Ended September 30, 2006 Compared with Thirty-nine Weeks Ended October 1,2005*

The following table setsforth the comparative condensed consolidated statements of operations for the thirty-nineweeks ended September 30, 2006 and October 1, 2005 on a combined basis,including the increase or decrease between the periods presented (inthousands):
| ** **                                              | ** ** | **Thirty-nine Weeks Ended September 30, 2006**                     | ** **    | ** **                                                                                         | ** ** | ** **   | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|---------------|----------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                              | ** ** | **February 14 to  September 30,   2006 (Successor   Entity)** | ** **    | **January 1 to   February 13,   2006   (Predecessor   Entity)** | ** ** | **Combined** | ** ** | **Thirty-nine   Weeks Ended   October 1, 2005** | ** ** | **Increase   (Decrease)** | ** ** |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| **Net  sales**                                          | ** ** | **$**                                                                                       | **1,577,583** | ** **                                                                                         | **$**      | **284,971**  | ** ** | **$** | **1,862,554** | ** ** | **$** | **1,773,531** | ** ** | **$** | **89,023** | ** ** |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| Cost of sales,  including buying and distribution costs |       | 951,007                                                                                     |          | 180,675                                                                                            |       | 1,131,682    |       | 1,041,880 |   | 89,802 |   |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| **Gross  profit**                                       | ** ** | **626,576**                                                                                 | ** **    | **104,296**                                                                                        | ** ** | **730,872**  | ** ** | **731,651** | ** ** | **(779** | **)** |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| Selling, general  and administrative expenses           |       | 705,705                                                                                     |          | 174,138                                                                                            |       | 879,843      |       | 743,364 |   | 136,479 |   |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| **Operating  loss**                                     | ** ** | **(79,129**                                                                                 | **)**         | **(69,842**                                                                                        | **)**      | **(148,971** | **)**      | **(11,713** | **)** | **(137,258** | **)** |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| Interest income                                         |       | (137                                                                                        | )             | (668                                                                                               | )          | (805         | )          | (678 | ) | (127 | ) |
| Interest expense                                        |       | 55,404                                                                                      |          | —                                                                                             |       | 55,404       |       | 3,301 |   | 52,103 |   |
| Net interest  expense (income)                          |       | 55,267                                                                                      |          | (668                                                                                               | )          | 54,599       |       | 2,623 |   | 51,976 |   |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| **Loss  before benefit for income taxes**               | ** ** | **(134,396**                                                                                | **)**         | **(69,174**                                                                                        | **)**      | **(203,570** | **)**      | **(14,336** | **)** | **(189,234** | **)** |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| Benefit for  income taxes                               |       | (50,322                                                                                     | )             | (21,270                                                                                            | )          | (71,592      | )          | (5,354 | ) | (66,238 | ) |
|                                                    |       |                                                                                        |          |                                                                                               |       |         |       |   |   |   |   |
| **Net loss**                                            | ** ** | **$**                                                                                       | **(84,074**   | **)**                                                                                              | **$**      | **(47,904**  | **)**      | **$** | **(131,978** | **)** | **$** | **(8,982** | **)** | **$** | **(122,996** | **)** |

 

Net sales for the thirty-nineweeks ended September 30, 2006 increased approximately 5.0% to $1,862.6 millioncompared to $1,773.5 million for the same period last year.  The increase in sales is primarily due to newstore openings and an increase in guest traffic offset by a decline in averagetransaction value.  During the thirty-nineweeks ended September 30, 2006, the Company opened 21 stores and closed twostores as compared with opening 39 stores and closing four stores during thesame period last year.

Comparable store salesdecreased 1.0% for the thirty-nine weeks ended September 30, 2006 compared to adecline of 7.8% for the same period last year. The overall decrease in comparable store sales is due to a decline inaverage transaction value due to markdowns associated with the Company’sefforts to clear nonproductive and aged inventory, offset by an increase inguest traffic due to the Company’s repositioning of its marketing programs,which includes more visual direct mail and preprint and a focus on core merchandise.

Gross profit for the thirty-nineweeks ended September 30, 2006 was $730.9 million, or 39.2% of net sales,compared with $731.7 million, or 41.3% of net sales, for the same period lastyear.  The decrease in gross profit as a 

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percentage of net saleswas primarily caused by increased markdowns. The markdowns were associated with the Company’s efforts to sellnonproductive and aged inventory in order to transition to newer assortmentsand position the Company for the Holiday season.

SG&A for the thirty-nineweeks ended September 30, 2006 was $879.9 million, or 47.2% of net sales,compared with $743.4 million, or 42.0% of net sales, for the same period lastyear.  The increase in SG&A isprimarily due to higher occupancy costs as a result of new store additions andcosts incurred due to the purchase of the Company.  In addition, due to the Company’s salesperformance, particularly in the first quarter, fixed costs such as occupancyand corporate office expenses as a percentage of net sales are greater.

Operating loss for the thirty-nineweeks ended September 30, 2006 was approximately $149.0 million or (8.0%) ofnet sales, compared with an operating loss of $11.7 million or (0.7%) of netsales, for the same period last year.

Net interest expense forthe thirty-nine weeks ended September 30, 2006 increased to approximately $54.6million from $2.6 million during the same period last year primarily due to theadditional interest expense associated with the Notes issued on February 14,2006.  In addition, higher averageborrowings required to fund working capital needs and an increase in averageborrowing interest rates offset by lower average investment balances alsocontributed to the overall increase in net interest expense.

The Company’s income taxbenefit was approximately $71.6 million for the thirty-nine weeks ended September30, 2006, compared with an income tax benefit of $5.3 million for the sameperiod last year.  This increase in taxbenefit is due to additional pretax losses caused in part by additional occupancycost and merger-related interest. The Company presently expects that it will realize most of the federaltax benefit for losses incurred in the thirty-nine week period ending September30, 2006 by: (i) carryback predecessor losses, (ii) absorption against taxableincome currently projected to be generated in the fourth quarter of 2006 and(iii) carryover any remaining loss to 2007. Due to an increase in nondeductible expenses related to the merger, theCompany’s effective tax benefit rate for the thirty-nine weeks ended September30, 2006 declined to 35.2% compared to 37.3% for the same period last year.

As a result of thefactors described above, net loss for the thirty-nine weeks ended September 30,2006 was approximately $132.0 million compared with a net loss of $ 9.0 millionfor the same period last year.

**Liquidity and Capital Resources**

In connection with theTransactions, the Company had significant cash outlays during the thirteen-weekand thirty-nine-week periods ended September 30, 2006 and became highlyleveraged upon the issuance of $650 million aggregate principal amount of theNotes.  As of December 31, 2005, theCompany had no indebtedness outstanding except for a $2.1 million mortgage noteobligation.  Cash outlays for the paymentof interest are significantly higher in the current fiscal year compared to thelast fiscal year as a result of the Notes.

The Notes consist of $650million aggregate principal amount of Senior Secured Floating Rate Notes due2014 of Linens ‘n Things, Inc. and Linens ‘n Things Center, Inc. (the “Issuers”).  The Notes bear interest at a per annum rateequal to LIBOR plus 5.625%, which is paid every three months on January 15,April 15, July 15 and October 15, commencing April 15, 2006.  The interest rate on the Notes is resetquarterly.  The Notes mature on January15, 2014.  As of September 30, 2006, theinterest rate on the Notes was 11.1%, based on a LIBOR rate of 5.5%.  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 12 to the Unaudited Condensed Consolidated FinancialStatements for disclosures regarding these derivatives).

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

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The lien on capital stockmay be released under certain circumstances. As a result of the filing and effectiveness of a registration statementon Form S-4 with the SEC with respect to the Notes, the Issuersand the guarantors became subject to applicable SEC rules withrespect to information required to be included in the prospectus in theregistration statement.  To the extent that the securities ofany Issuer or guarantor constitute collateral for the Notes and thevalue of the securities equals or exceeds 20% of the principal amount, or $130million of the Notes, separate financial statements of the Issueror guarantor would be required under these SEC rules to be includedin the Company’s SEC filings.  The indenture that governs the Notesprovides, however, with respect to any direct or indirect subsidiary of Linens ‘nThings, Inc., that the securities of the subsidiary are released from the lienon capital stock on the date that the lien triggers this separatefinancial statement requirement.  Accordingly, for any subsidiarywith securities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to thosesecurities.  The lien on the capital stock of Linens ‘n Things, Inc.remains in place.

Concurrent with theclosing of the Merger in February 2006, the Issuers also entered into a newsenior secured asset-basedrevolving credit facility agreement(the “Credit Facility”) with third-party institutional lenders whichexpires February 14, 2011.  The CreditFacility provides senior securedfinancing of up to $600 million, subject to a borrowing base consisting ofcertain eligible inventory and receivables, minus certain reserves.  A portion of the Credit Facility, not toexceed $40 million, is also available to a Canadian subsidiary of the Companysubject to the Canadian borrowing base.  TheCredit Facility replaced the $250 million senior revolving credit facilityamended November 2004, which allowed for up to $50 million in borrowings fromadditional lines of credit outside the agreement, including CAD $40 millioncovering the Company’s Canadian operations. The Credit Facility requires the Company to comply with financial ratiomaintenance covenants if the excess availability under the Credit Facility, atany time, does not exceed $75 million and also contains certain customaryaffirmative covenants and events of default. During the period February 14 to September 30, 2006, the Company alwaysmaintained excess availability under the Credit Facility above $75 million and,accordingly, is not subject to compliance with certain financial ratiomaintenance covenants as of September 30, 2006. As of September 30, 2006, the Issuers had $225.9 million inborrowings under the Credit Facility at an average interest rate of 7.0%.  The Company also had $193.7 million ofletters of credit outstanding as of September 30, 2006 issued under theCredit Facility, which includes standby letters of credit and import letters ofcredit used for merchandise purchases. Borrowings under the Credit Facility have been classified as short-termas of September 30, 2006 in accordance with the Company’s representationthat it expects to have the ability and intent to repay these borrowings fromexisting current assets within one year. The Company is not obligated under any formal or informal compensatingbalance requirements.

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

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

Asa result of the Transactions, the cash flow results for the thirty-nine weeksended September 30, 2006 have been separately presented in the CondensedConsolidated Statements of Cash Flows split between the “Predecessor Entity”,covering the period January 1 to February 13, 2006 and the “Successor Entity”covering the period February 14 to September 30, 2006.  The comparable period results for the prioryear are presented under “Predecessor Entity.” For comparative purposes, the Company combined the two periods fromJanuary 1, 2006 through September 30, 2006 in its discussion below.  This combination is not a GAAPpresentation.  However, the 

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Companybelieves this combination is useful to provide the reader a more accuratecomparison and is provided to enhance the reader’s understanding of cash flowsfor the periods presented.

Netcash used in operating activities for the periods February 14 to September 30,2006 and January 1 to February 13, 2006 was $211.8 million and $65.1 million,respectively.  Net cash used in operatingactivities for the combined thirty-nine weeks ended September 30, 2006 was $276.9million compared with $111.3 million used in operating activities for the sameperiod last year.  The increase in netcash used in operating activities is due to an increase in inventories primarilydue to new store openings and to support the upcoming holiday season, additionalcosts incurred by the Company resulting from the consummation of theTransactions and the timing of vendor payments.

Net cash used in investingactivities for the periods February 14 to September 30, 2006 and January 1 toFebruary 13, 2006 was $1,243.5 million and $7.8 million, respectively.  Net cash used in investing activities for thecombined thirty-nine weeks ended September 30, 2006 was $1,251.3 millioncompared with $89.0 million used in investing activities for the same periodlast year.  Excluding acquisition cost inconnection with the Transaction, net cash used in investing activities was $45.8million, a decrease from the prior year due to fewer new store openings.  The Company currently estimates capitalexpenditures will be approximately $80 million in fiscal 2006, primarily toopen approximately 30 new stores, to maintain existing stores, and for systemenhancements and other capital additions. For the thirty-nine week period ended September 30, 2006 such amountstotaled approximately $34 million, $11 million and $4 million to open newstores, to maintain existing stores and for system enhancements and othercapital additions, respectively.

Net cash provided byfinancing activities for the periods February 14 to September 30, 2006 andJanuary 1 to February 13, 2006 was $1,466.6 million and $5.0 million,respectively.  Net cash provided byfinancing activities for the combined thirty-nine weeks ended September 30,2006 was $1,471.6 million compared with $33.4 million provided by financingactivities for the same period last year. The increase is due to the issuance of the Notes, the issuance ofCompany stock primarily to the Sponsors in connection with the Transactions andan increase in borrowings under the Credit Facility to fund working capitalneeds.

Management regularlyreviews and evaluates its liquidity and capital needs.  The Company experiences peak periods for itscash needs generally during the second quarter and fourth quarter of the fiscalyear.  As the Company’s businesscontinues to grow and its current store expansion plan is implemented, suchpeak periods may require increases in the amounts available under the CreditFacility from those currently existing and/or other debt or equityfunding.  Management currently believesthat the Company’s cash flows from operations, its availability under theCredit Facility, its access to increases to the Credit Facility or additionalcapacity from new credit facilities will be sufficient to fund its expectedcapital expenditures, working capital and non-acquisition business expansionrequirements as they become due.  TheCompany cannot, however, give any assurances that it will be able to obtainaccess to increases to the Credit Facility or additional capacity from newcredit facilities in the future.

**Off-Balance Sheet Arrangements**

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

**Inflation**

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

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**Seasonality**

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

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

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

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

**Interest Rate Risk**

The Company’s financialinstruments include cash and cash equivalents and borrowings under the CreditFacility and the Notes.  The CreditFacility and the Notes carry floating rate interest and, therefore, the Company’sresults of operations for fiscal 2006 will be exposed to changes in interestrates.  As of September 30, 2006, theCompany had $225.9 million in borrowings under the Credit Facility at anaverage interest rate of 7.0% and $650 million aggregate principal amount inNotes at an interest rate of 11.1% (see Notes 4 and 10 to the CondensedConsolidated Financial Statements).  Asof September 30, 2006 a one percentage point change in floating rate interestwould cause an increase to interest expense of approximately $8.8 million.

On July 7, 2006 theIssuers entered into a zero cost interest rate collar agreement to hedge thecash flows associated with the LIBOR component of the interest rate on theNotes.  On July 7, 2006 the Issuers alsopurchased a one-year forward-starting interest rate cap agreement which takeseffect on January 15, 2008 (see Note 12 to the Unaudited Condensed ConsolidatedFinancial Statements for disclosures regarding these derivatives).

**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 33 stores in Canada as of September 30, 2006.  The Company believes its foreign currencytranslation risk is not material, as a hypothetical 10% strengthening orweakening of the U.S. dollar relative to the Canadian dollar would notmaterially affect the Company’s results from operations or cash flow.  As of September 30, 2006 and for the thirty-nine-weekperiod then ended the Company did not hedge against foreign currency risks.

**Item 4.            Controls and Procedures**

**Disclosure Controls andProcedures**

The Company’s management,including its Chief Executive Officer and its Chief Financial Officer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of September 30, 2006.  Based uponthat evaluation, the Company’s management, including the Chief ExecutiveOfficer and the Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures are effective as of the end of the periodcovered by this report.

**Changes in Internal Control OverFinancial Reporting**

Our management determinedthat as of the end of fiscal 2005, we did not have adequate review controls toensure the propriety of the accounting for the classification of capitalexpenditures related to store self-development transactions.  Our accounting treatment for capitalexpenditures related to store self-development transactions, initially recordedon the balance sheet as other current assets and on the cash flow statement asa change in other current assets, was subsequently determined to be incorrectaccording to generally accepted accounting principles, which principles providethat capital expenditures related to store self-development transactions shouldbe recorded on the balance sheet as property and equipment and on the cash flowstatement as additions to property and equipment.  Our management 

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corrected the accounting related to storeself-development transactions prior to the issuance of the financial statementsfor the fiscal year ended December 31, 2005. There was no change in the overall cash flow generated by us and theincorrect accounting had no impact on our income statement.  The control deficiency that resulted in theincorrect accounting for the classification of capital expenditures related tostore self-development transactions represented a material weakness inour internal control over financial reporting as of December 31, 2005.  Our management has implemented reviewcontrols to ensure the propriety of our accounting for these transactions.

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

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

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

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

**Item 1.            Legal Proceedings**

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

**Item 1A.         Risk Factors**

There have been nomaterial changes in the risk factors previously disclosed in the Company’s Form10-Q for the quarterly reporting period ended July 1, 2006.

**Item 2.            Unregistered Sales of EquitySecurities and Use of Proceeds**

On August 16, 2006, GeorgeG. Golleher, a non-employee director of Linens Holding Co. and Linens ‘nThings, Inc., purchased 10,000 shares of the Company’s common stock foraggregate consideration of $500,000.

**Item 6.            Exhibits**

31.1                           Certificationof Principal Executive Officer of Linens Holding Co. pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002.

31.2                           Certificationof Principal Financial Officer of Linens Holding Co. pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002.

31.3                           Certificationof Principal Executive Officer of Linens ‘n Things, Inc. pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

31.4                           Certificationof Principal Financial Officer of Linens ‘n Things, Inc. pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

31.5                           Certificationof Principal Executive Officer of Linens ‘n Things Center, Inc. pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

31.6                           Certificationof Principal Financial Officer of Linens ‘n Things Center, Inc. pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.

32.1                           Certificationof Principal Executive Officer and Principal Financial Officer of LinensHolding Co. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certificationof Principal Executive Officer and Principal Financial Officer of Linens ‘nThings, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.3                           Certificationof Principal Executive Officer and Principal Financial Officer of Linens ‘nThings Center, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Quarterly Report on Form 10-Q to be signed onits behalf by the undersigned thereunto duly authorized.
|                         | **LINENS HOLDING CO.**                 |
|-------------------------|----------------------------------------|
| ** **              | **LINENS ‘N THINGS, INC.**        |
| ** **              | **LINENS ‘N THINGS CENTER, INC.** |
| ** **              | ** **                             |
| ** **              | ** **                             |
| Date: November 14, 2006 | By:                                    | /s/ Robert J. DiNicola |
|                    |                                   | Robert J. DiNicola |
|                    |                                   | Chairman and Chief Executive Officer |
|                    |                                   | (principal executive officer) |
|                    |                                   |   |
|                    |                                   |   |
| Date: November 14, 2006 | By:                                    | /s/ Francis M. Rowan |
|                    |                                   | Francis M. Rowan |
|                    |                                   | Senior Vice President and Chief Financial Officer |
|                    |                                   | (principal financial and accounting officer) |

 

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