**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 THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterlyperiod ended October 31, 2006**

**or**

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

**For the transitionperiod from                         to                           **

**Commission FileNumber 1-13026**

**BLYTH, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                                                                      |   | **36-2984916**                     |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                                                   |   | (IRS Employer  Identification No.) |
|                                                                                                              |   |                               |
| **One  East Weaver Street, Greenwich, Connecticut 06831**                                                         |
| (Address of  principal executive offices)           (Zip  Code) |

 

**(203)661-1926**

(Registrant’stelephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x          No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer  x |   | Accelerated filer  o |   | Non-Accelerated filer  o |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o          No  x

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.

**39,293,262Common Shares as of November 30, 2006**

 

----

**BLYTH,INC.**

#### **INDEX**

| Part I.    | Financial Information                                                                       |                                                            |
|------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
|       |                                                                                        |                                                            |   |
| Item 1.    | Financial Statements  (Unaudited):                                                          |                                                            |
|       |                                                                                        |                                                            |
|       |                                                                                        | Condensed Consolidated Balance Sheets                           |   |
|       |                                                                                        |                                                            |   |
|       |                                                                                        | Condensed Consolidated Statements of Earnings (Loss)            |   |
|       |                                                                                        |                                                            |   |
|       |                                                                                        | Condensed Consolidated Statements of Stockholders’  Equity |   |
|       |                                                                                        |                                                            |   |
|       |                                                                                        | Condensed Consolidated Statements of Cash Flows                 |   |
|       |                                                                                        |                                                            |   |
|       |                                                                                        | Notes to Condensed Consolidated Financial Statements            |   |
|       |                                                                                        |                                                            |   |
| Item 2.    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |                                                            |
|       |                                                                                        |                                                            |
| Item 3.    | Quantitative and Qualitative Disclosures About Market  Risk                                 |                                                            |
|       |                                                                                        |                                                            |
| Item 4.    | Controls and Procedures                                                                     |                                                            |
|       |                                                                                        |
| Part II.   | Other Information                                                                           |                                                            |
|       |                                                                                        |
| Item 1.    | Legal Proceedings                                                                           |                                                            |
|       |                                                                                        |                                                            |
| Item  1A.  | Risk  Factors                                                                               |                                                            |
|       |                                                                                        |                                                            |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                            |
|       |                                                                                        |                                                            |
| Item 3.    | Defaults upon Senior Securities                                                             |                                                            |
|       |                                                                                        |                                                            |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                        |                                                            |
|       |                                                                                        |                                                            |
| Item 5.    | Other Information                                                                           |                                                            |
|       |                                                                                        |                                                            |
| Item  6.   | Exhibits                                                                                    |                                                            |
|       |                                                                                        |                                                            |
| Signatures |                                                                                        |                                                            |
|            |                                                                                             |                                                                 |  |  |  |

 

2

----

Part I.   FINANCIAL INFORMATION

Item I.   FINANCIAL STATEMENTS

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                      | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| **(In thousands, except share and per share data)**                                          | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current assets:**                                                                                                             | ** ** | ** **           | ** ** | ** **           | ** ** |
| Cash and cash  equivalents                                                                                                      |       | $                    | 80,615     |                 | $          | 242,068 |   |
| Short-term investments                                                                                                          |       | 95,000               |       | —               |       |
| Accounts receivable,  less allowance for doubtful receivables of $2,606 and $3,892, respectively                                |       | 88,864               |       | 109,857              |       |
| Inventories                                                                                                                     |       | 180,847              |       | 237,753              |       |
| Prepaid and other                                                                                                               |       | 34,099               |       | 35,643               |       |
| Assets held for sale                                                                                                            |       | —               |       | 3,027                |       |
| Deferred income taxes                                                                                                           |       | 16,781               |       | 20,645               |       |
| Assets of discontinued  operations                                                                                              |       | 2,997                |       | —               |       |
| Total current  assets                                                                                                           |       | 499,203              |       | 648,993              |       |
| **Property, plant and equipment,  at cost:**                                                                                    | ** ** | ** **           | ** ** | ** **           | ** ** |
| Less accumulated  depreciation of $199,936 and $264,941, respectively                                                           |       | 163,793              |       | 225,826              |       |
| **Other assets:**                                                                                                               | ** ** | ** **           | ** ** | ** **           | ** ** |
| Investment                                                                                                                      |       | 3,472                |       | 3,397                |       |
| Goodwill                                                                                                                        |       | 90,726               |       | 185,127              |       |
| Other intangible  assets, net of accumulated amortization of $7,300 and $5,917, respectively                                    |       | 35,800               |       | 37,183               |       |
| Other long-term assets                                                                                                          |       | 17,737               |       | 15,994               |       |
|                                                                                                                            |       | 147,735              |       | 241,701              |       |
| Total assets                                                                                                                    |       | $                    | 810,731    |                 | $          | 1,116,520 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                  | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Current liabilities:**                                                                                                        | ** ** | ** **           | ** ** | ** **           | ** ** |
| Bank lines of credit                                                                                                            |       | $                    | 8,636      |                 | $          | 25,772 |   |
| Current maturities of  long-term debt                                                                                           |       | 923                  |       | 1,049                |       |
| Accounts payable                                                                                                                |       | 49,217               |       | 75,735               |       |
| Dividends payable                                                                                                               |       | 10,578               |       | —               |       |
| Accrued expenses                                                                                                                |       | 85,786               |       | 93,000               |       |
| Income taxes payable                                                                                                            |       | 3,680                |       | 14,296               |       |
| Liabilities of  discontinued operations                                                                                         |       | 6,619                |       | —               |       |
| Total current  liabilities                                                                                                      |       | 165,439              |       | 209,852              |       |
| **Deferred income taxes**                                                                                                       |       | 21,201               |       | 39,383               |       |
| **Long-term debt, less current  maturities**                                                                                    |       | 259,765              |       | 344,921              |       |
| **Other long-term liabilities**                                                                                                 |       | 23,482               |       | 28,540               |       |
| **Commitments and contingencies**                                                                                               |       | —               |       | —               |       |
| **Stockholders’ equity:**                                                                                                  | ** ** | ** **           | ** ** | ** **           | ** ** |
| Preferred stock -  authorized 10,000,000 shares of $0.01 par value; no shares issued and  outstanding                           |       | —               |       | —               |       |
| Common stock -  authorized 100,000,000 shares of $0.02 par value; issued 50,622,860 shares  and 50,528,060 shares, respectively |       | 1,013                |       | 1,010                |       |
| Additional contributed  capital                                                                                                 |       | 128,404              |       | 127,580              |       |
| Retained earnings                                                                                                               |       | 517,905              |       | 657,983              |       |
| Accumulated other  comprehensive income                                                                                         |       | 17,217               |       | (1,935               | )          |
| Unearned compensation  on restricted stock                                                                                      |       | —               |       | (3,070               | )          |
| Treasury stock, at  cost, 11,335,798 shares and 9,533,416 shares, respectively                                                  |       | (323,695             | )          | (287,744             | )          |
| Total  stockholders’ equity                                                                                                |       | 340,844              |       | 493,824              |       |
| Total liabilities and  stockholders’ equity                                                                                |       | $                    | 810,731    |                 | $          | 1,116,520 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

3

----

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)**

**(Unaudited)**

 
| **Nine months ended October 31 (In thousands,  except per share data)**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                                                                         |       | $        | 840,775    |     | $          | 873,556 |   |
| Cost of goods sold                                                                                                                |       | 434,047  |       | 436,306  |       |
| Gross profit                                                                                                                      |       | 406,728  |       | 437,250  |       |
| Selling                                                                                                                           |       | 283,435  |       | 284,762  |       |
| Administrative                                                                                                                    |       | 95,501   |       | 94,673   |       |
| Goodwill impairment                                                                                                               |       | 36,769   |       | —   |       |
|                                                                                                                              |       | 415,705  |       | 379,435  |       |
| Operating profit  (loss)                                                                                                          |       | (8,977   | )          | 57,815   |       |
| Other expense (income):                                                                                                           |       |     |       |     |       |
| Interest expense                                                                                                                  |       | 14,576   |       | 14,287   |       |
| Interest income                                                                                                                   |       | (5,352   | )          | (1,446   | )          |
| Foreign exchange  and other                                                                                                       |       | (614     | )          | 959      |       |
|                                                                                                                              |       | 8,610    |       | 13,800   |       |
| Earnings (loss)  from continuing operations before income taxes and minority interest                                             |       | (17,587  | )          | 44,015   |       |
| Income tax expense  (benefit)                                                                                                     |       | (7,008   | )          | 9,493    |       |
| Earnings (loss)  from continuing operations before minority interest                                                              |       | (10,579  | )          | 34,522   |       |
| Minority interest                                                                                                                 |       | 114      |       | (506     | )          |
| Earnings (loss)  from continuing operations                                                                                       |       | (10,693  | )          | 35,028   |       |
| Earnings (loss) from  discontinued operations, net of income tax expense (benefit) of ($1,278) in  2006 and $295 in 2005 (note 3) |       | (109,504 | )          | 2,128    |       |
| Net earnings (loss)                                                                                                               |       | $        | (120,197   | )        | $          | 37,156 |   |
| Basic:                                                                                                                            |       |     |       |     |       |
| Earnings (loss) from  continuing operations per common share                                                                      |       | $        | (0.27      | )        | $          | 0.86 |   |
| Earnings (loss) from  discontinued operations per common share                                                                    |       | (2.74    | )          | 0.05     |       |
| Net earnings (loss) per  common share                                                                                             |       | $        | (3.01      | )        | $          | 0.91 |   |
| Weighted average number  of shares outstanding                                                                                    |       | 39,945   |       | 40,948   |       |
| Diluted:                                                                                                                          |       |     |       |     |       |
| Earnings (loss) from  continuing operations per common share                                                                      |       | $        | (0.27      | )        | $          | 0.85 |   |
| Earnings (loss) from  discontinued operations per common share                                                                    |       | (2.74    | )          | 0.05     |       |
| Net earnings (loss) per  common share                                                                                             |       | $        | (3.01      | )        | $          | 0.90 |   |
| Weighted average number  of shares outstanding                                                                                    |       | 39,945   |       | 41,190   |       |

 

***The accompanying notes are an integral part of thesefinancial statements.***

4

----

 

**BLYTH,INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)**

**(Unaudited)**
| **Three months ended October 31 (In thousands, except per share data)**        | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                                                                                        |       | $        | 297,911    |     | $          | 328,458 |   |
| Cost of goods  sold                                                                                                              |       | 160,563  |       | 174,838  |       |
| Gross profit                                                                                                                     |       | 137,348  |       | 153,620  |       |
| Selling                                                                                                                          |       | 99,579   |       | 102,455  |       |
| Administrative                                                                                                                   |       | 33,084   |       | 31,879   |       |
|                                                                                                                             |       | 132,663  |       | 134,334  |       |
| Operating profit                                                                                                                 |       | 4,685    |       | 19,286   |       |
| Other expense  (income):                                                                                                         |       |     |       |     |       |
| Interest expense                                                                                                                 |       | 4,587    |       | 5,030    |       |
| Interest income                                                                                                                  |       | (1,819   | )          | (706     | )          |
| Foreign exchange and other                                                                                                       |       | (22      | )          | 85       |       |
|                                                                                                                             |       | 2,746    |       | 4,409    |       |
| Earnings from continuing operations before income  taxes and minority interest                                                   |       | 1,939    |       | 14,877   |       |
| Income tax  expense (benefit)                                                                                                    |       | (33      | )          | 1,066    |       |
| Earnings from continuing operations before minority  interest                                                                    |       | 1,972    |       | 13,811   |       |
| Minority  interest                                                                                                               |       | 40       |       | 54       |       |
| Earnings from continuing operations                                                                                              |       | 1,932    |       | 13,757   |       |
| Earnings (loss) from discontinued operations, net of  income tax expense (benefit) of ($237) in 2006 and $4,222 in 2005 (note 3) |       | (2,153   | )          | 9,284    |       |
| Net earnings  (loss)                                                                                                             |       | $        | (221       | )        | $          | 23,041 |   |
| Basic:                                                                                                                           |       |     |       |     |       |
| Earnings from  continuing operations per common share                                                                            |       | $        | 0.05       |     | $          | 0.33 |   |
| Earnings (loss)  from discontinued operations per common share                                                                   |       | (0.05    | )          | 0.23     |       |
| Net earnings  (loss) per common share                                                                                            |       | $        | —     |     | $          | 0.56 |   |
| Weighted average  number of shares outstanding                                                                                   |       | 39,211   |       | 40,978   |       |
| Diluted:                                                                                                                         |       |     |       |     |       |
| Earnings from  continuing operations per common share                                                                            |       | $        | 0.05       |     | $          | 0.33 |   |
| Earnings (loss)  from discontinued operations per common share                                                                   |       | (0.05    | )          | 0.23     |       |
| Net earnings  (loss) per common share                                                                                            |       | —   |       | $        | 0.56       |   |
| Weighted average number  of shares outstanding                                                                                   |       | 39,531   |       | 41,141   |       |

 

***Theaccompanying notes are an integral part of these financial statements.***

5

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**BLYTH, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Unaudited)**

 
| **(In thousands, except share data)**             | ** ** | **Common  Stock** | ** ** | **Additional  Contributed  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock** | ** ** | **Unearned  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| **For the  nine months ended October 31, 2005:**                      | ** ** | ** **        | ** ** | ** **                           | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Balance, February  1, 2005                                            |       | $                 | 1,007      |                                 | $          | 118,148                |       | $                   | 651,156    |                       | $          | (285,064                                                  | )          | $          | —     |   | $ | 36,102 |   | $ | 521,349 |   |
| Net earnings for  the period                                          |       |              |       |                                 |       | 37,156                 |       |                |       |                       |       |                                                      |       | 37,156     |       |
| Foreign currency  translation adjustments                             |       |              |       |                                 |       |                   |       |                |       |                       |       | (31,702                                                   | )          | (31,702    | )          |
| Unrealized  holding gains on certain investments (net of tax of $40)  |       |              |       |                                 |       |                   |       |                |       |                       |       | 123                                                       |       | 123        |       |
| Net gain on  hedging instruments (net of tax of $1,218)               |       |              |       |                                 |       |                   |       |                |       |                       |       | 3,655                                                     |       | 3,655      |       |
| Comprehensive  loss                                                   |       |              |       |                                 |       |                   |       |                |       |                       |       |                                                      |       | 9,232      |       |
| Common stock  issued in connection with long-term incentive plan      |       | 3                 |       | 3,511                                |       |                   |       |                |       |                       |       |                                                      |       | 3,514      |       |
| Tax benefit from  stock options                                       |       |              |       | 316                                  |       |                   |       |                |       |                       |       |                                                      |       | 316        |       |
| Issuance of  restricted stock, net of cancellations                   |       |              |       | 5,550                                |       |                   |       | (604                | )          | (4,946                     | )          |                                                      |       | —     |       |
| Amortization of  unearned compensation                                |       |              |       |                                 |       |                   |       |                |       | 1,541                      |       |                                                      |       | 1,541      |       |
| Dividends                                                             |       |              |       |                                 |       | (18,027                | )          |                |       |                       |       |                                                      |       | (18,027    | )          |
| Treasury stock  purchases                                             |       |              |       |                                 |       |                   |       | (2,071              | )          |                       |       |                                                      |       | (2,071     | )          |
| Balance, October  31, 2005                                            |       | $                 | 1,010      |                                 | $          | 127,525                |       | $                   | 670,285    |                       | $          | (287,739                                                  | )          | $          | (3,405     | ) | $ | 8,178 |   | $ | 515,854 |   |
| **For the  nine months ended October 31, 2006:**                      | ** ** | ** **        | ** ** | ** **                           | ** ** | ** **             | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **                                                | ** ** | ** ** | ** ** |
| Balance, February  1, 2006                                            |       | $                 | 1,010      |                                 | $          | 127,580                |       | $                   | 657,983    |                       | $          | (287,744                                                  | )          | $          | (3,070     | ) | $ | (1,935 | ) | $ | 493,824 |   |
| Net loss for the  period                                              |       |              |       |                                 |       | (120,197               | )          |                |       |                       |       |                                                      |       | (120,197   | )          |
| Foreign currency  translation adjustments                             |       |              |       |                                 |       |                   |       |                |       |                       |       | 18,922                                                    |       | 18,922     |       |
| Unrealized  holding gains on certain investments (net of tax of $115) |       |              |       |                                 |       |                   |       |                |       |                       |       | 187                                                       |       | 187        |       |
| Net gain on  hedging instruments (net of tax of $23)                  |       |              |       |                                 |       |                   |       |                |       |                       |       | 43                                                        |       | 43         |       |
| Comprehensive  loss                                                   |       |              |       |                                 |       |                   |       |                |       |                       |       |                                                      |       | (101,045   | )          |
| Reclassification  of unearned compensation                            |       |              |       | (3,070                               | )          |                   |       |                |       | 3,070                      |       |                                                      |       | —     |       |
| Common stock  issued in connection with long-term incentive plan      |       | 3                 |       | 2,145                                |       |                   |       |                |       |                       |       |                                                      |       | 2,148      |       |
| Tax benefit from  stock options                                       |       |              |       | 109                                  |       |                   |       |                |       |                       |       |                                                      |       | 109        |       |
| Restricted stock  cancellations                                       |       |              |       | 963                                  |       |                   |       | (963                | )          |                       |       |                                                      |       | —     |       |
| Amortization of  unearned compensation                                |       |              |       | 677                                  |       |                   |       |                |       |                       |       |                                                      |       | 677        |       |
| Dividends                                                             |       |              |       |                                 |       | (19,881                | )          |                |       |                       |       |                                                      |       | (19,881    | )          |
| Treasury stock  purchases                                             |       |              |       |                                 |       |                   |       | (34,988             | )          |                       |       |                                                      |       | (34,988    | )          |
| Balance, October 31,  2006                                            |       | $                 | 1,013      |                                 | $          | 128,404                |       | $                   | 517,905    |                       | $          | (323,695                                                  | )          | $          | —     |   | $ | 17,217 |   | $ | 340,844 |   |

 

***Theaccompanying notes are an integral part of these financial statements.***

6

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**BLYTH, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

 
| **Nine months ended October 31 (In thousands)**                          | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Cash flows from  operating activities:                                                                 |       |       |       |     |       |
| Net earnings (loss)                                                                                    |       | $          | (120,197   | )        | $          | 37,156 |   |
| Adjustments to reconcile net earnings (loss) to net  cash used in operating activities:                |       |       |       |     |       |
| Loss on sale of discontinued operations, net of tax                                                    |       | 89,109     |       | —   |       |
| Depreciation and amortization                                                                          |       | 25,034     |       | 27,170   |       |
| Loss (gain) on disposition of fixed assets                                                             |       | 1,093      |       | (18      | )          |
| Tax benefit from stock options                                                                         |       | 109        |       | 316      |       |
| Amortization of unearned compensation on restricted  stock                                             |       | 677        |       | —   |       |
| Deferred income taxes                                                                                  |       | (9,984     | )          | 840      |       |
| Equity in (gain) loss of investee                                                                      |       | (75        | )          | 164      |       |
| Minority interest                                                                                      |       | (222       | )          | (730     | )          |
| Goodwill impairment                                                                                    |       | 36,769     |       | —   |       |
| Loss on sale of assets held for sale                                                                   |       | 79         |       | 1,159    |       |
| Changes in operating assets and liabilities, net of effect  of business acquisitions and divestitures: |       |       |       |     |       |
| Accounts receivable                                                                                    |       | (10,814    | )          | (80,049  | )          |
| Inventories                                                                                            |       | (6,697     | )          | (56,004  | )          |
| Prepaid and other                                                                                      |       | (15,097    | )          | (9,503   | )          |
| Deposits and other assets                                                                              |       | 958        |       | 1,161    |       |
| Accounts payable                                                                                       |       | (14,879    | )          | (11,411  | )          |
| Accrued expenses                                                                                       |       | 6,432      |       | 4,418    |       |
| Other liabilities                                                                                      |       | (1,870     | )          | 2,213    |       |
| Income taxes                                                                                           |       | (11,815    | )          | (5,259   | )          |
| Net cash used in operating activities                                                                  |       | (31,390    | )          | (88,377  | )          |
| Cash flows from  investing activities:                                                                 |       |       |       |     |       |
| Purchases of property, plant and equipment                                                             |       | (12,409    | )          | (10,820  | )          |
| Purchases of short-term investments                                                                    |       | (1,074,586 | )          | —   |       |
| Proceeds from sales of short-term investments                                                          |       | 979,586    |       | —   |       |
| Proceeds from sale of property, plant and equipment                                                    |       | 5,515      |       | —   |       |
| Proceeds from sale of businesses, net of cash  disposed                                                |       | 86,841     |       | —   |       |
| Purchases of businesses, net of cash acquired                                                          |       | (6,654     | )          | (7,121   | )          |
| Net cash used in investing activities                                                                  |       | (21,707    | )          | (17,941  | )          |
| Cash flows from  financing activities:                                                                 |       |       |       |     |       |
| Proceeds from issuance of common stock                                                                 |       | 2,148      |       | 3,514    |       |
| Purchases of treasury stock                                                                            |       | (34,988    | )          | (2,071   | )          |
| Borrowings from bank lines of credit                                                                   |       | 33,889     |       | 115,008  |       |
| Repayments on bank lines of credit                                                                     |       | (32,318    | )          | (43,450  | )          |
| Repayments of long-term debt                                                                           |       | (75,117    | )          | (4,613   | )          |
| Payments on capital lease obligations                                                                  |       | (190       | )          | —   |       |
| Dividends paid                                                                                         |       | (9,303     | )          | (8,602   | )          |
| Net cash provided by (used in) financing activities                                                    |       | (115,879   | )          | 59,786   |       |
| Effect of  exchange rate changes on cash                                                               |       | 8,050      |       | (343     | )          |
| Net decrease in cash and cash equivalents                                                              |       | (160,926   | )          | (46,875  | )          |
| Less: cash and cash  equivalents of discontinued operations at end of period                           |       | 527        |       | —   |       |
| Cash and cash  equivalents at beginning of period                                                      |       | 242,068    |       | 91,695   |       |
| Cash and cash  equivalents at end of period                                                            |       | $          | 80,615     |     | $          | 44,820 |   |
|                                                                                                   |       |       |       |     |       |
| Supplemental  disclosure of cash flow information:                                                     |       |       |       |     |       |
| Non-cash  transactions:                                                                                |       |       |       |     |       |
| Capital lease  for equipment                                                                           |       | $          | 1,246      |     | $          | — |   |
|                                                                                                   |       |       |       |     |       |

 

***Theaccompanying notes are an integral part of these financial statements.***

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**BLYTH, INC. ANDSUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.**             Basis of Presentation

The condensedconsolidated financial statements include the accounts of the Company and itsdirect and indirect subsidiaries.  Allsignificant intercompany accounts and transactions have been eliminated.  Investments in companies that are notmajority owned or controlled are reported using the equity method and arerecorded in investments.  Certain of theCompany’s subsidiaries operate on a 52- or 53-week fiscal year ending on theSaturday closest to January 31.  Europeanoperations maintain a calendar year accounting period, which is consolidatedwith the Company’s fiscal period.  In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments necessary for fair presentation ofthe Company’s consolidated financial position at October 31, 2006 and theconsolidated results of its operations for the three and nine month periodsended October 31, 2006 and 2005 and cash flows for the nine month periods endedOctober 31, 2006 and 2005.  These interimstatements should be read in conjunction with the Company’s consolidatedfinancial statements for the fiscal year ended January 31, 2006, as set forthin the Company’s Annual Report on Form 10-K. Operating results for the nine months ended October 31, 2006 are notnecessarily indicative of the results that may be expected for the fiscal yearending January 31, 2007.

**Stock Based Compensation**

**Summary of Plans**

AtOctober 31, 2006, the Company had one stock-based compensation plan, the 2003Long-Term Incentive Plan (“2003 Plan”), available to grant future awards, asdescribed below, and two terminated or expired stock-based compensation plans(the Amended and Restated 1994 Employee Stock Option Plan and the Amended andRestated 1994 Stock Option Plan for Non-Employee Directors), under which vestedand unexercised options remain outstanding. There were 6,500,100 shares authorized for grant under these plans andat October 31, 2006, there were approximately 3,400,000 shares available forgrant under these plans.

The Board of Directors and the stockholders of the Companyhave approved the adoption and subsequent amendments of the 2003 Plan.  The 2003 Plan provides for grants of incentive andnonqualified stock options, stock appreciation rights, restricted stock,restricted stock units, performance shares, performance units, dividendequivalents and other stock unit awards to officers, employees and non-employeedirectors.  The 2003 Plan also providesfor grants of nonqualified stock options to directors of the Company who arenot, and who have not been during the immediately preceding 12-month period,officers or employees of the Company or any of its subsidiaries.

Restricted stock andrestricted stock units (“RSUs”) are granted to certain employees to incentperformance and retention.  RSUs issuedunder the plans provide that shares awarded may not be sold or otherwisetransferred until restrictions have lapsed. The release of RSUs on each of the vesting dates is contingent uponcontinued active employment by the employee until the vesting dates.

On December 9, 2005, theBoard of Directors of the Company approved the acceleration of the vesting ofall unvested stock options.  Stock optionawards granted from December 10, 2000 through the date of acceleration with respect to approximately 350,000 sharesof the Company’s common stock, which represented 100% of the unvested options,were subject to this acceleration, which was effective as of December 9,2005.  Virtually all of these options hadexercise prices in excess of the current market values and were not fullyachieving their original objectives of incentive compensation and employeeretention.

Thetotal compensation expense related to all stock-based compensation plans forthe three and nine months ended October 31, 2006 was approximately $0.2 millionand $0.9 million, respectively.  Thetotal compensation expense related to all stock-based compensation plans forthe three and nine months ended October 31, 2005 was approximately $0.3 millionand $0.8 million, respectively.  The taxbenefit recognized for the three and nine months ended October 31, 2006 wasapproximately $0.1 million and $0.3 million, respectively.

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The tax benefit recognizedfor the three and nine months ended October 31, 2005 was approximately $0.2million and $0.3 million, respectively. Total stock-based compensation benefit included in discontinued operationsfor the nine months ended October 31, 2006 was approximately $0.2 million.  Total stock-based compensation expenseincluded in discontinued operations for the three and nine months ended October31, 2005 was approximately $40 thousand and $0.1 million, respectively. Nocompensation cost was capitalized as part of inventory.

**Transactions involving stock options are summarizedas follows:**
|                                  | ** ** | ** ** | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|----------------------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Remaining**             | ** ** | **Aggregate**            | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Exercise Price**   | ** ** | **Contractual Life** | ** ** | **Intrinsic Value** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **                | ** ** | ** **                | ** ** | **(In thousands)**  | ** ** |
| Outstanding at  January 31, 2006 |       | 1,236,400  |       | $                         | 26.12      |                      | 5.16       |                     |       |   |
| Options granted                  |       | 17,500     |       | 20.63                     |       | 4.54                      |       |                     |       |
| Options exercised                |       | (94,800    | )          | 22.51                     |       | —                    |       |                     |       |
| Options forfeited                |       | (103,600   | )          | 26.37                     |       | —                    |       |                     |       |
| Options expired                  |       | (16,500    | )          | 24.83                     |       | —                    |       |                     |       |
| Outstanding at  October 31, 2006 |       | 1,039,000  |       | $                         | 26.35      |                      | 4.70       |                     | $          | 235 |   |
| Exercisable at October  31, 2006 |       | 1,021,500  |       | $                         | 26.45      |                      | 4.70       |                     | $          | 177 |   |

 

The aggregate intrinsicvalue in the table above represents the total pretax intrinsic value (thedifference between the Company’s closing stock price on the last trading day ofthe nine months ended October 31, 2006 and the exercise price, multiplied bythe number of in-the-money options) that would have been received by the optionholders had all option holders exercised their options on October 31,2006.  This amount will change in futureperiods based on the fair market value of the Company’s stock and the number ofshares outstanding.  Total intrinsicvalue of options exercised for the three and nine months ended October 31, 2006was $0.3 million.  Compensation expensein both the three and nine month periods ended October 31, 2006 related tostock options was approximately $10 thousand. As of October 31, 2006, $0.1 million of total unrecognized compensation costrelated to stock options is expected to be recognized over a weighted averageperiod of 3 years.   All outstandingstock options at October 31, 2006 are expected to vest.

**Transactions involving restricted stock and RSUs aresummarized as follows:**

|                                                          | ** ** | ** ** | ** ** | **Weighted Average**           | ** ** | **Aggregate**            | ** ** |
|----------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **Shares** | ** ** | **Grant-date Fair Value** | ** ** | **Intrinsic Value** | ** ** |
| ** **                                               | ** ** | ** ** | ** ** | ** **                          | ** ** | **(In thousands)**  | ** ** |
| Nonvested  restricted stock and RSUs at January 31, 2006 |       | 146,970    |       | $                                   | 31.85      |                     |       |   |
| Granted                                                  |       | 257,605    |       | 21.82                               |       |                     |       |
| Vested                                                   |       | (12,500    | )          | 31.19                               |       |                     |       |
| Forfeited                                                |       | (47,750    | )          | 29.02                               |       |                     |       |
| Nonvested  restricted stock and RSUs at October 31, 2006 |       | 344,325    |       | $                                   | 24.63      |                     |       |   |
| Total restricted stock  and RSUs at October 31, 2006     |       | 362,825    |       | $                                   | 25.02      |                     | $          | 8,679 |   |
|                                                          |            |            |            |                                     |            |                          |            |  |  |

 

**The total intrinsic value ofrestricted stock and RSUs vested during the nine months ended October 31, 2006was $0.2 million.  Compensation expenserelated to restricted stock and RSUs for the three and nine months endedOctober 31, 2006 was approximately $0.2 million and $0.9 million,respectively.  Compensation expenserelated to RSUs for the three and nine months ended October 31, 2005 wasapproximately $0.3 million and**

9

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**$0.8 million, respectively.Restricted stock and RSUs benefit included in discontinued operations for thenine months ended October 31, 2006 was approximately $0.2 million.  Restricted stock and RSUs expense included indiscontinued operations for the three and nine months ended October 31, 2005was approximately $40 thousand and $0.1 million, respectively.**

Also, as a result of theadoption of the Statement of Financial Accounting Standards No. 123 (revised2004), “Share-Based Payment,” (“SFAS 123(R)”), $3.1 million of unearnedcompensation recorded in stockholders’ equity as of February 1, 2006 wasreclassified to and reduced the balance of additional contributed capital.  As of October 31, 2006, there was $6.6million of unearned compensation expense related to non-vested restricted stockand RSU awards.  The total unrecognizedstock-based compensation cost to be recognized in future periods as of October31, 2006 does not consider the effect of stock-based awards that may be issuedin subsequent periods.  This cost isexpected to be recognized over a weighted average period of 2.8 years.  All outstanding shares of restricted stockand RSUs at October 31, 2006 are expected to vest.

**Impactof Adoption of 123(R)**

On February 1, 2006, theCompany adopted SFAS 123(R) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors, including employee stock options, restricted stock and RSUs based onestimated fair values.  SFAS 123(R)supersedes the Company’s previous disclosure only provisions of SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”), andAccounting Principles Board (APB) opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) and related interpretations in accounting for stockoptions granted to its employees and directors under the intrinsic value methodemployed by the Company for periods prior to fiscal 2007.  In March 2005, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating toSFAS 123(R).  The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requirescompanies to estimate the fair value of stock-based payment awards on the dateof grant using an option-pricing model, where applicable.  The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite serviceperiod in the Company’s Condensed Consolidated Statement of Earnings (Loss).  Prior to the adoption of SFAS 123(R), theCompany accounted for stock-based awards to employees and directors using the intrinsicvalue method in accordance with APB 25 as allowed under Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”).  Under the intrinsic value method,no stock-based compensation expense had been recognized in the Company’sCondensed Consolidated Statements of Earnings (Loss), because the exerciseprice of the Company’s stock options granted to employees and directors equaledthe fair value of the underlying stock at the date of grant.

Stock-based compensationexpense recognized during the period is based on the value of the portion ofstock-based payment awards that is ultimately expected to vest during theperiod.  Stock-based compensation expenserecognized in the Company’s Condensed Consolidated Statements of Earnings(Loss) for the three and nine months ended October 31, 2006 includescompensation expense for restricted stock, RSUs and stock-based awards grantedsubsequent to January 31, 2006 based on the grant date fair value estimated inaccordance with the provisions of SFAS 123(R). The Company recognizes thesecompensation costs net of a forfeiture rate for only those awards expected tovest, on a straight-line basis over the requisite service period of the award,which is the vesting term of 3 years for stock options; cliff vesting of 50%over 4 years and 50% over 5 years or 3 year vesting for employee restrictedstock and RSUs; and cliff vesting of 50% over 1 year and 50% over 2 years for

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non-employee restrictedstock and RSUs.  SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

**In the Company’s pro forma information required under SFAS123 for periods prior to fiscal 2007, the Company accounted for forfeitures ofstock options as they occurred.  Therewas no stock-based compensation expense recognized in the Company’s CondensedConsolidated Statements of Earnings (Loss) for the first nine months of fiscal2007 for stock options granted prior to February 1, 2006 because no portion ofthose stock-based payment awards was unvested. In accordance with the modified prospective transition method, theCompany’s Condensed Consolidated Financial Statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS 123(R).**

Upon adoption of SFAS123(R), the Company elected to continue to use the Black-Scholes option-pricingmodel (“Black-Scholes model”) to determine fair value for stock optiongrants.  The Company’s determination offair value of stock-based payment awards on the date of grant using anoption-pricing model is affected by the Company’s stock price as well asassumptions regarding a number of highly complex and subjective variables.  These variables include, but are not limitedto: the Company’s expected stock price volatility over the term of the awards,and actual and projected employee stock option exercise behaviors.

**Assumptionsused to estimate fair value**

The fair value of stockoptions is estimated on the date of grant using the Black-Scholes model.  The Company granted 17,500 stock optionsduring the nine months ended October 31, 2006. The Company granted no stock options during the nine months endedOctober 31, 2005.  The fair value ofthese stock options was determined using the following weighted averageassumptions.
|                           | ** ** | **Nine months ended October 31,** | ** ** |
|---------------------------|------------|-------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| Expected  volatility      |       | 2.9                                                   | %          | N/A |   |
| Risk free  interest rates |       | 4.94                                                  | %          | N/A |   |
| Expected lives            |       | 3.5                                                   |       | N/A |   |
| Expected dividend yield   |       | 2.23                                                  | %          | N/A |   |

 

The weighted average fairvalue of options granted for the nine months ended October 31, 2006 was $4.78.

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**Pro forma Impact of 123(R)**

Ifcompensation expense for the Company’s stock options had been determined in accordancewith the fair value method in SFAS 123 and SFAS 148, the Company’s reported netincome and earnings per share at October 31, 2005 would have been adjusted tothe pro forma amounts indicated below:
|                                                                                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(In thousands, except per share data)**                                          | ** ** | **October 31, 2005**   | ** ** | **October 31, 2005**  | ** ** |
| Net earnings:                                                                                               |       |                             |       |                            |       |
| As reported                                                                                                 |       | $                                | 23,041     |                            | $          | 37,156 |   |
| Stock-based employee compensation expense determined  under SFAS No. 123 for all awards, net of related tax |       | 293                              |       | 899                             |       |
| Pro forma                                                                                                   |       | $                                | 22,748     |                            | $          | 36,257 |   |
| Net earnings per  common share:                                                                             |       |                             |       |                            |       |
| As reported:                                                                                                |       |                             |       |                            |       |
| Basic                                                                                                       |       | $                                | 0.56       |                            | $          | 0.91 |   |
| Diluted                                                                                                     |       | 0.56                             |       | 0.90                            |       |
| Pro forma:                                                                                                  |       |                             |       |                            |       |
| Basic                                                                                                       |       | $                                | 0.56       |                            | $          | 0.89 |   |
| Diluted                                                                                                     |       | 0.55                             |       | 0.88                            |       |

 

**Other Information**

Authorized unissued shares may be used under thestock-based compensation plans.  TheCompany intends to issue shares of its common stock to meet the stockrequirements of its awards in the future.

**2.**             Business Acquisitions

On August 15, 2005, theCompany acquired a 100% interest in Boca Java, a small gourmet coffee and teacompany.  The results of operations ofBoca Java, which were not material, are included in the Condensed ConsolidatedStatements of Earnings (Loss) of the Company since August 16, 2005.  For segment reporting purposes, Boca Java isincluded in the Catalog & Internet segment.

**3.**             Discontinued Operations and Divestitures

***Discontinued Operations***

In March 2006, the Companyannounced its intention to evaluate additional strategic opportunitiesidentified since the September 2005 announcement of the proposed spin off ofthe entire Wholesale segment, and stated that the focus would likely be on oneor more of the European wholesale businesses.

On April 12, 2006, theCompany sold its European seasonal decorations business, Kaemingk B.V. (“Kaemingk”),in the Wholesale segment, to an entity controlled by the management ofKaemingk.  On June 16, 2006, the Companysold its European everyday home, garden and seasonal business, Edelman B.V. (“Edelman”),and its European gift and florist products business, Euro-Decor B.V. (“Euro-Decor”),both in the Wholesale segment, to an entity with which members of themanagement of Edelman and Euro-Decor are affiliated.  On August 17, 2006, the Company sold itsEuropean mass candle business, Gies, which was part of the Wholesalesegment.  Also, during the second quarterof fiscal 2007, the Company made the decision to hold another European businessfor

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sale, Colony, which is apremium candle business in the Wholesale segment.  Accordingly, these businesses have all beenreported as discontinued operations for all periods presented in the CondensedConsolidated Statements of Earnings (Loss).

The aggregate carryingvalue of the remaining discontinued business and the remaining unpaid disposalcosts of the businesses was a net liability of $3.6 million at October 31,2006.  The assets and liabilities relatedto these businesses have been classified separately in the CondensedConsolidated Balance Sheets at October 31, 2006 as discontinuedoperations.  Prior periods’ balancesheets have not been adjusted to reflect the effect of the discontinuedbusinesses.  The major classes of assetsand liabilities of discontinued operations included in the CondensedConsolidated Balance Sheets at October 31, 2006 are summarized as follows:
| (In thousands)                          | ** ** | **October 31, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| **Assets  of Discontinued Operations:**      | ** ** |                           | ** ** |
| Cash and cash equivalents                    |       | $                              | 527        |   |
| Accounts receivable                          |       | 2,470                          |       |
|                                         |       | $                              | 2,997      |   |
|                                         |       |                           |       |
| **Liabilities  of Discontinued Operations:** | ** ** |                           | ** ** |
| Accounts payable                             |       | $                              | 2,591      |   |
| Accrued expenses and other liabilities       |       | 4,028                          |       |
|                                         |       | $                              | 6,619      |   |

 

Included in the net income (loss) fromdiscontinued operations in the Condensed Consolidated Statements of Earnings(Loss) for the three and nine months ended October 31, 2006 and 2005 are thefollowing:
|                                                             | ** ** | **Three months ended October 31,** | ** ** | **Nine months ended October 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(In thousands)**                                     | ** ** | **2006**                                               | ** ** | **2005**                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                        |       |                                                   |       |                                                  |       |   |   |   |   |
| Net sales                                                   |       | $                                                      | 11,699     |                                                  | $          | 116,069 |   | $ | 98,294 |   | $ | 218,893 |   |
| Income (loss)  from discontinued operations, net of tax     |       | $                                                      | (5,941     | )                                                     | $          | 9,284 |   | $ | (20,395 | ) | $ | 2,128 |   |
| Gain (loss) on  sale of discontinued operations, net of tax |       | $                                                      | 3,788      |                                                  | $          | — |   | $ | (89,109 | ) | $ | — |   |

 

Included in the net income (loss)from discontinued operations were a net operating loss related to Kaemingk of$0.3 million for the nine months ended October 31, 2006, and net operatingincome of $7.0 million and $6.7 million, respectively, for the three and ninemonths ended October 31, 2005.  In thefirst quarter of fiscal 2007, the Company recorded a non-tax deductible loss onsale of discontinued operations of $18.4 million on the sale of Kaemingk.

Included in the net income (loss)from discontinued operations were a net operating loss related to Edelman andEuro-Decor of $2.2 million for the nine months ended October 31, 2006, and netoperating income of $4.0 million and $2.2 million, respectively, for the threeand nine months ended October 31, 2005. In the first quarter of fiscal 2007, the Company recorded a non-taxdeductible goodwill impairment charge of $16.7 million related to these

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businesses, which has beenincluded in the loss on sale of discontinued operations.  In the second quarter and third quarter offiscal 2007, the Company recorded a non-taxable gain on the sale of Edelman andEuro-Decor of $1.9 million and $0.2 million, respectively.

Included in the net income (loss)from discontinued operations were net operating losses related to Gies of $2.5million and $9.9 million, respectively, for the three and nine months endedOctober 31, 2006, and net operating losses of $0.8 million and $3.4 million,respectively, for the three and nine months ended October 31, 2005.  Also included in the loss on sale ofdiscontinued operations for the nine months ended October 31, 2006 was anon-tax deductible charge of $31.1 million for the impairment of the Giesbusiness.  This charge, which wasrecorded in the second quarter, reflected the amount by which the carryingvalue of the net assets exceeded the estimated fair value of the business.  In the third quarter of fiscal 2007, due tochanges in the net assets of the business and foreign currency, the Companyrecorded a non-taxable gain on the sale of Gies of $2.2 million.

Included in the net income(loss) from discontinued operations were net operating losses related to Colonyof $3.4 million and $8.0 million, respectively, for the three and nine monthsended October 31, 2006, and net operating losses of $0.8 million and $3.4million, respectively, for the three and nine months ended October 31, 2005.  Also included in the loss on sale ofdiscontinued operations for the nine months ended October 31, 2006 was anon-tax deductible charge of $27.2 million for the impairment of the Colonybusiness.  A charge of $28.6 million, wasrecorded in the second quarter, which reflected the amount by which thecarrying value of the net assets exceeded the estimated fair value of thebusiness.  In the third quarter of fiscal2007, the Company recorded a non-taxable gain of $1.4 million for a reductionof the previously recorded impairment due to changes in the net assets andforeign currency.

***Divestitures***

During the fourth quarterof fiscal 2006, the Company divested its North American mass channel seasonaldecorations business, Impact Plastics, in the Wholesale segment through asale.  The operating results of ImpactPlastics were immaterial to the consolidated operating results of theCompany.  On January 20, 2006, theCompany sold the business for approximately $7.6 million in cash and apromissory note of $2.0 million.  Thesale resulted in a pre-tax loss of approximately $1.6 million.  In addition, $7.8 million of goodwillattributable to Impact Plastics, which was tax deductible, was disposed of aspart of this divestiture.

**4.****            ****Restructuring Charges**

During the third quarterof fiscal 2007, we began the restructuring of our North American mass channelhome fragrance business with the announcement that we will be closing ourTijuana, Mexico manufacturing facility. In addition, we plan to eliminate unprofitable customers and streamlinethe stock keeping unit (“SKU”) base of the mass business.

The initial steps of thisrestructuring project resulted in fiscal 2007 third quarter charges totaling$5.2 million.  Inventory write-downs andequipment impairments of $4.5 million and severance costs of approximately $0.3million were charged to cost of goods sold, while the remaining $0.4 millionrelated to severance was charged to general and administrative expenses.  These restructuring efforts are expected tocontinue into fiscal 2008, with additional charges related to severance andequipment impairment estimated to be approximately $13 million.  In addition, we will continue to evaluate ourSKU base and customer relationships.  Asa result of these evaluations there may be additional inventory write-downsrelated to the elimination of customers that are not as profitable as we desireand/or the further reduction of the SKU base of the mass business.

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**5.**             Short-TermInvestments

The Company accounts forits short-term investments in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities.”  The Company’s short-terminvestments consist of auction rate securities and variable rate demandobligations classified as available-for-sale securities.  Our short-term investments in thesesecurities are recorded at cost, which approximates fair market value due totheir variable interest rates, which typically reset every 7 to 35 days.

Despite the long-termnature of their stated contractual maturities, the Company generally has theability to liquidate these securities in 35 days or less.  Management’s intent is to hold thesesecurities as liquid assets convertible to cash for applicable operationalneeds as they may arise.

**At October 31, 2006 and January 31, 2006, theCompany held $95.0 million and $0.0 million, respectively, of short-terminvestments, which consist of auction rate securities and variable rate demandobligations classified as available-for-sale securities.**

**Short-term investments by contractual maturity areas follows (in thousands):**
|                                 | ** ** | **October 31, 2006** | ** ** | **January 31, 2006** | ** ** |
|---------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Due within one  year            |       | $                              | 34,500     |                           | $          | — |   |
| Due between one  and five years |       | —                         |       | —                         |       |
| Due after ten  years            |       | 60,500                         |       | —                         |       |
| **Total**                       |       | $                              | 95,000     |                           | $          | — |   |

 

There were no cumulativegross unrealized holding gains (losses) or gross realized gains (losses) fromour short-term investments. All income generated from these short-terminvestments was recorded as interest income. Actual maturities may differ fromcontractual maturities should the borrower have the right to call certainobligations.

**6.**             Inventories

The components ofinventory are as follows (in thousands):
|                 | ** ** | **October 31, 2006** | ** ** | **January 31, 2006** | ** ** |
|-----------------|------------|--------------------------------|------------|--------------------------------|------------|
| Raw materials   |       | $                              | 23,532     |                           | $          | 31,954 |   |
| Work in process |       | 498                            |       | 361                            |       |
| Finished goods  |       | 156,817                        |       | 205,438                        |       |
| Total           |       | $                              | 180,847    |                           | $          | 237,753 |   |

 

**7.****             Goodwill and OtherIntangibles**

Goodwill and otherindefinite lived intangibles are subject to an annual assessment forimpairment, which the Company performs in the fourth fiscal quarter, or morefrequently if events or circumstances indicate the goodwill or other indefinitelived intangibles might be impaired.

During the second quarter offiscal 2007, the Company identified triggering events in two reporting unitswithin the Wholesale segment.  In thefirst reporting unit, the Company’s decision to discontinue sales of a newproduct line coupled with sharply rising commodity costs led the Company toperform an impairment analysis of goodwill in the reporting unit.  In the second reporting unit, new managementwith a significantly changed near-term outlook for the businesses that giveseffect to the changing business environment led the Company to perform animpairment analysis of the goodwill in this reporting unit.   As a result of these analyses, the goodwillin both

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reporting units was determined to be impaired, asthe fair value of the reporting units was less than the carrying values of thereporting units including goodwill.  Thedecrease in the fair value of the reporting units was due to a significantdecrease in the projected results for the full fiscal year and future years asa result of the factors previously discussed. The estimated fair value of the reporting units was determined utilizinga combination of valuation techniques, namely the discounted cash flowmethodology and the market multiple methodology.  As a result, the Company recorded a non-cashpre-tax goodwill impairment charge of $36.8 million in the Wholesale segment.

**As discussedin note 3, the Company sold its European seasonal and everyday decorationsbusinesses, Kaemingk, Edelman and Euro-Decor, in the first half of fiscal 2007,which resulted in a reduction in goodwill attributable to these businessestotaling $66.5 million.**

**The following table shows changesin the carrying amount of goodwill for the nine months ended October 31, 2006,by operating segment (in thousands):**
|                                               | ** ** | ** **              | ** ** | **Catalog &** | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|---------------|------------|------------|------------|
| ** **                                    | ** ** | **Direct Selling** | ** ** | **Internet**           | ** ** | **Wholesale** | ** ** | **Total**  | ** ** |
| Goodwill at  January 31, 2006                 |       | $                       | 2,298      |                   | $          | 76,308        |       | $          | 106,521    |   | $ | 185,127 |   |
| Euro-Decor  pension adjustment                |       |                    |       |                   |       | 212           |       | 212        |       |
| Kaemingk earn  out payment                    |       |                    |       |                   |       | 6,659         |       | 6,659      |       |
| Boca Java  adjustment                         |       |                    |       | 76                     |       |          |       | 76         |       |
| Goodwill  disposed of related to the sale of: |       |                    |       |                   |       |          |       |       |       |
| Kaemingk                                      |       |                    |       |                   |       | (31,775       | )          | (31,775    | )          |
| Edelman and Euro-Decor                        |       |                    |       |                   |       | (34,736       | )          | (34,736    | )          |
| Impairment  charges                           |       |                    |       |                   |       | (36,769       | )          | (36,769    | )          |
| Foreign currency  translation adjustment      |       |                    |       |                   |       | 1,932         |       | 1,932      |       |
| Total  adjustments                            |       | —                  |       | 76                     |       | (94,477       | )          | (94,401    | )          |
| Goodwill at October 31,  2006                 |       | $                       | 2,298      |                   | $          | 76,384        |       | $          | 12,044     |   | $ | 90,726 |   |

 

Other intangible assets,all of which are included in the Catalog & Internet segment, consisted ofthe following (in thousands):
|                                              | ** ** | **October 31, 2006** | ** ** | **January 31, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **Gross**                      | ** ** | **Accumulated  Amortization**  | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  trade names and trademarks |       | $                              | 28,100     |                           | $          | — |   | $ | 28,100 |   | $ | 28,100 |   | $ | — |   | $ | 28,100 |   |
| Customer lists                               |       | 15,000                         |       | 7,300                          |       | 7,700 |   | 15,000 |   | 5,917 |   | 9,083 |   |
| Total                                        |       | $                              | 43,100     |                           | $          | 7,300 |   | $ | 35,800 |   | $ | 43,100 |   | $ | 5,917 |   | $ | 37,183 |   |

 

Amortization expense for other intangible assets was $1.4 million and$1.6 million for the nine months ended October 31, 2006 and 2005,respectively.  Estimated amortizationexpense for the next five fiscal years, beginning with fiscal 2008, is asfollows:  $1.5 million, $1.5 million,$1.2 million, $1.0 million and $0.7 million.

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**8.****             Earnings per Share**

The components of basicand diluted earnings per share are as follows (in thousands):
|                                                         | ** ** | **Three months**           | ** ** | **Nine months**            | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **ended October 31,** | ** ** | **ended October 31,** | ** ** |
| ** **                                              | ** ** | **2006**                        | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net earnings  (loss)                                    |       | $                               | (221       | )                               | $          | 23,041 |   | $ | (120,197 | ) | $ | 37,156 |   |
| Weighted average  number of common shares outstanding:  |       |                            |       |                            |       |   |   |   |   |
| Basic                                                   |       | 39,211                          |       | 40,978                          |       | 39,945 |   | 40,948 |   |
| Dilutive effect of stock options and restricted  shares |       | 320                             |       | 163                             |       | — |   | 242 |   |
| Weighted average  number of common shares outstanding:  |       |                            |       |                            |       |   |   |   |   |
| Diluted                                                 |       | 39,531                          |       | 41,141                          |       | 39,945 |   | 41,190 |   |
|                                                         |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 

For the three and ninemonths ended October 31, 2006, restricted stock, RSUs, and options to purchase1,016,500 and 1,401,825 shares of common stock, respectively, are not includedin the computation of earnings per share because the effect would beanti-dilutive.  Also, for the three andnine months ended October 31, 2005, options to purchase 993,200 and 440,633shares of common stock, respectively, are not included in the computation ofearnings per share because the effect would be anti-dilutive.

**9.****             Treasury and CommonStock**
| **Treasury Stock (In thousands, except  shares):** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| For the nine  months ended October 31, 2005:       |       |       |       |       |       |
| Balance at  February 1, 2005                       |       | 9,468,416  |       | $          | (285,064   | ) |
| Restricted stock  cancellations                    |       | —     |       | (604       | )          |
| Treasury stock  purchases                          |       | 65,000     |       | (2,071     | )          |
| Balance at  October 31, 2005                       |       | 9,533,416  |       | $          | (287,739   | ) |
|                                               |       |       |       |       |       |
| For the nine  months ended October 31, 2006:       |       |       |       |       |       |
| Balance at  February 1, 2006                       |       | 9,533,416  |       | $          | (287,744   | ) |
| Restricted stock  cancellations                    |       | —     |       | (963       | )          |
| Treasury stock  purchases                          |       | 1,802,382  |       | (34,988    | )          |
| Balance at October 31,  2006                       |       | 11,335,798 |       | $          | (323,695   | ) |

 

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| **Common Stock (In thousands, except shares):**                  | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| For the nine  months ended October 31, 2005:                     |       |       |       |       |       |
| Balance at  February 1, 2005                                     |       | 50,367,827 |       | $          | 1,007      |   |
| Common stock  issued in connection with long-term incentive plan |       | 155,733    |       | 3          |       |
| Issuance of  restricted stock, net of canellations               |       | 1,500      |       | —     |       |
| Balance at  October 31, 2005                                     |       | 50,525,060 |       | $          | 1,010      |   |
|                                                             |       |       |       |       |       |
| For the nine  months ended October 31, 2006:                     |       |       |       |       |       |
| Balance at  February 1, 2006                                     |       | 50,528,060 |       | $          | 1,010      |   |
| Common stock  issued in connection with long-term incentive plan |       | 94,800     |       | 3          |       |
| Balance at October 31,  2006                                     |       | 50,622,860 |       | $          | 1,013      |   |

 

**10.**                               Segment Information

Blyth is a designer andmarketer of home fragrance products and accessories, home décor, seasonaldecorations, household convenience items, personalized gifts and products forthe foodservice trade.  The Companycompetes in the global Home Expressions industry, and our products can be foundthroughout North America, Europe and Australia. The Company’s financial results are reported in three segments - theDirect Selling segment, the Catalog & Internet segment and the Wholesalesegment.  These reportable segments arebased on similarities in distribution channels, customers and management oversight.

Within the Direct Sellingsegment, the Company designs, manufactures or sources, markets and distributesan extensive line of products including scented candles, candle-relatedaccessories, fragranced bath gels and body lotions and other fragrancedproducts under the PartyLite® brand.  TheCompany also operates a small Direct Selling business, Two SistersGourmet.  All direct selling products aresold directly to the consumer through a network of independent salesconsultants using the party plan method of direct selling.  PartyLite® brand products are sold in NorthAmerica, Europe and Australia.  TwoSisters GourmetTM brand products are sold in North America.

Within the Catalog &Internet segment, the Company designs, sources and markets a broad range ofhousehold convenience items, premium photo albums, frames, holiday cards,personalized gifts, kitchen accessories and gourmet coffee and tea.  These products are sold directly to theconsumer under the Boca JavaTM, Easy ComfortsTM, Exposuresâ,Home Marketplace®, Miles Kimballâ and Walter Drakeâbrands.  These products are soldprimarily in North America.

Within the Wholesalesegment, the Company designs, manufactures or sources, markets and distributesan extensive line of home fragrance products, candle-related accessories,seasonal decorations such as ornaments, and home décor products such as pictureframes, lamps and textiles. Products in this segment are sold primarily inNorth America to retailers in the premium, specialty and mass channels underthe CBK®, Carolina®, Colonial Candle of Cape Cod®, Colonial at HOMEâ,Florasense® and Seasons of Cannon Falls® brands.  In addition, chafing fuel and tabletoplighting products and accessories for the Away From Home or foodservice tradeare sold through this segment under the Ambria®, FilterMate®, HandyFuelTM andSterno® brands.

Operating profit in allsegments represent net sales less operating expenses directly related to thebusiness segments and corporate expenses allocated to the businesssegments.  Other expense includesinterest expense,

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interest income andforeign exchange and other, which are not allocated to the businesssegments.  Identifiable assets for eachsegment consist of assets used directly in its operations and intangibleassets, if any, resulting from purchase business combinations.  Unallocated Corporate within the identifiableassets include corporate cash and cash equivalents, short-term investments,prepaid income tax, corporate fixed assets, deferred bond costs and otherlong-term investments, which are not allocated to the business segments.
|                                                                                           | ** ** | **Three months**           | ** ** | **Nine months**            | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **ended October 31,** | ** ** | **ended October 31,** | ** ** |
| **(In thousands)**                                                                   | ** ** | **2006**                        | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net  Sales**                                                                            | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct Selling                                                                            |       | $                               | 144,898    |                            | $          | 154,711 |   | $ | 453,886 |   | $ | 469,147 |   |
| Catalog & Internet                                                                    |       | 52,708                          |       | 51,661                          |       | 127,620 |   | 122,489 |   |
| Wholesale                                                                                 |       | 100,305                         |       | 122,086                         |       | 259,269 |   | 281,920 |   |
| **Total**                                                                                 |       | $                               | 297,911    |                            | $          | 328,458 |   | $ | 840,775 |   | $ | 873,556 |   |
| **Operating  profit (loss)**                                                              | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Direct Selling                                                                            |       | $                               | 4,177      |                            | $          | 12,173 |   | $ | 39,092 |   | $ | 61,077 |   |
| Catalog & Internet                                                                    |       | 2,469                           |       | 35                              |       | (3,595 | ) | (4,263 | ) |
| Wholesale                                                                                 |       | (1,961                          | )          | 7,078                           |       | (44,474 | ) | 1,001 |   |
|                                                                                      |       | 4,685                           |       | 19,286                          |       | (8,977 | ) | 57,815 |   |
| Other expense                                                                             |       | (2,746                          | )          | (4,409                          | )          | (8,610 | ) | (13,800 | ) |
| **Earnings (loss) from continuing  operations before income taxes and minority interest** | ** ** | $                               | 1,939      | ** **                      | $          | 14,877 | ** ** | $ | (17,587 | ) | $ | 44,015 | ** ** |

 
|                                   | ** ** | **October 31, 2006** | ** ** | **January 31, 2006** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **Identifiable  Assets**          | ** ** | ** **                     | ** ** | ** **                     | ** ** |
| Direct Selling                    |       | $                              | 238,133    |                           | $          | 230,097 |   |
| Catalog & Internet            |       | 170,733                        |       | 165,672                        |       |
| Wholesale                         |       | 246,472                        |       | 522,386                        |       |
| Unallocated Corporate             |       | 152,396                        |       | 198,365                        |       |
| Assets of discontinued operations |       | 2,997                          |       | —                         |       |
| **Total**                         |       | $                              | 810,731    |                           | $          | 1,116,520 |   |

 

**11.**                               Assets Held for Sale

**During the thirdquarter of fiscal 2005, the Colorado Springs facility, purchased as part of theWalter Drake acquisition, became available for sale.  During the third quarter of fiscal 2006, theCompany recorded an impairment of $1.2 million on the facility due to thedeterioration of local real estate market conditions.  The facility was sold on April 7, 2006 for$2.9 million, net of related transaction costs, and resulted in an additionalloss of approximately $0.1 million.  Thebuilding was classified as assets held for sale in the Condensed ConsolidatedBalance Sheets as of January 31, 2006.**

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**12.****                               BankLines of Credit**

OnOctober 2, 2006, the Company executed Amendment No. 1 (the “Amendment”) to itsunsecured revolving credit facility (“Credit Facility”) dated as of June 2,2005.  The Amendment (i) reduces theamount available for borrowing under the Credit Agreement from $150 million to$75 million, (ii) changes the initial termination date from June 2, 2010 toJune 1, 2009, (iii) increases the rates of interest applicable to loans underthe Credit Agreement and (iv) modifies some of the covenants.  The Company has the ability to increase theamount available for borrowing, under certain circumstances, by an additional$50 million.  The Credit Facility may beused for seasonal working capital needs and general corporate purposes,including strategic acquisitions. The Credit Facility contains, among otherprovisions, requirements for maintaining certain financial ratios andlimitations on certain payments.  As ofOctober 31, 2006, the Company was in compliance with such provisions.  Amounts outstanding under the amended CreditFacility bear interest, at the Company’s option, at JPMorgan Chase Bank’s primerate or Eurocurrency rate plus a spread ranging from 0.80% to 1.70% calculatedon the basis of the Company’s senior unsecured long-term debt rating.  As of October 31, 2006, approximately $25.3million (including letters of credit) was outstanding under the CreditFacility.

**13.**                               Debt

**On September 24, 1999, the Company issued $150.0 million of7.90% Senior Notes due October 1, 2009 at a discount of approximately $1.4million, which is being amortized over the life of the notes. In June 2006, theCompany repurchased $25.1 million of these notes at a 1% premium. Subsequent toOctober 31, 2006, the Company repurchased an additional $27.0 million of thesenotes.**

**14.**                               Contingencies

The Company hascontingent liabilities that have arisen in the ordinary course of its business,including pending litigation.  TheCompany believes the outcome of these matters will not have a material adverseeffect on its consolidated financial position, results of operations or cashflows.

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**Item 2.**          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**RESULTS OF OPERATIONS:**

**O**verview

Blyth is a designer andmarketer of home fragrance products and accessories, home décor, seasonaldecorations, household convenience items, personalized gifts and products forthe foodservice trade.  We compete in theglobal Home Expressions industry, and our products can be found throughoutNorth America, Europe and Australia.  Ourfinancial results are reported in three segments - the Direct Selling segment,the Catalog & Internet segment and the Wholesale segment.  These reportable segments are based onsimilarities in distribution channels, customers and management oversight.

Today, on an annualizednet sales basis considering the full year impact of recent acquisitions anddivestitures, Blyth is comprised of an approximately $700 million directselling business, an approximately $200 million catalog and internet businessand an approximately $330 million wholesale business.  Sales and earnings growth differ in eachsegment depending on geographic location, market penetration, our relativemarket share and product and marketing execution, among other business factors.  Over the long term, all three segments shouldexperience single-digit growth, most likely within the low to mid-single digitrange, again depending on the business factors previously noted.

Our current focus isdriving sales growth of our brands so we may leverage more fully ourinfrastructure.  New product developmentcontinues to be critical to all three segments of our business.  In the Direct Selling segment, monthly salesand productivity incentives are designed to attract, retain and increase theearnings opportunity of independent sales consultants. In fiscal 2006 wecompleted the acquisition of a small gourmet food company, Two Sisters Gourmet,which markets its products through the Direct Selling channel.  We entered the Catalog and Internet channelof direct-to-consumer distribution in 2003, giving us a presence in all of ourdesired channels.  Our most recentacquisition, Boca Java, a small gourmet coffee and tea company, was in theCatalog & Internet segment.   In theWholesale segment, we have numerous collaborative initiatives underway, whichwe believe will help drive sales and leverage the sales and marketing talentsacross this segment.  These initiativesinclude customer information sharing and leveraging our in-house sales forces,as well as ongoing global sourcing objectives and other organic strategicinitiatives into which we are investing resources.

**Recent Developments**

**In September 2005, we announced our proposed intention tospin off the Wholesale segment to our stockholders.  We requested and received from the InternalRevenue Service a ruling on the tax-free status for the transaction.  In March 2006, we announced our intention toevaluate additional strategic opportunities that have been identified since theannouncement of the spin off, which would likely focus on one or more of ourEuropean Wholesale businesses, believing that substantial upside opportunitiesexist in the North American Wholesale business despite challenging marketconditions impacting the Home Expressions industry.**

Inaccordance with this intention to explore strategic alternatives with respectto our European Wholesale business, (a) on April 12, 2006, we sold KaemingkB.V. (“Kaemingk”) to an entity controlled by the management of this business,(b) on June 16, 2006, we sold Edelman B.V. (“Edelman”) and Euro-Decor B. V. (“Euro-Decor”)to an entity with which members of the management of Edelman and Euro-Decor areaffiliated, and (c) on August 17, 2006, we sold the Gies Group. Accordingly,the results of operations for Kaemingk, Edelman, Euro-Decor and Gies have beenreclassified as discontinued operations for all periods presented.  The remaining European Wholesale business,Colony, is classified as held for sale as of October 31, 2006. Similarly, theresults of operations for Colony have been reclassified as discontinued operationsfor all periods presented.  The assetsand liabilities of the business to be sold have been classified as assets ofdiscontinued operations and liabilities of discontinued operations,respectively, in the Company’s Condensed Consolidated Balance Sheets.

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During the third quarterof fiscal 2007, we began the restructuring of our North American mass channelhome fragrance business with the announcement that we will be closing ourTijuana, Mexico manufacturing facility. In addition, we plan to eliminate unprofitable customers and streamlinethe SKU base of the mass business.

The initial steps of thisrestructuring project resulted in fiscal 2007 third quarter charges totaling$5.2 million.  Inventory write-downs andequipment impairments of $4.5 million and severance costs of approximately $0.3million were charged to cost of goods sold, while the remaining $0.4 millionrelated to severance was charged to general and administrative expenses.  These restructuring efforts are expected tocontinue into fiscal 2008, with additional charges related to severance andequipment impairment estimated to be approximately $13 million.  In addition, we will continue to evaluate ourSKU base and customer relationships.  Asa result of these evaluations there may be additional inventory write-downsrelated to the elimination of customers that are not as profitable as we desireand/or the further reduction of the SKU base of the mass business.

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**Net Sales**

Netsales in the nine months ended October 31, 2006 decreased $32.8 million, or3.8%, to $840.8 million from $873.6 million in the same period a yearearlier.   Net sales decreased $30.6million, or 9.3%, to $297.9 million in the third quarter of fiscal 2007 from$328.5 million in the third quarter of fiscal 2006.  The decrease is a result of the sale ofImpact Plastics, the shortfall in PartyLite’s U.S. sales and lower mass candlesales in our Wholesale business, partially offset by an increase in the Catalog& Internet segment sales as well as improvement in our seasonal, home décorand Sterno businesses.

NetSales - Direct Selling Segment

Net sales in the DirectSelling segment for the first nine months of fiscal 2007 decreased $15.2million, or 3.2%, to $453.9 million from $469.1 million a year earlier.  PartyLite’s U.S. sales decreased approximately12.0%. Management believes this sales decrease was driven by a decline in thenumber of sales consultants as a result of increased channel competition aswell as fewer shows per consultant.  Additionally,last year’s sales benefited from the reversal of a contingent reserve in the amount of $5.5million for a U.S. state settlement of an unclaimed property matter associatedwith gift cards sold since the inception of the gift card program in the DirectSelling business.  Excluding thepreviously mentioned reversal PartyLite’s U.S. sales decreased approximately 10.0%during the first nine months of fiscal 2007 as compared to prior year.  PartyLite Canada’s sales increased approximately 8.0%as a result of the increase in active and productive independent consultants,and PartyLite Europe’s sales increased approximately 9.0% also as a result ofan increase in the number of sales consultants in most of its geographicmarkets.

Net sales in the DirectSelling segment for the quarter ended October 31, 2006 decreased $9.8 million,or 6.3%, to $144.9 million, from $154.7 million in the quarter ended October31, 2005. PartyLite’s U.S. sales decreased approximately 12.0% compared to theprior year due to a decrease in the number of sales consultants, hostesses andparty guests.  PartyLite Canada salesdecreased approximately approximately 4.0% compared to the same quarter in theprior year due to a lower number of consultants.  In PartyLite’s European markets, salesincreased approximately 14.0% due to an increase in active independentconsultants in most markets.

Net Sales - Catalog &Internet Segment

Net sales in the Catalog & Internet segment for thefirst nine months of fiscal 2007 increased $5.1 million, or 4.2%, to $127.6million from $122.5 million in the same period earlier.  Net sales in the Catalog& Internet segment increased $1.0 million, or 1.9%, to $52.7 million in thequarter ended October 31, 2006, compared with $51.7 million in the same periodin fiscal 2006.  This increase is due to higher sales in most of our major catalogs andaccretive sales from Boca Java which was acquired in August 2005.

Net Sales - Wholesale Segment

Net sales in the Wholesalesegment decreased $22.6 million, or 8.0%, to $259.3 million in the nine monthsended October 31, 2006 from $281.9 million in the nine months ended October 31,2005. Net sales in the Wholesale segment in the quarter ended October 31, 2006decreased $21.8 million, or 17.9%, to $100.3 million from $122.1 million in thesame period a year earlier.  The declinefrom last year is primarily attributable to the divestiture of Impact Plasticsin January 2006 and the continued softness in the mass candle sales, partiallyoffset by increased sales in our premium home décor and Sterno businesses.

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**Gross Profit**

**Gross profit in the first nine months of fiscal 2007decreased $30.6 million, or 7.0%, to $406.7 million, from $437.3 million in thefirst nine months of fiscal 2006. Gross profit margin decreased from 50.1% forthe first nine months of fiscal 2006 to 48.4% for the first nine months offiscal 2007.  Gross profit decreased$16.3 million, or 10.6% from $153.6 million in the quarter ended October 31,2005 to $137.3 million in the quarter ended October 31, 2006.  Gross profit margin decreased from 46.8% forthe third quarter of fiscal 2006 to 46.1% in the third quarter of fiscal 2007.  Thedecrease from prior year is principally due to lower PartyLite U.S. sales,restructuring charges in our North American mass candle business and highercommodity costs.**

**SellingExpense**

**Selling expense decreased $1.4 million, or 0.5%, from$284.8 million in the first nine months of fiscal 2006, when selling expensewas 32.6% of net sales, to $283.4 million in the same period in fiscal 2007, or33.7% of net sales. **Sellingexpense decreased $2.9 million, or 2.8%, from $102.5 million in the thirdquarter of fiscal 2006, when selling expense was 31.2% of net sales, to $99.6million in the same period in fiscal 2007, or 33.4% of net sales.  The decrease in selling expense is a resultof lower sales and related selling expenses within PartyLite U.S. as well astight cost controls at several business units.

**AdministrativeExpense**

**Administrative expense increased $0.8 million, or0.8%, from $94.7 million in the first nine months of fiscal 2006 to $95.5million in the same period of fiscal 2007. As a percent of sales, administrative expense was 11.4% for fiscal 2007and 10.8% for fiscal 2006. Administrative expense increased $1.2 million, or 3.8%, from $31.9million in the third quarter of fiscal 2006 to $33.1 million in the same periodof fiscal 2007.  As a percent of sales,administrative expense was 11.1% for fiscal 2007 and 9.7% for fiscal 2006.  The increase relates to severance costs of$0.4 million in our North American Wholesale business associated with headcountreductions and other executive severance costs of $1.1 million in the currentfiscal quarter.**

**GoodwillImpairment**

Goodwill and otherindefinite lived intangibles are subject to an annual assessment forimpairment, which the Company performs in the fourth fiscal quarter, or morefrequently if events or circumstances indicate the goodwill or other indefinitelived intangibles might be impaired.

**During the second quarter of fiscal 2007, the Companyidentified triggering events in two reporting units within the Wholesalesegment.  In the first reporting unit,the Company’s decision to discontinue sales of a new product line coupled withsharply rising commodity costs led the Company to perform an impairmentanalysis of goodwill in the reporting unit. In the second reporting unit, new management with a significantlychanged near-term outlook for the businesses that gives effect to the changingbusiness environment led the Company to perform an impairment analysis of thegoodwill in this reporting unit.   As aresult of these analyses, the goodwill in both reporting units was determinedto be impaired, as the fair value of the reporting units was less than the carryingvalues of the reporting units including goodwill.  The decrease in the fair value of thereporting units is due to a significant decrease in the projected results forthe full fiscal year and future years as a result of the factors previouslydiscussed.  The estimated fair value ofthe reporting units was determined utilizing a combination of valuationtechniques, namely the discounted cash flow methodology and the market multiplemethodology.  As a result, the Companyrecorded a non-cash pre-tax goodwill impairment charge of $36.8 million in theWholesale segment.**

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**Operating Profit(Loss)**

Operatingprofit decreased $66.8 million from $57.8 million of profit in the first ninemonths of fiscal 2006 to a loss of $9.0 million in the same period of fiscal2007.  In addition to the goodwill impairmentcharge discussed above, operating profit was affected by reduced sales in ourPartyLite U.S. business, restructuring charges in our North American masscandle business, and higher commodity costs.

Operatingprofit decreased $14.6 million from $19.3 million of profit in the quarterended October 31, 2005 to $4.7 million in the same period of fiscal 2007.  This decline was primarily due to the impactof lower PartyLite U.S. sales, the loss on sales of excess and obsoleteinventory in the mass candle business, and higher commodity costs.

Operating Profit - Direct SellingSegment

Operating profit in the Direct Selling segment for thefirst nine months of fiscal 2007 decreased $22.0 million, or 36.0%, to $39.1million from $61.1 million in the same period a year earlier. This decrease wasdue to a decline in gross profit caused by reduced sales in the U.S. and higherwax and other commodity costs, as well as the previously mentioned reversal of thecontingent reserve of $5.5 million for the settlement of an unclaimed propertymatter in fiscal 2006.

Operatingprofit in the quarter ended October 31, 2006 in the Direct Selling segment****decreased $8.0 million, or 65.6%, to $4.2 million from$12.2 million in the same period a year earlier.  This decrease was primarilydriven by the sales decrease in PartyLite U.S., as well as increased commoditycosts.

Operating Profit (Loss) - Catalog& Internet Segment

Operatingloss in the Catalog & Internet segment was $3.6 million in the nine monthsended October 31, 2006 compared favorably to a loss of $4.3 million in the ninemonths ended October 31, 2005.  Operating profit in thequarter ended October 31, 2006 in the Catalog & Internet segment increased$2.4 million to $2.5 million from $0.1 million in the same period a yearearlier.  The improvement over the prioryear is primarily due to increased sales from our major catalogs and reducedpromotional spending, which more than offset the continued investment in BocaJava for the quarter.

Operating Profit (Loss) -Wholesale Segment

Operating profit in the Wholesale segment was $1.0 millionfor the nine months ended October 31, 2005 compared to a loss of $44.5 millionin the nine months ended October 31, 2006. As previously mentioned, a goodwill impairment charge of $36.8 millionwas recorded in the second quarter of fiscal 2007, as well as restructuringcharges of $5.2 million recorded in the third quarter.

Operating profit in theWholesale segment was $7.1 million for the quarter ended October 31, 2005compared to a loss of $2.0 million for the quarter ended October 31, 2006 primarily driven by the North American mass candle business, whichexperienced lower sales volume and higher commodity costs, in addition to therestructuring costs recorded in the mass candle business.

**Interest Expense and InterestIncome**

**Interestexpense increased approximately $0.3 million, or 2.1% from $14.3 million in thefirst nine months of fiscal 2006 to $14.6 million in the same period of fiscal2007, due to fluctuations in borrowings and interest rates.**

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**Interest expense decreased approximately $0.4 million, or8.0% from $5.0 million in the quarter ended October 31, 2005 to $4.6 million inthe quarter ended October 31, 2006, due to decreased line of credit borrowingspartially offset by an increase in interest rates.**

**Interest income increased approximately $4.0 million from$1.4 million in the first nine months of fiscal 2006 to $5.4 million in thesame period of fiscal 2007.  Interestincome increased approximately $1.1 million from $0.7 million in the thirdquarter of fiscal 2006 to $1.8 million in the same period of fiscal 2007.  The increase is due to higher cash balancesand an increase in interest rates.**

**IncomeTaxes**

**Income tax expense (benefit) decreased $16.5 million froman expense of $9.5 million in the first nine months of fiscal 2006 to a benefitof $7.0 million in the same period in the current fiscal year.  The tax benefit was a result of $10.6 millionof tax benefit related to $28.0 million of the goodwill impairment that was taxdeductible.  Taxes were favorablyimpacted by the decrease in U.S. earnings versus higher foreign sourcedearnings, which are taxed at a lower rate than U.S. earnings. The effective taxrate for the nine months ended October 31, 2006 was a benefit of 39.8% comparedto an expense of 21.6% in the prior year.**

Income tax expense(benefit) decreased $1.1 million from an expense of $1.1 million in the threemonths ended October 31, 2005to a benefit of approximately $30 thousand in the three months endedOctober 31, 2006.  Taxes were favorablyimpacted by the decrease in U.S. earnings versus higher foreign sourcedearnings, which are taxed at a lower rate than U.S. earnings.****The effective tax rate for the three months ended October31, 2006 was a benefit of 1.7% compared to an expense of 7.2% in the prior year*.*

**Earnings(Loss) from Continuing Operations**

**Loss from continuing operations for nine months endedOctober 31, 2006 was $10.7 million, or $0.27 per diluted share, compared toearnings of $35.0 million, or $0.85 per diluted share, for the nine monthsended October 31, 2005.  Included in thecurrent year loss from continuing operations is an after-tax restructuringcharge of $3.2 million or $0.08 per diluted share.**

**Earnings from continuing operations for three months endedOctober 31, 2006 was $1.9 million, or $0.05 per diluted share, compared toearnings of $13.8 million, or $0.33 per diluted share, for the three monthsended October 31, 2005.  Included in thecurrent year loss from continuing operations is an after-tax restructuringcharge of $3.2 million or $0.08 per diluted share.**

**DiscontinuedOperations**

The loss fromdiscontinued operations, net of tax, for the nine months ended October 31,2006 was $109.5 million.  The lossincludes a non-tax deductible loss of $18.4 million on the sale of the Kaemingkbusiness in the first quarter of fiscal 2007, a non-tax deductible net loss onthe sale of the Edelman and Euro-Decor businesses of $14.5 million, whichincludes a goodwill impairment charge of $16.7 million recorded in the firstquarter, and a non-tax deductible loss on the sale of the Gies business of$28.9 million, which includes an impairment charge of $31.1 million recorded inthe second quarter of fiscal 2007.  Theloss from discontinued operations also includes a non-tax deductible impairmentcharge of $27.2 million for the Colony business which is classified as held forsale.  Also, the loss includes operatinglosses for the businesses of $20.4 million for the nine months ended October31, 2006.  Income from discontinuedoperations, net of tax, for the nine months ended October 31, 2005 was$2.1 million.

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**Loss from discontinued operations, net of tax, for thethree months ended October 31, 2006 was $2.2 million.  Included in income (loss) from discontinuedoperations were non-taxable gains of $2.3 million for the sales of the Gies,Edelman and Euro-Decor**businesses and a non-taxable gain of $1.4 million to adjust thecarrying value of the Colony net assets to the estimated fair value of thebusiness offset by operating losses of $5.9 million in the quarter endedOctober 31, 2006.  Income fromdiscontinued operations, net of tax, for the three months endedOctober 31, 2005 was $9.3 million.

**Liquidityand Capital Resources**

Net cash used inoperations decreased to approximately $31.4 million in the first nine months offiscal 2007 from $88.4 million in the same period of fiscal 2006.  This improvement in cash from operations infiscal 2007 is primarily due to the impact of divestitures which had a seasonalworking capital requirement.

Capital expenditures forproperty, plant and equipment were $12.4 million in the nine months endedOctober 31, 2006 compared to $10.8 million in the prior year period.  The decrease from historical levels is due tothe Company continuing to reduce spending on manufacturing facilities, whilemoving to more of an outsourced product supply model and divestitures.  The Company anticipates total capitalspending of approximately $20.0 million for fiscal 2007, primarily for theexpansion of the Direct Selling European distribution center in support ofongoing growth, information technology and research and development-relatedequipment and upgrades to machinery and equipment in existing manufacturing anddistribution facilities.

OnOctober 2, 2006, the Company executed Amendment No. 1 (the “Amendment”) to itsunsecured revolving credit facility (“Credit Facility”) dated as of June 2,2005.  The Amendment (i) reduces theamount available for borrowing under the Credit Agreement from $150 million to$75 million, (ii) changes the initial termination date from June 2, 2010 toJune 1, 2009, (iii) increases the rates of interest applicable to loans underthe Credit Agreement and (iv) modifies some of the covenants.  The Company has the ability to increase theamount available for borrowing, under certain circumstances, by an additional$50 million.  The Credit Facility may beused for seasonal working capital needs and general corporate purposes,including strategic acquisitions. The Credit Facility contains, among otherprovisions, requirements for maintaining certain financial ratios andlimitations on certain payments.  As ofOctober 31, 2006, the Company was in compliance with such provisions.  Amounts outstanding under the amended CreditFacility bear interest, at the Company’s option, at JPMorgan Chase Bank’s primerate or Eurocurrency rate plus a spread ranging from 0.80% to 1.70% calculatedon the basis of the Company’s senior unsecured long-term debt rating.  As of October 31, 2006, approximately $25.3million (including letters of credit) was outstanding under the CreditFacility.

At October 31, 2006, theCompany had a total of $10.0 million available under an uncommitted line of creditwith Bank of America to be used for letters of credit.  Effective November 10, 2006, the amountavailable under the uncommitted line of credit was reduced to $2.0million.  At October 31, 2006,approximately $0.1 million of letters of credit were outstanding under thiscredit line.

As of September 30, 2006,Colony Gift Corporation Limited (“Colony”) had a $9.4 million short-termrevolving credit facility with Barclays Bank, which matured in July 2006.  This revolving credit facility is pending renewaland, borrowings will continue on a month to month basis.  Colony had borrowings under the creditfacility of approximately $8.6 million, at a weighted average interest rate of5.6%, as of September 30, 2006.

At October 31, 2006, MilesKimball had approximately $9.1 million of long-term debt outstanding under areal estate mortgage note payable to John Hancock Life Insurance Company, whichmatures June 1, 2020.  Under the terms ofthe note, payments of principal and interest are required monthly at a fixedinterest rate of 7.89%.

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In July 1995, the Companyprivately placed $25.0 million aggregate principal amount of 7.54% Senior Notesdue 2005.  The final payment on the noteswas made on June 30, 2005.

In May 1999, the Companyfiled a shelf registration statement for issuance of up to $250.0 million indebt securities with the Securities and Exchange Commission.  On September 24, 1999, the Company issued$150.0 million of 7.90% Senior Notes due October 1, 2009 at a discount ofapproximately $1.4 million, which is being amortized over the life of thenotes.  In June 2006, the Companyrepurchased $25.1 million of these notes at a 1% premium.  Subsequent to October 31, 2006, the Companyrepurchased an additional $27.0 million of these same notes.  Such notes contain, among other provisions,restrictions on liens on principal property or stock issued to collateralizedebt.  At October 31, 2006, the Companywas in compliance with such provisions. Interest is payable semi-annually in arrears on April 1 and October1.  On October 20, 2003, the Companyissued $100.0 million 5.50% Senior Notes due on November 1, 2013 at a discountof approximately $0.2 million, which is being amortized over the life of thenotes.  Such notes contain provisions andrestrictions similar to those in the 7.90% Senior Notes.  At October 31, 2006, the Company was incompliance with such provisions. Interest is payable semi-annually in arrears on May 1 and November 1.  The notes may be redeemed in whole or in partat any time at a specific redemption price. The proceeds of the debt issuance were used for general corporatepurposes.

At October 31, 2006, CBK had $4.4million of debt outstanding under an Industrial Revenue Bond (“IRB”), whichmatures on January 1, 2025.  The bond isbacked by an irrevocable letter of credit issued by LaSalle Bank NationalAssociation.  The loan is collateralizedby certain of CBK’s assets.  The amountoutstanding under the IRB bears interest at short-term floating rates, whichequaled a weighted average interest rate of 5.5% at October 31, 2006.  Payments of principal are required annuallyand interest payments are required monthly under the terms of the bond.

TheCompany’s short-term investments consist of auction rate securities andvariable rate demand obligations classified as available-for-salesecurities.  The short-term investmentsin these securities are recorded at cost, which approximates fair market valuedue to their variable interest rates, which typically reset every 7 to 35 days,and, despite the long-term nature of their stated contractual maturities, theCompany generally has the ability to liquidate these securities in 35 days orless.  Management’s intent is to holdthese securities as liquid assets convertible to cash for applicableoperational needs as they may arise.  AtOctober 31, 2006, the Company held $95.0 million of short-term investments,which consist of auction rate securities and variable rate demand obligationsclassified as available-for-sale securities. The contractual maturities on these short-term investments range fromwithin one year and beyond ten years.

OnJanuary 24, 2006, the Board of Directors approved a domestic reinvestment planfor the approximately $130 million in foreign earnings, which were previouslyconsidered permanently reinvested in non-U.S. legal entities, which the Companyrepatriated under the American Job Creations Act of 2004.  The funds were brought back to the UnitedStates late in the fourth quarter of fiscal 2006 and received the favorable taxtreatment provided by the Act.  The Companyrecorded a one-time tax expense of $9.1 million, which is reflected in theCompany’s prior year effective tax rate. As part of its repatriation plan, the Company intends to make a domesticinvestment of the repatriated amount in a wide range of initiatives, includingthe hiring and training of U.S. workers, research and development efforts,qualified retirement plan funding, capital expenditures to support the U.S.businesses, advertising and marketing with respect to its various trademarks,brand names and rights to intangible property, and acquisitions of U.S.-basedbusinesses, all consistent with the requirements of the legislation.

On June 7, 2006, theCompany’s Board of Directors amended the Repurchase Program and increased thenumber of shares of common stock authorized to be repurchased by 6,000,000shares, from 6,000,000 shares to 12,000,000 shares. Since January 31, 2006, theCompany has purchased 1,802,382 shares on the open market for a cost ofapproximately $35.0 million, bringing the cumulative total purchased shares to6,429,182 as of October 31, 2006

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for a total cost of approximately $149.6 million.  Additionally, the Company repurchased4,906,616 shares for an aggregate purchase price of $172.6 million in July 2004through a Dutch auction cash tender offer. The acquired shares are held as common stock in treasury at cost.

On September 7, 2006, theCompany announced that it had declared a cash dividend of $0.27 per share ofcommon stock for the six months ended July 31, 2006.  The dividend, authorized at the Company’sSeptember 7, 2006 Board of Directors meeting, was payable to shareholders ofrecord as of November 1, 2006, and was paid on November 15, 2006.  The total payment was $10.6 million.

**CriticalAccounting Policies**

There were no changes toour critical accounting policies in the third quarter of fiscal 2007.  For a discussion of the Company’s criticalaccounting policies see our Annual Report on Form 10-K for the fiscal yearended January 31, 2006.

**RecentAccounting Pronouncements**

During the first quarter of fiscal 2007, the FinancialAccounting Standards Board (FASB) issued SFAS No. 155, “Accounting forCertain Hybrid Financial Instruments — an amendment of FASB Statements No. 133and 140” (SFAS No. 155) and SFAS No. 156, “Accounting for Servicingof Financial Instruments — an amendment of FASB Statement No. 140” (SFASNo. 156). SFAS No. 155 requires that interests in securitizedfinancial assets be evaluated to determine whether they contain embeddedderivatives, and permits the accounting for any such hybrid financialinstruments as single financial instruments at fair value with changes in fairvalue recognized directly in earnings. SFAS No. 156 specifies thatservicing assets or liabilities recognized upon the sale of financial assetsmust be initially measured at fair value, and subsequently either measured atfair value or amortized in proportion to and over the period of estimated netservicing income or loss. The Company plans to adopt both standards onFebruary 1, 2007.  The Company does not expect the adoption ofthe standards to have a material impact on the Company’s consolidated financialposition, annual results of operations or cash flows.

In July 2006, the FASBissued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” This Interpretation requires that a recorded tax benefit must be more likelythan not of being sustained upon examination by tax authorities based upon itstechnical merits.  The amount of benefit recorded is the largest amount ofbenefit that is greater than 50 percent likely of being realized upon ultimatesettlement.  Upon adoption, any adjustment will be recorded directly tobeginning retained earnings. The Interpretation is effective for the Companybeginning no later than February 1, 2007.  The Company has not yet adoptedthe Interpretation and has not analyzed its potential effect on the Company’sfinancial statements.

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) and SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS No.158).  SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures regarding fair valuemeasurements.  SFAS No. 157 applies underother accounting pronouncements that require or permit fair value measurements.  Accordingly, SFAS No. 157 does not requireany new fair value measurements.  SFASNo. 157 is effective for fiscal years beginning after November 15, 2007.  SFAS No. 158 requires the Company torecognize the funded status of its defined benefit plan as an asset orliability on the financial statements and the changes in the funded status, netof tax, within accumulated other comprehensive income, to the extent thesechanges are not recognized in earnings as components of periodic net benefitcost.  Additionally, SFAS No. 158 requiresthe plan’s funded status to be measured as of the end of our current fiscalyear.  The SFAS No. 158 recognitionprovisions will be effective as of the end of fiscal year 2007 and the SFAS No.158 measurement date provisions will be effective as of the end of fiscal year2009.  The Company does not

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expect the adoption of the standards to havea material impact on the Company’s consolidated financial position, annualresults of operations or cash flows.  Asit relates to SFAS No. 158, this determination was based on the January 31,2006 funded status of its pension plan. The actual effects will depend on the funded status of the pension planat January 31, 2007, which will depend on several factors, principally fiscal2007 returns on plan assets and January 31, 2007, discount rates.

In September 2006, the SECissued Staff Accounting Bulletin No. 108 (SAB No. 108), “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements.”  Thisissuance eliminates the diversity in practice in quantifying financialstatement misstatements.  SAB No. 108establishes the approach that requires the Company to quantify the misstatementon each of the financial statements and related disclosures.  SAB No. 108 is effective for the fiscal yearending January 31, 2007 and the Company has evaluated the impact of SAB No. 108and does not expect it to have a material impact on the financial statements.

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**Item 3.**   QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

**MarketRisk**

The Company hasoperations outside of the United States and sells its products worldwide.  The Company’s activities expose it to avariety of market risks, including the effects of changes in foreign currencyexchange rates, interest rates and commodity prices.  These financial exposures are activelymonitored and, where considered appropriate, managed by the Company.

**InterestRate Risk**

As of October 31, 2006,the Company is subject to interest rate risk on approximately $34.4 million ofvariable rate debt.  Each 1-percentagepoint change in the interest rate would impact pre-tax earnings byapproximately $0.3 million if applied to the total.

On July 10, 2003, theCompany terminated the interest rate swap agreement in relation to $50.0million of its outstanding 7.90% Senior Notes, which mature on October 1,2009.  This termination resulted in adeferred gain of approximately $5.0 million, which is being amortized over theremaining term of the Notes.

**ForeignCurrency Risk**

TheCompany uses foreign exchange forward and options contracts to hedge the impactof foreign currency fluctuations on foreign denominated inventory purchases,intercompany payables and certain intercompany loans.  The Company does not hold or issue derivativefinancial instruments for trading purposes.

TheCompany hedged the net assets of certain of its foreign operations throughforeign currency forward contracts during fiscal 2006.  The Company does not intend to continue tohedge the net assets of its foreign operations during fiscal 2007.  Any increase or decrease in the fair value ofthe forwards related to changes in the spot foreign exchange rates was offsetby the change in the value of the hedged net assets of the foreign operationsrelating to changes in spot foreign exchange rates.  The net after-tax gain related to thederivative net investment hedge instruments recorded in accumulated othercomprehensive income (loss) (“OCI”) totaled $1.8 million as of October 31, 2006.

The Company hasdesignated its forward exchange and options contracts on forecastedintercompany purchases and future purchase commitments as cash flow hedges and,as such, as long as the hedge remains effective and the underlying transactionremains probable, the effective portion of the changes in the fair value ofthese contracts will be recorded in OCI until earnings are affected by thevariability of the cash flows being hedged. With regard to commitments for inventory purchases, upon payment of eachcommitment, the underlying forward contract is closed and the correspondinggain or loss is transferred from accumulated OCI and is included in themeasurement cost of the acquired asset. If a hedging instrument is sold or terminated prior to maturity, gainsand losses are deferred in accumulated OCI until the hedged item issettled.  However, if the hedged item isno longer likely to occur, the resultant gain or loss on the terminated hedgeis recognized into earnings immediately. Approximately $0.1 million of hedge gains related to cash flow hedgesare included in accumulated OCI at October 31, 2006, and are expected to betransferred into earnings within the next twelve months upon payment of theunderlying commitment.

The Company hasdesignated its foreign currency forward contracts related to intercompany loansand intercompany payables as fair value hedges. The gains or losses on the fair value hedges are recognized intoearnings and generally offset the transaction gains or losses in the foreigndenominated loans that they are intended to hedge.

For consolidatedfinancial statement presentation, net cash flows from such hedges areclassified in the categories of the cash flow with the items being hedged.

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The following table provides information about the Company’s foreignexchange forward and options contracts at October 31, 2006:
|                                                                           | ** ** | **U.S. Dollar**     | ** ** | **Average**            | ** ** | **Estimated**       | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|------------------------|------------|---------------------|------------|
| **(In thousands, except average contract rate)** | ** ** | **Notional Amount** | ** ** | **Contract Rate** | ** ** | **Fair Value** | ** ** |
| Canadian Dollar                                                           |       | $                        | 5,800      |                   | 0.89       |                | $          | 6 |   |
| Pound Sterling                                                            |       | 250                      |       | 1.91                   |       | 5                   |       |
| Euro                                                                      |       | 4,400                    |       | 1.29                   |       | 56                  |       |
|                                                                      |       | $                        | 10,450     |                   |       |                | $          | 67 |   |

 

The foreign exchange contracts outstanding have maturity dates throughApril 2007.

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**Item 4.**   CONTROLS AND PROCEDURES

(a)Evaluation of disclosure controls and procedures.

Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Securities Exchange Act of 1934 (“ExchangeAct”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by thisquarterly report as required by paragraph (b) of Exchange Act Rules 13a-15 or15d-15.  Based upon this evaluation, ourprincipal executive officer and our principal financial officer have concludedthat our disclosure controls and procedures are effective as of October 31,2006.

(b)Changes in internal control over financial reporting.

Therehave been no changes in our internal control over financial reporting identifiedin connection with the evaluation required by paragraph (d) of Exchange ActRules 13a-15 or 15d-15 that occurred during the third quarter of fiscal 2007that has materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

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**Part II.  **OTHER INFORMATION

**Item 1.**   Legal Proceedings

None.

**Item 1A. Risk Factors**

***RisksAssociated with Proposed FTC Regulations***

InApril 2006, the U.S. Federal Trade Commission issued a notice of proposedrulemaking that if implemented, will regulate all sellers of “businessopportunities” in the United States. The proposed rule would, among otherthings, require all sellers of business opportunities, which would likelyinclude PartyLite and Two Sisters Gourmet, to implement a seven day waitingperiod before entering into an agreement with a prospective businessopportunity purchaser and provide all prospective business opportunitypurchasers with substantial disclosures in writing regarding the businessopportunity and the company.  Based oninformation currently available, we anticipate that the final rule may requireseveral years to become final and effective, and may differ substantially fromthe rule as originally proposed. Nevertheless the proposed rule, if implementedin its original form, would negatively impact our Direct Selling businesses.

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

The following table setsforth certain information concerning the repurchase of the Company’s CommonStock made by the Company during the third quarter of the fiscal year endingJanuary 31, 2007.

##### **ISSUER PURCHASES OF EQUITY SECURITIES(1**)

| Period                                       | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b)  Average  Price Paid  per Share** | ** ** | **(c) Total  Number of  Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **(d) Maximum Number (or  Approximate Dollar  Value) of Shares that May  Yet Be Purchased Under  the Plans or Programs** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| August 1, 2006 –  August 31, 2006       |       | 0                                                     |       | —                                            |       | 0                                                                                                                             |       | 5,570,818                                                                                                                                                                                      |       |
| September 1,  2006 – September 30, 2006 |       | 0                                                     |       | —                                            |       | 0                                                                                                                             |       | 5,570,818                                                                                                                                                                                      |       |
| October 1, 2006 –  October 31, 2006     |       | 0                                                     |       | —                                            |       | 0                                                                                                                             |       | 5,570,818                                                                                                                                                                                      |       |
| Total                                        |       | 0                                                     |       | —                                            |       | 0                                                                                                                             |       | 5,570,818                                                                                                                                                                                      |       |

 

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(1) On September10, 1998, the Company’s Board of Directors approved the Company’s sharerepurchase program (the “Repurchase Program”) pursuant to which the Company wasauthorized to repurchase up to 1,000,000 shares of its issued and outstandingCommon Stock in open market transactions. On June 8, 1999, the Company’s Board of Directors amended the RepurchaseProgram and increased the number of shares of Common Stock to be repurchased by1,000,000 shares, from 1,000,000 to 2,000,000 shares.  On March 30, 2000, the Company’s Board ofDirectors further amended the Repurchase Program and increased the number ofshares of Common Stock to be repurchased by 1,000,000 shares, from 2,000,000 to3,000,000 shares.  On December 14, 2000,the Company’s Board of Directors further amended the Repurchase Program andincreased the number of shares of Common Stock to be repurchased by 1,000,000shares, from 3,000,000 to 4,000,000 shares. On April 4, 2002, the Company’s Board of Directors further amended theRepurchase Program and increased the number of shares of Common Stock to berepurchased by 2,000,000 shares, from 4,000,000 to 6,000,000 shares.  On June 7, 2006, the Company’s Board ofDirectors further amended the Repurchase Program and increased the number ofshares of common stock authorized to be repurchased by 6,000,000 shares, from6,000,000 shares to 12,000,000 shares. As of October 31, 2006, the Company has purchased a total of 6,429,182shares of Common Stock under the Repurchase Program.  The Repurchase Program does not have anexpiration date.  The Company intends tomake further purchases under the Repurchase Program from time to time.

**Item 3.**   Defaults upon Senior Securities

None

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

None

**Item 5.****   Other Information**

None

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**Item 6.****   Exhibits**

Exhibits

10.18                  Share Sale and Purchase Agreement between PrebolaNR 293 AB (under name change to ALG Holding AB) and Blyth Wholesale Holdings,Inc. dated August 14, 2006.

31.1                        Certificationof Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934.

31.2                        Certificationof Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) underthe Securities Exchange Act of 1934.

32.1                        Certification of Chairman and Chief ExecutiveOfficer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                        Certification of Vice President and ChiefFinancial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|   |   |              |   |                                        |
|--------|--------|-------------------|--------|---------------------------------------------|
|        |   |              |   | BLYTH, INC.                                 |
|   |   |              |   |                                        |
|   |   |              |   |                                        |
|   | Date:  | December 11, 2006 |   |                                        | By: | /s/Robert B. Goergen |   |
|   |   |              |   | Robert B.  Goergen                          |
|   |   |              |   | Chairman and  Chief Executive Officer       |
|   |   |              |   |                                        |
|   |   |              |   |                                        |
|   | Date:  | December 11, 2006 |   |                                        | By: | /s/Robert H. Barghaus |   |
|   |   |              |   | Robert H.  Barghaus                         |
|   |   |              |   | Vice President  and Chief Financial Officer |

 

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